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[G.R. No. 107789. April 30, 2003.] REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT), petitioner, vs.

THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) and VICTOR AFRICA, respondents. AEROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO, MANUEL NIETO III, RAMON NIETO, ROSARIO ARELLANO, VICTORIA LEGARDA, ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMEN TUAZON and RAFAEL VALDEZ, intervenors. [G.R. No. 147214. April 30, 2003.] VICTOR AFRICA, petitioner, vs. THE HONORABLE SANDIGANBAYAN and THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, respondents. Victor Africa for himself. M.M. Lazaro & Associates for Intervenor AEROCOM. SYNOPSIS These consolidated cases stemmed from the resolutions of the Sandiganbayan (1) ordering the calling and holding of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting for 1992 under its supervision and (2) authorizing the Presidential Commission on Good Government (PCGG) to cause the holding of a special stockholders' meeting to increase ETPI's authorized capital stock and to vote therein the sequestered Class "A" shares of stock. The Supreme Court ruled that the Members of the Sandiganbayan cannot participate in the stockholders meeting for the election of the ETPI Board of Directors. Neither shall the Clerk of Court be appointed to call such meeting and issue notices thereof. The Sandiganbayan shall appoint, or the parties may agree to constitute, a committee of competent and impartial persons to call, send notices and preside at the meeting for the election of the ETPI Board of Directors. SCaIcA The Court likewise ruled that the PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend the Articles of Incorporation for the purpose of increasing the authorized capital stock unless there is a prima facie evidence showing that said shares are ill-gotten and there is an imminent danger of dissipation. Consequently, the Court referred the petitions at bar to the Sandiganbayan for reception of evidence to determine whether there is a prima facie evidence showing that the sequestered shares in question are ill-gotten and there is an imminent danger of dissipation to entitle the PCGG to vote them in a stockholders' meeting. SYLLABUS

1. POLITICAL LAW; ADMINISTRATIVE LAW; ADMINISTRATIVE BODIES; PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT; CANNOT VOTE SEQUESTERED SHARES; EXCEPTION. — The PCGG cannot thus vote sequestered shares, except when there are "demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property." 2. ID.; ID.; ID.; ID.; TWO-TIERED TEST IN DETERMINING WHETHER SEQUESTERED SHARES MAY BE VOTED UPON. — The principle laid down in Baseco was further enhanced in the subsequent cases of Cojuangco v. Calpo and Presidential Commission on Good Government v. Cojuangco, Jr., where this Court developed a "two-tiered" test in determining whether the PCGG may vote sequestered shares: The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination of at least two factual matters: 1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the state; and 2. whether there is an immediate danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while the main issue pends with the Sandiganbayan. 3. ID.; ID.; ID.; ID.; ID.; INAPPLICABLE IN CASES INVOLVING FUNDS OF PUBLIC CHARACTER. — The two-tiered test, however, does not apply in cases involving funds of "public character." In such cases, the government is granted the authority to vote said shares, namely: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names, and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. HaDEIc 4. COMMERCIAL LAW; CORPORATION CODE; PRIVATE CORPORATIONS; STOCK AND TRANSFER BOOK, SHALL BE THE BASIS OF DETERMINING THE TRUE OWNERS OF THE SHARES OF STOCK, REGARDLESS OF THE PRESENCE OF ALTERATIONS BY SUBSTITUTION THEREIN; CASE AT BAR. — This Court sees no grave abuse of discretion on the part of the Sandiganbayan in ruling that: "The charge that there were "alterations by substitution" in the Stock and Transfer Book is not a matter which should preclude the Stock and Transfer Book from being the basis or guide to determine who the true owners of the shares of stock in ETPI are. If there be any substitution or alterations, the anomaly, if at all, may be explained by the corporate secretary who made the entries therein. At any rate, the accuracy of the Stock and Transfer Book may be checked by comparing the entries therein with the issued stock certificates. The fact is that any transfer of stock or issuance thereof would necessitate an alteration of the record by substitution. Any anomaly in any entry which may deprive a person or entity of its right to vote may generate a controversy personal to the corporation and the stockholder and should not affect the issue as to whether it is the PCGG or the shareholder who has the right to vote. In other words, should there be a stockholder who feels aggrieved by any alteration by substitution in the Stock and Transfer Book, said stockholder may object thereto at the proper time and before the stockholders meeting." Whether the ETPI Stock and Transfer Book was falsified and whether such falsification

deprives the true owners of the shares of their right to vote are thus issues best settled in a different proceeding instituted by the real parties-in-interest. 5. ID.; ID.; ID.; TRANSFER OF SHARES; REGISTRATION IS A PREREQUISITE FOR VOTING OF SHARES; RATIONALE. — Explaining why registration is a prerequisite for the voting of shares, this Court, in Batangas Laguna Tayabas Bus Company, Inc., v. Bitanga, discoursed: "Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee . . . cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders' resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider." DcITHE 6. ID.; ID.; ID.; STOCK CERTIFICATES; CONSIDERED AS NON-NEGOTIABLE INSTRUMENTS; CASE AT BAR. — With respect to the PCGG's submission that under Section 34 of the Negotiable Instruments Law, it may take title to the shares represented by the blank stock certificates found in Malacañang and vote the same, the same is untenable. The PCGG assumes that stock certificates are negotiable. They are not. ". . . [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." That the PCGG found the stock certificates endorsed in blank does not necessarily make it the owner of the shares represented therein. Their true ownership has to be ascertained in a proper proceeding. 7. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CONTEMPT; NO OTHER COURT THAN THE ONE CONTEMNED WILL PUNISH A GIVEN CONTEMPT; EXCEPTION. — "In whatever context it may arise, contempt of court involves the doing of an act, or the failure to do an act, in such a manner as to create an affront to the court and the sovereign dignity with which it is clothed. As a matter of practical judicial administration, jurisdiction has been felt properly to rest in only one tribunal at a time with respect to a given controversy. Partly because of administrative considerations, and partly to visit the full personal effect of the punishment on a contemnor, the rule has been that no other court than the one contemned will punish a given contempt. The rationale that is usually advanced for the general rule that the power to punish for contempt rests with the court contemned is that contempt proceedings are sui generic and are triable only by the court against whose authority the contempts are charged;

the power to punish for contempt exists for the purpose of enabling a court to compel due decorum and respect in its presence and due obedience to its judgments, orders and processes; and in order that a court may compel obedience to its orders, it must have the right to inquire whether there has been any disobedience thereof, for to submit the question of disobedience to another tribunal would operate to deprive the proceeding of half its efficiency." The above rule is not of course absolute as it admits exception "when the entire case has already been appealed [in which case] jurisdiction to punish for contempt rests with the appellate court where the appeal completely transfers to proceedings thereto or where there is a tendency to affect the status quo or otherwise interfere with the jurisdiction of the appellate court." RESOLUTION CARPIO MORALES, J p: These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the second "for Review on Certiorari" although it is actually one for Certiorari, stem from a Resolution of November 13, 1992 issued by the Sandiganbayan in Civil Case No. 0130, 1 on motion of Victor Africa (Africa) who prayed that said court order the "calling and holding of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting for 1992 under the [c]ourt's control and supervision and prescribed guidelines." EDCIcH It is gathered that on August 7, 1991, the Presidential Commission on Good Government (PCGG) conducted an ETPI stockholders meeting during which a PCGG controlled board of directors was elected. A special stockholders meeting was later convened by the registered ETPI stockholders wherein another set of board of directors was elected, as a result of which two sets of such board and officers were elected. Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been "illegally 'exercising' the rights of stockholders of ETPI," 2 especially in the election of the members of the board of directors, filed the above-said motion before the Sandiganbayan. The PCGG did not object to Africa's motion provided that: 1. ETPI. An Order be issued upholding the right of PCGG to vote all the Class "A" shares of

2. In the alternative, in the remote event that PCGG's right to vote the sequestered shares be not upheld, an Order be issued: a. Disregarding the Stock and Transfer Book and Booklet of Stock Certificates of ETPI in determining who can vote the shares in an Annual Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of the total subscription in ETPI, and c. Directing the amendment of the Articles of Incorporation and By-laws of ETPI providing for the minimum safeguards for the conservation of assets . . . prior to the calling of a stockholders meeting. 3 By the assailed Resolution of November 13, 1992, 4 the Sandiganbayan resolved Africa's motion, the dispositive portion of which reads: WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27, 1992, at 2:00 o'clock in the afternoon, at the ETPI Board Room, Telecoms Plaza, 7th Floor, 316 Gil J. Puyat Avenue, Makati, Metro Manila. The Executive Clerk of Court of this Division shall issue the call and notice of annual stockholders meeting of ETPI addressed to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shall be conducted under the supervision and control of this Court, through Mr. Justice Sabino R. de Leon, Jr. In accordance with the Supreme Court ruling in Cojuangco et al vs. Azcuna, et al., supra, only the registered owners, their duly authorized representatives or their proxies may vote their corresponding shares. The following minimum safeguards must be set in place and carefully maintained until final judicial resolution of the question of whether or not the sequestered shares of stock (or in a proper case the underlying assets of the corporation concerned) constitute ill-gotten wealth: "a. An independent comptroller must be appointed by the Board of Directors upon nomination of the PCGG as conservator. The comptroller shall not be removable (nor shall his position be abolished or his compensation changed) without the consent of the conservator. The comptroller shall, in addition to his other functions as such, have charge of internal audit. b. The corporate secretary must be acceptable to the conservator. If the corporate secretary ceases to be acceptable to the conservator, a new one must be appointed by the Board of Directors upon nomination of the conservator. c. The external auditors of the corporation must be independent and must be acceptable to the conservator. The independent external auditors shall not be changed without the consent of the conservator. d. The conservator must be represented in the Board of Directors and in the Executive (or equivalent) and Audit Committees of the corporation involved and of its majority-owned subsidiaries or affiliates. The representative of the conservator must be a full director (not merely an honorary or ex-officio director) with the right to vote and all other rights and duties of a member of the Board of Directors under the Corporation Code. The conservator's representative shall not be removed from the Board of Directors (or the mentioned

Committees) without the consent of the conservator. The conservator shall, however, have the right to remove and change its representative at any time, and the new representative shall be promptly elected to the Board and its mentioned Committees. e. All transactions involving the disbursement of corporate funds in excess of P5 million must have the prior approval of the director representing the conservator, in order to be valid and effective. f. The incurring of debt by the corporation, whether in the form of bonds, debentures, commercial paper or any other form, in excess of P5 million, must have the prior approval of the director representing the conservator, in order to be valid and effective. g. The disposition of a substantial part of assets of the corporation (substantial meaning in excess of P5 million) shall require the prior approval of the director representing the conservator, in order to be valid and effective. h. The above safeguards must be written into the articles of incorporation and bylaws of the company involved. In other words, the articles of incorporation and by-laws of the company must be amended so as to incorporate the above safeguards. i. Any amendment of the articles of incorporation or by-laws of the company that will modify in any way any of the above safeguards, shall need the prior approval of the director representing the conservator." SO ORDERED. 5 (Italics supplied) Assailing the foregoing resolution, the PCGG filed before this Court the herein first petition, docketed as G.R. No. 107789, anchored upon the following grounds: I RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN RULING THAT THE REGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO VOTE IN SPITE OF (A) THE RULING OF THIS HONORABLE COURT IN PCGG V. SEC AND AFRICA (G.R. NO. 82188) AND (B) A CLEAR SHOWING THAT ETPI'S STOCK AND TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO DETERMINE WHO CAN VOTE IN A STOCKHOLDERS' MEETING. II RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG CANNOT VOTE AT LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF ETPI. III

6 (Emphasis in the original) By Resolution of November 26. Inc. Carlos Nieto. 107789. 7975. 147214. and (b) holding the stockholders' meeting of ETPI scheduled on November 27. IV THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH GRAVE ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF COURT TO PERFORM THE DUTIES OF A CORPORATE SECRETARY. A motion for leave to intervene relative to Africa's "Motion to Cite the PCGG and its Accomplices in Contempt" was filed by ETPI. The meeting was held as scheduled and the increase in ETPI's authorized capital stock from P250 Million to P2. Their motion was granted by this Court by Resolution of January 14. In compliance therewith." it claiming that the increase in authorized capital stock was necessary in light of the requirements laid down by Executive Order No. 1996. challenging the Sandiganbayan Resolutions of December 13. Africa alleged that the Sandiganbayan committed "grave abuse of discretion" when. assuming that the Sandiganbayan had such power.6 Billion was "unanimously approved. The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and Corporate Secretary to call the special stockholders meeting. 2001 before this Court the herein second petition. Africa filed before this Court a motion to cite the PCGG "and its accomplices" in contempt and "to nullify the 'stockholders meeting' called/conducted by PCGG and its accomplices. 2001 (denying reconsideration of the December 13." he contending that only this Court. there existed a prima facie factual foundation for the issuance of the writ of sequestration covering the Class "A" shares of stock. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE SHARES [OF "SMALL STOCKHOLDERS" OF WHICH HE IS ONE AND AEROCOM AND POLYGON] AND/OR OWNERS THEREOF[. 8 By Resolution of May 7. Aerocom Investors and Managers. 9 this Court resolved to refer the PCGG's very urgent petition to hold the special stockholders' meeting to the Sandiganbayan for reception of evidence and resolution. In his petition in G. After the parties submitted their respective memoranda. 1993. I . Benito Nieto. This Court granted the motion for leave but ETPI never filed any pleading relative to Africa's motion to cite the PCGG in contempt. 1996. Manuel Nieto III. Carmen Tuazon and Rafael Valdez. Further. . ROXAS. Ramon Nieto. filed a motion to intervene in G. a. No.m. 1996 (authorizing the holding of a stockholders meeting to increase ETPI's authorized capital stock and to vote therein the sequestered Class "A" shares of stock) and February 16. 1997. By Resolution of February 16.R.R. 2001. Rita de los Reyes. 2003. Victoria Legarda. Africa alleged that he was not given notice of the meeting. Rosario Arellano.R." 11 On April 1. 1992. On December 7. 107789. filed a "VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS' MEETING FOR [THE] SOLE PURPOSE OF INCREASING [ETPI's] AUTHORIZED CAPITAL STOCK. now the subject of the present Resolution. 147214 with G. 1997. and not the Sandiganbayan. at 2:00 p. JR. No. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS THE RIGHTS APPURTENANT TO A STOCKHOLDER[. No. 13 this Court ordered the consolidation of G. By Resolution of February 24. 1992. (AEROCOM). . and the PCGG was entitled to vote the sequestered shares of stock. in early 1995. and the PCGG had no right to vote the sequestered Class "A" shares. 10 which is being assailed in the herein second petition. 1996. . granting the PCGG "authority to cause the holding of a special stockholders' meeting of ETPI for the sole purpose of increasing ETPI's authorized capital stock and to vote therein the sequestered Class 'A' shares of stock. the Sandiganbayan issued a Resolution of December 13. all stockholders of record of ETPI.] [AND] b." In said Resolution. by the assailed Resolutions. its Resolution of December 13. Angela Lobregat. 1996 authorizing the PCGG to hold the stockholders meeting had not yet become final because the motions for reconsideration of said resolution were still pending. 1992. 109 7 and Republic Act No. 12 docketed as G. this Court enjoined the Sandiganbayan from (a) implementing its Resolution of November 13. 1992. No.R. 1997.WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE REPUBLIC. TO CONTROL AND SUPERVISE THE STOCKHOLDERS' MEETING.R. Notices were sent to those entitled to vote for a meeting on March 17. Africa went on to contend that. Ma. RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN ORDERING THE HOLDING OF A STOCKHOLDERS' MEETING IN ETPI WITHOUT FIRST SETTING IN PLACE — BY AMENDING THE ARTICLES AND BY-LAWS OF ETPI TO INCORPORATE — THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE COURT IN COJUANGCO V. the PCGG. has the power to authorize the PCGG to call a stockholders meeting and vote the sequestered shares. 147214. AND (B) ITS OWN JUSTICE SABINO DE LEON. the Sandiganbayan finally resolved to deny the motions for reconsideration of its Resolution of December 13. 1996 Resolution). No.] He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG to vote the non-sequestered ETPI Class "A" shares and nullify the votes the PCGG had cast in the stockholders meeting held on March 17. the Sandiganbayan held that there was an urgent necessity to increase ETPI's authorized capital stock. prompting Africa to file on April 6.

to "provisionally take (it) over in the public interest or to prevent . to prevent the dispersion or . agency or instrumentality of the government. The road to hell. or revise the articles or by-laws. as in the case of sequestered objects. (its) disposal or dissipation. It is not that of manager. etc. which is "to prevent the disposal or dissipation" of the business enterprise. running. i. . and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered. the PCGG is a conservator. punish for direct or indirect contempt in accordance with the Rules of Court. businesses in current operation). . . 1986. and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. Inc. frozen or provisionally taken over. circumspection. much less an owner. much like a court-appointed receiver. such a replacement or substitution should be avoided if at all possible." Reason dictates that it is only under these conditions and circumstances that the supervision. (sequestered) shares of stock. or innovator. granted to it by the President of the Philippines through a Memorandum dated June 26.e. As already earlier stressed with no little insistence. its essential role.. PCGG May Not Exercise Acts of Ownership One thing is certain. Presidential Commission on Good Government 14 where this Court defined the powers of the PCGG as follows: a. no court exercises effective supervision or can upon due application and hearing. not fleeced. b. grant authority for the performance of acts of dominion. of the ultimate objective of the whole exercise. .. and undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. the intrusion into management should be restricted to the minimum degree necessary to accomplish the legislative will. and this is specially true in the situations contemplated by the sequestration rules where. not ruined. the PCGG may in this case exercise some measure of control in the operation. . There should be no exercise of the right to vote simply because the right exists. Therefore. experienced and honest managers may be recruited. as already discussed. amendment of the Articles of Incorporation. going concerns. is that of conservator. receive rents.e. Equally evident is that resort to the provisional remedies in question should entail the least possible interference with business operations or activities so that. Limitations Thereon Now. In this context. [it] does not make the PCGG the owner thereof. in the event that the accusation of the business enterprise being "ill-gotten" be not proven. for example. "watchdog" or overseer. In the case of sequestered businesses generally (i. or otherwise bring about substantial changes in policy. The stock is not to be voted to replace directors. c. . the greatest prudence. not run into the ground. And it goes without saying that where replacement of management officers may be called for. it may be returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration. unlike cases of receivership. PCGG Has Only Powers of Administration The PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over. Sight should never be lost .The first issue to be resolved is whether the PCGG can vote the sequestered ETPI Class "A" shares in the stockholders meeting for the election of the board of directors. But even in this special situation." The Memorandum should be construed in such a manner as to be consistent with." "to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors. the act of sequestration[. indiscriminate. care and attention should accompany that undertaking to the end that truly competent. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him. something more than mere physical custody is connoted. Voting of Sequestered Stock. "pending the outcome of proceedings to determine the ownership of . In fact. d. and always in the context of the stated purposes of sequestration or provisional takeover. program or practice of the corporation except for demonstrably weighty and defensible grounds. and seek and secure the assistance of any office. it is within the parameters of these conditions and circumstances that the PCGG may properly exercise the prerogative to vote sequestered stock of corporations.] freezing or provisional takeover of property does not import or bring about a divestment of title over said property. administration and control of business enterprises provisionally taken over may legitimately be exercised. it has been said. caretaker. once judicially established to be "ill-gotten.. or because the stocks sequestered constitute the controlling or a substantial part of the corporate voting power. Conditions Therefor So. declaration of dividends. particularly in respect of viable establishments. in the special instance of a business enterprise shown by evidence to have been "taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos. is paved with good intentions. too. not driven to bankruptcy. and not contradictory to the Executive Orders earlier promulgated on the same matter. In relation to the property sequestered. or business enterprises in operation." the PCGG is given power and authority. which is to turn over the business to the Republic. That Memorandum authorizes the PCGG. or frustrate or otherwise make ineffectual its efforts to carry out its task. it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic. not an owner. The leading case on the matter is Bataan Shipyard & Engineering Co. no matter how well meaning. There should be no role to be played in this area by rank amateurs." and since the term is obviously employed in reference to going concerns. or management of the business itself. pay outstanding debts due. There should be no hasty. unreasoned replacement or substitution of management officials or change of policies. collect debts due. such as to bring and defend actions in its own name. as already adverted to. v. frozen or provisionally taken over. The business is not to be experimented or played around with. it can not perform acts of strict ownership.

that public property registered in the names of non-owners is affected with trust relations. Explained the Court: "The facts show that the corporation known as BASECO was owned and controlled by President Marcos 'during his administration. in the premises. through its designated directors. should indeed be shunned if at all possible. and 2. and that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of ownership. if they ever were at all. was placed under sequestration by the PCGG. or business enterprises in operation. .' and that it was by and through the same means. does not apply in cases involving funds of "public character. where as in this case. 20 explained: The [public character] exceptions are based on the common-sense principle that legal fiction must yield to truth. Calpo 16 and Presidential Commission on Good Government v. (to the PCGG) dated June 26. Jr. . by taking undue advantage of his public office and/or using his powers. in its Resolution of October 28. or influence. there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm. and other government-owned or controlled entities." Given this factual background. through nominees. In Baseco. it ruled further: . the PCGG may in this case exercise some measure of control in the operation. Substitution of directors is not to be done without reason or rhyme. authority. 1986[. they are fiduciaries. that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co. and undertaken only when essential to prevent disappearance or wastage of corporate property. 1986. Directors are not to be voted out simply because the power to do so exists. Cocofed. (Emphasis in the original) The PCGG cannot thus vote sequestered shares. 19 This Court. the Court discussed PCGG's right over BASECO in the following manner: "Now. in the special instance of a business enterprise shown by evidence to have been 'taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos. something more than mere physical custody is connoted. except when there are "demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property. however. in Republic v.' and since the term is obviously employed in reference to going concerns. of whom the highest degree of diligence and rectitude is.. required. or management of the business itself. and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. . whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the state. whether there is an immediate danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while the main issue pends with the Sandiganbayan. 18 The two-tiered test.." In such cases. as already adverted to. properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation." 15 The principle laid down in Baseco was further enhanced in the subsequent cases of Cojuangco v. the government is granted the authority to vote said shares.undue disposal of the corporate assets.' the PCGG is given power and authority. (its) disposal or dissipation. This is why. In the case at bar. Cojuangco. experience and probity. . the government can." It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the management of the company's affairs should henceforth be guided and governed by the norms herein laid down. not owners of the business.] this Court declared that — "Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President . They should never for a moment allow themselves to forget they are conservators." Citing an earlier Resolution. 17 where this Court developed a "two-tiered" test in determining whether the PCGG may vote sequestered shares: The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination of at least two factual matters: 1. trustees. Inc. and always under such circumstances as to assure that replacements are truly possessed of competence. namely: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names. to provisionally take (it) over in the public interest or to prevent . particularly. a private corporation known as the Bataan Shipyard and Engineering Co. running..

where as in this case."Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in respondent's calling and holding of a stockholder's meeting for the election of directors as authorized by the Memorandum of the President . Inc. it must be remembered. The PCGG contends. clear.) Unfortunately. Philippines. Sandiganbayan. Precisely this Court issued a Resolution of July 28. as well as to the instant petition. Likewise in 1987. 23 And it further held that the PCGG could not vote the sequestered shares as "only the owners of the shares of stock of subject corporation. in Antiporda v. The only conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds.000. with Jose L. Africa P1. without necessarily judging its truth or veracity. Rather. clear." 22 The PCGG's contention is misleading. is not a trier of facts. the government can. this Court said that in determining the issue of whether the PCGG should be allowed to vote sequestered shares. Melencio-Herrera. 21 that Africa had dissipated ETPI's assets. it is not a finding of facts. Expressly citing Cojuangco-Roxas. but which landed in private hands as in BASECO. the public character exception in Baseco v. It may not vote the shares in a .200.000. Precisely this statement was made to impress upon the parties that the narration of facts is just that — a narration. but more of a presentation of the complete picture of events which led to the sequestration of Eastern Telecommunications. or (2) purchased with public funds or those affected with public interest. thus: Under a consultancy contract. ETPI paid to Jose L. Roxas 25 that: The rule in this jurisdiction is. v. . This Court. 1992. The PCGG cannot perform acts of strict ownership of sequestered property. therefore. in which she was joined by Justice Florentino P. (to the PCGG) dated June 26. Jr. However. prima facie. PCGG and Cojuangco Jr. more than P57 million. upon motion of Africa. properly controverted. it was crucial to find out first whether this were purchased with public funds. properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation. most recently. that the narration of facts found in the decision therein did not constitute a finding of facts: The categorical statement in the decision of June 30. and particularly so in this case where the facts narrated are precisely the facts in litigation before the Sandiganbayan. through its designated directors. since the true and real ownership of said shares is yet to be determined and proven more conclusively by the Courts. somehow. Dissipation by the PCGG Board of Directors is also charged by the BAN group. 1986." (Italics supplied) The "public character" test was reiterated in many subsequent cases. 1988 in the same case to clarify. . v. the government shall vote the shares. An investigation of the anomalies charged by one against the other may be taken up in another case. their duly authorized representatives or their proxies.. It is a mere conservator. skirted the question of whether there is evidence of dissipation of ETPI assets." (Italics supplied) The exception was cited again by the Court in Cojuangco-Roxas in this wise: "The rule in this jurisdiction is. This Court made no finding in PCGG v. however. may vote the said shares. landed in the hands of private persons. explained this principle as follows: "I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to the government or whose capitalization comes from public funds but which." 24 relying on this Court's ruling in Cojuangco. however. in its impugned Resolution of November 13. Polygon Investors and Managers. then the two-tiered test is applied. specially the sensitive ones. as follows: "It is thus important to determine first if the sequestered corporate shares came from public funds that landed in private hands. Africa as Chairman and Victor Africa as President. Securities and Exchange Commission. that it is entitled to vote the sequestered shares in the election of the board of directors. v. therefore. then the two-tiered test does not apply. Roxas prevail. Inc. The PCGG cannot perform acts of strict ownership of sequestered property." This Court summed up the rule in the determination of whether the PCGG has the right to vote sequestered shares as follows: In short. Jr. SEC et al. to have been (1) originally government shares. when the sequestered shares in the name of private individuals or entities are shown." The Concurring Opinion of Justice Ameurfina A. holding instead that: The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of ETPI during its administration of ETPI is a matter which is not in issue herein.00 as "allowances. that is. another P1. earned from ETPI as of 1987. particularly.00 as "professional fees" and Manuel Nieto. when sequestered shares registered in the names of private individuals or entities are alleged to have been acquired with ill-gotten wealth. et al." (Italics supplied) The Court granted PCGG the right to vote the sequestered shares because they appeared to be "assets belonging to the government itself.. the Sandiganbayan. it invoking this Court's alleged finding in PCGG et al. It is a mere conservator. To my mind. It may not vote the shares in a corporation and elect the members of the board of directors. 1988 that the "relevant background facts of the case culled from Petitioners' Urgent Consolidated Petition" was not without a reason or purpose. caution and prudence should be exercised in the case of sequestered shares of an on-going private business enterprise. that Africa dissipated ETPI's assets. (Italics supplied. Being based on mere allegations. Feliciano. as in the case of BASECO.200.

corporation and elect members of the board of directors. The only conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO. In short, the Sandiganbayan held that the public character exception does not apply, in which case it should have proceeded to apply the two-tiered test. This it failed to do. The questions thus remain if there is prima facie evidence showing that the subject shares are ill-gotten and if there is imminent danger of dissipation. This Court is not, however, a trier of facts, hence, it is not in a position to rule on the correctness of the PCGG's contention. Consequently, this issue must be remanded to the Sandiganbayan for resolution. II On the PCGG's submission that the Stock and Transfer Book should not be used as the basis for determining the voting rights of the shareholders because some entries therein were altered "by substitution": This Court sees no grave abuse of discretion on the part of the Sandiganbayan in ruling that: The charge that there were "alterations by substitution" in the Stock and Transfer Book is not a matter which should preclude the Stock and Transfer Book from being the basis or guide to determine who the true owners of the shares of stock in ETPI are. If there be any substitution or alterations, the anomaly, if at all, may be explained by the corporate secretary who made the entries therein. At any rate, the accuracy of the Stock and Transfer Book may be checked by comparing the entries therein with the issued stock certificates. The fact is that any transfer of stock or issuance thereof would necessitate an alteration of the record by substitution. Any anomaly in any entry which may deprive a person or entity of its right to vote may generate a controversy personal to the corporation and the stockholder and should not affect the issue as to whether it is the PCGG or the shareholder who has the right to vote. In other words, should there be a stockholder who feels aggrieved by any alteration by substitution in the Stock and Transfer Book, said stockholder may object thereto at the proper time and before the stockholders meeting. 26 Whether the ETPI Stock and Transfer Book was falsified and whether such falsification deprives the true owners of the shares of their right to vote are thus issues best settled in a different proceeding instituted by the real parties-in-interest. III On the PCGG's submission that the Sandiganbayan gravely abused its discretion when it held that it cannot vote at least 23.9% of the outstanding capital stock of ETPI, which percentage is broken down as follows: Shares ceded to the government by virtue

of the Benedicto compromise Shares represented by some stock

-

12.8%

certificates found in Malacañang (at least) Shares held and admitted by Manuel Nieto to belong to then President Marcos -

-

3.1%

8.0%

The PCGG alleges that the 12.8% indicated above represents 51% of the combined shareholdings of Roberto S. Benedicto and his controlled corporations amounting to 12.8% of the total equity of ETPI which was ceded to the Republic; the 3.1% represents the shares covered by the ETPI stock certificates endorsed in blank found in Malacañang, now in its (PCGG's) possession, which it submits it may, under Section 34 of the Negotiable Instruments Law, 27 take title thereto and vote the same in the stockholders meeting; and the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, in an Affidavit of May 28, 1986, admitted actually belong to former President Marcos: 5. That in relation to and simultaneously with the board meeting of PHILCOMSAT, on March 21, 1986, I declared my concurrence in the disclosures made on the participation of Mr. Ferdinand E. Marcos and associates in the companies covered by the sequestration order dated March 14, 1986 i.e., 39,926.2% (sic) of the total subscribed capital stock of Philippine Overseas Telecommunications Corporation and 40% of the individual shareholdings of Jose L. Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern Telecommunications Philippines, Inc. 28 On the question of whether the PCGG can vote all the above shares, the Sandiganbayan, finding in the affirmative, held in its Resolution of November 13, 1992: Considering the Compromise Agreement entered into by the PCGG and Roberto S. Benedicto in Civil Case No. 009 wherein Roberto S. Benedicto assigned and transferred to the Government 12.8% of the shares of stock of ETPI, which Compromise Agreement was made the basis of a judgment of this Court, it is only proper that the PCGG may vote these shares in the stockholders meeting after said judgment shall have become final and executory. Besides, before the PCGG can vote these shares, the transfer to the State of the shares of stock must be entered in the Stock and Transfer Book, the entries therein being the only basis for which the stockholder may vote the said shares. The same ruling is made in respect to the shares of stock represented by stock certificates found in Malacañang (3.1%) and the shares of stock allegedly admitted by Manuel H. Nieto to belong to former President Ferdinand E. Marcos (8.0%). 29 (Italics supplied)

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the shares representing 12.8% of ETPI's outstanding capital stock, the only requirement it imposed being that the transfer of the shares be registered in the Stock and Transfer Book and that, in the case of the Benedicto shares, the Compromise Agreement be final and executory. In requiring that the transfer of the Benedicto shares be first recorded in ETPI's Stock and Transfer Book before the PCGG may vote them, the Sandiganbayan committed no grave abuse of discretion. For Section 63 of the Corporation Code provides: Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations shall be divided into shares for which the certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by the delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. xxx xxx xxx.

With respect to the PCGG's submission that under Section 34 of the Negotiable Instruments Law, it may take title to the shares represented by the blank stock certificates found in Malacañang and vote the same, the same is untenable. The PCGG assumes that stock certificates are negotiable. They are not. . . . [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. 32 That the PCGG found the stock certificates endorsed in blank does not necessarily make it the owner of the shares represented therein. Their true ownership has to be ascertained in a proper proceeding. Similarly, the ownership of the Nieto shares has yet to be adjudicated. That they allegedly belong to former President Marcos does not make the PCGG, its owner. The PCGG must, in an appropriate proceeding, first establish that they truly belong to the former President and that they were ill-gotten. Pending final judgment over the ownership of these shares, the PCGG may not register and vote the Nieto and the Malacañang shares in its name. If the Sandiganbayan finds, however, that there is evidence of dissipation of these shares, the PCGG may vote the same as conservator thereof. IV On the PCGG's imputation of grave abuse of discretion upon the Sandiganbayan for ordering the holding of a stockholders meeting to elect the ETPI board of directors without first setting in place, through the amendment of the articles of incorporation and the by-laws of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas: 33 This Court laid down those safeguards because of the obvious need to reconcile the rights of the stockholder whose shares have been sequestered and the duty of the conservator to preserve what could be illgotten wealth. It is through the right to vote that the stockholder participates in the management of the corporation. The right to vote, unlike the rights to receive dividends and liquidating distributions, is not a passive thing because management or administration is, under the Corporation Code, vested in the board of directors, with certain reserved powers residing in the stockholders directly. The board of directors and executive committee (or management committee) and the corporate officers selected by the board may make it very difficult if not impossible for the PCGG to carry out its duties as conservator if the Board or officers do not cooperate, are hostile or antagonistic to the conservator's objectives. Thus, it is necessary to achieve a balancing of or a reconciliation between the stockholders' right to vote and the conservator's statutory duty to recover and in the process thereof, to conserve assets, thought to be ill-gotten wealth, until final judicial determination of the

Explaining why registration is a prerequisite for the voting of shares, this Court, in Batangas Laguna Tayabas Bus Company, Inc., v. Bitanga, 30 discoursed: Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee . . . cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders' resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Whether the PCGG needs to await the finality of the judgment 31 based on the RepublicBenedicto compromise agreement is now moot since it is not disputed that it had long become final and executory. Accordingly, the PCGG may vote in its name the shares ceded to the Republic by Benedicto pursuant to the said agreement once they are registered in its name.

character of such assets or until a final compromise agreement between the parties is reached. There are, in the main, two (2) types of situations that need to be addressed. The first situation arises where the sequestered shares of stock constitute a distinct minority of the voting shares of the corporation involved, such that the registered owners of such sequestered shares would in any case be able to vote in only a minority of the Board of Directors of the corporation. The second situation arises where the sequestered shares of stock constitute a majority of the voting shares of the corporation concerned, such that the registered owners of such shares of stock would in any case be entitled to elect a majority of the Board of Directors of the corporation involved. Turning to the first situation, the Court considers and so holds that in order to enable the PCGG to perform its functions as conservator of the sequestered shares of stock pending final determination by the courts as to whether or not the same constitute ill-gotten wealth or a final compromise agreement between the parties, the PCGG must be represented in the Board of Directors of the corporation and to its majority-owned subsidiaries or affiliates and in the Executive Committee (or its equivalent) and the Audit Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The PCGG representative must have a right of full access to and inspection of (including the right to obtain copies of) the books, records and all other papers of the corporation relating to its business, as well as a right to receive copies of reports to the Board of Directors, its Executive (or equivalent) and Audit Committees. By such representation and rights of full access, the PCGG must be able so to observe and monitor the carrying out of the business of the corporation as to discover in a timely manner any move or effort on the part of the registered owners of the sequestered stock alone or in concert with other shareholders, to conceal, waste and dissipate the assets of the corporation, or the sequestered shares themselves, and seasonably to bring such move or effort to the attention of the Sandiganbayan for appropriate action. In the second situation above referred to, the Court considers and so holds that the following minimum safeguards must be set in place and carefully maintained until final judicial resolution of the question of whether or not the sequestered shares of stock (or, in a proper case, the underlying assets of the corporation concerned) constitute ill-gotten wealth or until a final compromise agreement between the parties is reached: a. An independent comptroller must be appointed by the Board of Directors upon nomination of the PCGG as conservator. The comptroller shall not be removable (nor shall his position be abolished or his compensation changed) without the consent of the conservator. The comptroller shall, in addition to his other functions as such, have charge of internal audit. b. The corporate secretary must be acceptable to the conservator. If the corporate secretary ceases to be acceptable to the conservator, a new one must be appointed by the Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable to the conservator. The independent external auditors shall not be changed without the consent of the conservator. d. The conservator must be represented in the Board of Directors and in the Executive (or equivalent) and Audit Committees of the corporation involved and of its majority-owned subsidiaries or affiliates. The representative of the conservator must be a full director (not merely an honorary or ex officio director) with the right to vote and all other rights and duties of a member of the Board of Directors under the Corporation Code. The conservator's representative shall not be removed from the Board of Directors (or the mentioned Committees) without the consent of the conservator. The conservator shall, however, have the right to remove and change its representative at any time, and the new representative shall be promptly elected to the Board and its mentioned Committees. e. All transactions involving the disbursement of corporate funds in excess of P5 million must have the prior approval of the director representing the conservator, in order to be valid and effective. f. The incurring of debt by the corporation, whether in the form of bonds, debentures, commercial paper or any other form, in excess of P5 million, must have the prior approval of the director representing the conservator, in order to be valid and effective. g. The disposition of a substantial part of assets of the corporation (substantial meaning in excess of P5 million) shall require the prior approval of the director representing the conservator, in order to be valid and effective. h. The above safeguards must be written into the articles of incorporation and bylaws of the company involved. In other words, the articles of incorporation and by-laws of the company must be amended so as to incorporate the above safeguards. i. Any amendment of the articles of incorporation or by-laws of the company that will modify in any way any of the above safeguards, shall need the prior approval of the director representing the conservator. The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is intended merely to be indicative. The precise amount may differ depending upon the size of the corporation involved and the reasonable operating requirements of its business. Whether a particular case falls within the first or the second type of situation described above, the following safeguards are indispensably necessary: 1. The sequestered shares and any stock dividends pertaining to such shares, may not be sold, transferred, alienated, mortgaged, or otherwise disposed of and no such sale, transfer or other disposition shall be registered in the books of the corporation, pending final

and for legitimate purposes. of course. (Italics supplied) The Court is aware that the implementation of some of the above safeguards may require agreement between the registered stockholders and the PCGG as well as action on the part of the Securities and Exchange Commission." That could be a possibility. According to him . Eduardo de los Angeles (who returned the Notices because he was not authorized to receive such Notices). and dissipate assets. Amendment of Articles of Incorporation. The PCGG nonetheless insists that those measures should be written in the articles and by-laws before such meeting. instead of a "notice of (Delayed) Annual Stockholder's Meeting" which requires a prior 10-day notice. respondent Victor Africa filed a Motion dated March 30. the [Marcos] cronies will elect themselves or their representatives. a legitimate concern of the PCGG. Which of them is the legitimate board of directors? Which of them may rightfully vote to amend the articles of incorporation and integrate the safeguards laid down in Cojuangco? It is essential. . Nevertheless. As a result. . charged as it is with the duties of a conservator. V As for the PCGG's contention that the Sandiganbayan gravely abused its discretion in ordering the Division Clerk of Court to call the stockholders meeting and in appointing then Sandiganbayan Associate Justice Sabino de Leon. . at least ten (10) days before the date of the meeting. interest-bearing. — Except as otherwise provided by law. for inexplicable reasons. any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. need not be burdened with the additional duties of a corporate secretary. if an annual meeting. The danger of the so-called Marcos cronies taking control of the corporation and dissipating its assets is. written or printed notice of all annual and special meetings of stockholders. stating the place and time of the meeting and the general nature of the business to be considered. it is impressed with merit. 4. 1992 asking the Sandiganbayan to "issue the call and Notice of Annual Stockholder's Meeting in ETPI" because under ETPI's By-laws such meeting should be held in the month of May . and for an appreciable period of time. the Clerk of Court may not have the requisite knowledge and expertise to discharge the functions of a corporate secretary. at this late stage. therefore. to be held by such banks for the benefit of whoever is held by final judicial decision or final compromise agreement. account in a first class bank or banks. ETPI's By-laws provide: "Sec. directs petitioners and the PCGG to effect the implementation of this decision under the supervision and control of the Sandiganbayan so that the right to vote the sequestered shares and the installation and operation of the safeguards above-specified may be exercised and effected in a substantially contemporaneous manner and with all deliberate dispatch. the Division Clerk of Court whimsically sent all the Notices meant for the Class B stockholders to Atty. which requires only a prior 5-day notice." Here. to cure this aberration of two boards of directors sitting in a single corporation before the articles of incorporation are amended to set in place the Cojuangco safeguards. telegraph. . 16. destroy or alter corporate records. but shall instead be deposited in an escrow. Notice of Meeting. registered air-mail. (Emphasis in the original) There is nothing in the Cojuangco case that would suggest that the above measures should be incorporated in the articles and by-laws before a stockholders meeting for the election of the board of directors is held. to control and supervise the same. he does not know some of the Class B stockholders for whom notices were sent to him. . or the vote or written assent of at least two thirds (2/3) of the members if it be a non-stock corporation. and 2. Moreover. such danger may be averted by the "substantially contemporaneous" amendment of the articles after the election of the board. . . including stock dividends pertaining to such shares. "otherwise.. . 1992. shall be transmitted by personal delivery. It is not thus surprising to find the PCGG complaining that: .judicial resolution of the question of ill-gotten wealth or a final compromise agreement between the parties. no proper notice has been sent to At the time Africa filed his motion for the holding of the annual stockholders meeting. one controlled by the PCGG and the other by the registered stockholders. Jr. The Clerk of Court. Instead of sending the Notices to each stockholder at his recorded address." However. the Division Clerk of Court issued a "Notice of Special Stockholder's Meeting" . acceptable to the Sandiganbayan. have every opportunity to disburse funds. The Court. In the Resolution dated November 13. who is already saddled with judicial responsibilities. xxx xxx xxx. if a special meeting. there were two sets of ETPI directors. therefore. but the peculiar circumstances of this case require that the election of the board of directors first be held before the articles of incorporation are amended. or cable to each stockholder of record entitled to vote thereat at his address last known to the Secretary of the Company. without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code. control the corporation. — Unless otherwise prescribed by this Code or by special law. or at least five (5) days before the date of the meeting. Section 16 of the Corporation Code requires the majority vote of the board of directors to amend the articles of incorporation: Sec. This Court said as much in Cojuangco: . Dividend and liquidating distributions shall not be delivered to the registered stockholders of the sequestered shares. to be entitled to the shares involved. the Sandiganbayan granted the Motion and authorized its Division Clerk of Court to issue such "Notice of Annual Stockholder's Meeting.

36 Worse. and the action taken at such a meeting will not be set aside because of a wrongful use of the court's interlocutory decree. . 41) This Court also approved a similar action by the Securities and Exchange Commission in Sales v. and such others. 34 (Emphasis in the original) The appointment of a sitting member of the Sandiganbayan is particularly unsound for. And given the stakes involved.) A court of equity may. 38 provides a solution to the Sandiganbayan's dilemma. The appointment of the committee members and the delineation of the scope of the duties of the committee may be made pursuant to an agreement by the parties or in accordance with the provisions of Rule 9 (Management Committee) of the Interim Rules of Procedure for Intra-Corporate Controversies insofar as they are applicable. under such situation. . The dispositive portion of said Resolution reads: Taking account of all the foregoing. the Sandiganbayan has scheduled and is dead set to supervise a stockholder's meeting on November 27. (18 C. the need for an impartial referee to supervise and control the meeting. Securities and Exchange Commission. This Court appreciates the quandary that the Sandiganbayan faced when it ordered its Division Clerk of Court to call the meeting: ETPI has two sets of officers and. (19 C. In the same motion. 40 (Emphasis supplied) . 1996 granting the PCGG authority to cause the holding of such meeting. . 1270. and the PCGG voted the sequestered ETPI shares despite the absence of evidence of dissipation of assets. the case of Board of Directors and Election Committee of SMB Workers Savings and Loan Asso. et al. Tan. presumably. the Sandiganbayan would be faced with the "anomaly" 37 of eventually reviewing the decisions rendered by a member of its court during the stockholders meeting. Such a court cannot make directions contrary to statute and public policy with respect to the conduct of such election. Unless properly notified. Intervenor AEROCOM has shared Africa's assertions. Under the Articles of Incorporation . if he were to preside at the meeting and rule upon the objections that may be raised by some stockholders. etc. and the appointment thereto of Candido C. the justice so appointed would be compelled to inhibit himself from any judicial controversy arising from the stockholders meeting. .J. As earlier stated. Yet. . What then is the reason for him to attend and supervise the meeting? To observe so that he can later testify in the court where he himself sits — in the court which will eventually decide any controversy which may arise from the meeting? 35 Obviously. . two corporate secretaries.Class B stockholders. this Court upheld the creation of a committee empowered to call." to the Sandiganbayan for reception of evidence and resolution. This clearly violates the substantial rights of the Class B stockholders who own 40% of ETPI. on showing of good reason. . as the PCGG points out: . the stockholders meeting would be contentious. . Africa asks this Court to nullify the March 17. Viernes as chairman and representative of the court and one representative each from the parties. of ETPI. Happily. . and By-laws .S. it having been shown that the Election Committee that conducted the election annulled by the respondent court if allowed to act as such may jeopardize the rights of the respondents. In a proper proceeding a court of equity may direct the holding of a stockholders' meeting under the control of a special master.S. Inc. (its) authorized capital stock" and the exercise by the PCGG of the right to vote at said meeting.. where not brought to the attention of the court prior to the meeting. the Court Resolved to REFER the "VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS' MEETING FOR SOLE PURPOSE OF INCREASING EASTERN'S AUTHORIZED CAPITAL STOCK" to the Sandiganbayan for reception of evidence and resolution — WITH ALL DELIBERATE DISPATCH but no longer than sixty (60) days from notice hereof — of the factual issues raised by the parties as herein set out. to say the least. VI And now.. referred the PCGG's "VERY URGENT MOTION FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS MEETING . appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot otherwise be had. factual or otherwise as are relevant. was not notified of the meeting. most of the Class B stockholders who reside in the United Kingdom (and whose shares are not sequestered) will not be able to exercise their right to vote. conduct and supervise the election of the board of directors: As regards the creation of a committee of three vested with the authority to call. There. 1997 stockholders meeting which increased ETPI's authorized capital stock on the grounds that he. v. . in order to decide the basic question in this proceeding of the necessity and propriety of the holding of the special stockholders' meeting of EASTERN for the "sole purpose of increasing . this Court. 39 Such a committee composed of impartial persons knowledgeable in corporate proceedings would provide the needed expertise and objectivity in the calling and the holding of the meeting without compromising the Sandiganbayan or its officers. Africa's motion to cite the PCGG and its "accomplices" in contempt for calling and holding a stockholders meeting to increase ETPI's authorized capital stock without this Court's authority and despite the pendency of motions for reconsideration of the Sandiganbayan Resolution of December 13. hence. conduct and supervise the election. by Resolution of May 7. 1996. Class B stockholders are entitled to vote two members of the Board of Directors. an ETPI stockholder. the Court in the exercise of its equity jurisdiction may appoint such committee.J. 1992.

however. 2001. No. when the PCGG's "VERY URGENT PETITION TO HOLD SPECIAL STOCKHOLDERS MEETING . The more fundamental question that confronts this Court is: Was the PCGG entitled to vote the sequestered shares in the stockholders meeting of March 17. 147214. the question on the validity of the PCCG's voting the Class "A" shares to increase the authorized capital stock of ETPI. Nevertheless. and in order that a court may compel obedience to its orders. the Decisions of this Court declaring that his shares in ETPI 45 and those of AEROCOM 46 and POLYGON (Polygon Investors & Managers. in its Resolution of February 16. thus: Under the Management of Cable and Wireless ETPI grew and prospered. 14 issued on May 7. supra. 0130. however. which were paid in dollars to the BAN Group. Hence. that it is entitled to vote said shares because this Court. the shares were presumed to have been regularly sequestered. that ETPI's assets were being dissipated by the BAN (Benedicto. Business Associates. for to submit the question of disobedience to another tribunal would operate to deprive the proceeding of half its efficiency. which was contemned. incidental to. Subordinates. and not this Court. or the failure to do an act. apply to Africa's motion since at the time he filed it on April 1. which has jurisdiction over the motion to declare the PCGG and "its accomplices" in contempt. The claim is personal to AEROCOM and POLYGON. No. subject to review on certiorari exclusively by the Supreme Court. jurisdiction has been felt properly to rest in only one tribunal at a time with respect to a given controversy.R. Nieto) Group. Inc. and not this Court. their Close Relatives. L-147214 assailing the December 17. VII FINALLY. it was the Sandiganbayan. his petition in G. Africa. AEROCOM and POLYGON are not or are no longer sequestered is of little consequence since the decisions were promulgated after the Sandiganbayan issued its resolution granting the PCGG authority to call and hold the stockholders meeting to increase the authorized capital stock. or Nominees" whether civil or criminal are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and all incidents arising from. The PCGG maintains. 44 This is another reason for the denial of the motion to cite the PCGG and its "accomplices" in contempt. jurisdiction over it pertains exclusively and originally to the Sandiganbayan. Consequently. so he contends. by its claim. should have been allowed to vote their respective shares during the meeting. that this Court rendered decisions holding that the shares of Africa. they. As a matter of practical judicial administration. Even assuming arguendo that the holding of the meeting was contemptuous because the December 13. contempt of court involves the doing of an act. 43 As such." 42 This exception does not. or related to. this does not preclude Africa from invoking his own right as a "small stockholder" of ETPI to vote in the stockholders meeting for the purpose of increasing ETPI's authorized capital stock. Two matters require clarification at this point. 1996 Resolution of the Sandiganbayan had not yet been filed. the rule has been that no other court than the one contemned will punish a given contempt. 1986. said . Partly because of administrative considerations. Africa's motion must thus be denied. 1997 stockholders meeting must likewise be denied for lack of jurisdiction. 41 The above rule is not of course absolute as it admits exception "when the entire case has already been appealed [in which case] jurisdiction to punish for contempt rests with the appellate court where the appeal completely transfers to proceedings thereto or where there is a tendency to affect the status quo or otherwise interfere with the jurisdiction of the appellate court. all cases of the Commission regarding "the Funds. in such a manner as to create an affront to the court and the sovereign dignity with which it is clothed. In whatever context it may arise.) 47 were not sequestered. began to run into millions. " was referred to the Sandiganbayan. SEC. Moneys. it must have the right to inquire whether there has been any disobedience thereof.Clearly. Agents. Mrs. 1997? Second. But when its dividends. Assets. The motion to nullify the March 17. Imelda Romualdez Marcos. and partly to visit the full personal effect of the punishment on a contemnor. and Properties Illegally Acquired or Misappropriated by Former President Ferdinand Marcos. There is thus no need for the parties to seek this Court's imprimatur to hold the same. such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction. Africa faults the Sandiganbayan for failing to acknowledge. the PCGG correctly argues that Africa has no cause of action to claim on behalf of AEROCOM and POLYGON that these two companies are entitled to vote their respective shares in the stockholders meeting to increase ETPI's authorized capital stock. At that time. In his petition in G. The rationale that is usually advanced for the general rule that the power to punish for contempt rests with the court contemned is that contempt proceedings are sui generic and are triable only by the court against whose authority the contempts are charged. the power to punish for contempt exists for the purpose of enabling a court to compel due decorum and respect in its presence and due obedience to its judgments. recognized in PCGG v. 1996 Sandiganbayan Resolution had not yet attained finality. First. and not the PCGG. Dummies. . 1997 before this Court. orders and processes. it is the Sandiganbayan. this Court gave the latter full authority to decide the issue of whether a stockholders meeting should be held. Implicit in this authority was the power to grant (or deny) the petition. Under Section 2 of the President's Executive Order No. .R. Such motion is but an incident to Sandiganbayan Civil Case No.

Victor Africa as President.".200. The PCGG further submits that the Sandiganbayan found prima facie evidence for the issuance of the writ of sequestration covering the Class "A" shares of ETPI. of what use is the PCGG if it cannot even do this? .3 percent Polygon Investors and Managers Inc. Jose Africa Africa's relatives 17.3 percent Aerocom Investors and Managers Inc. et al. Said order completely ties the hands of the PCGG.5 percent By the end of 1987. the ownership of the Class "A" stocks of the corporation was as follows: Roberto S.000.198.2 percent .3 percent 16. . et al. the Sandiganbayan temporarily restrained the PCGG "from calling and/or holding stockholders meetings and voting the sequestered shares thereat for the purpose of amending the articles or by-laws of ETPI.200. however.845. namely: Aerocom Investors. programs or practices. misread this Court's ruling in the said SEC case. Sandiganbayan. Benedicto Universal Molasses Corp. program and practices of said corporation (except for the specified purpose of amending the right of first refusal clause in ETPI's Articles of Incorporation and By Laws) and impliedly to vote the sequestered shares of stocks has been upheld by the Supreme Court in the case of "PCGG vs. another P1. earned from ETPI as of 1987 more than P57M.6 percent to warrant the voting by the PCGG of sequestered shares. . [T]he propriety and legality of allowing the PCGG to cause the holding of a stockholders' meeting of the ETPI for the purpose of electing a new Board of Directors or effecting changes in the policy. 50 (Underscoring and italics supplied) The Sandiganbayan. In lifting the injunction on that aspect. Under a consultancy contract..2 percent 3. Jr. PCGG vs. In 1984. Polygon Investors and Managers with Jose L. No declaration therein was made that in all instances the PCGG may vote the sequestered shares to effect substantial changes in ETPI policy. SEC. . so that in 1986. 1988 . but whether there is prima facie evidence showing that the shares are ill-gotten and whether there is evidence of dissipation of assets .000. the initial capital of P1M of the BAN Group. ." 51 2. . .. or otherwise effecting substantial changes in policy. One of the issues raised therein was whether the Sandiganbayan committed grave abuse of discretion in enjoining the PCGG from calling and holding stockholders meetings and voting the sequestered ETPI shares for the purpose of deleting the "right of first refusal" clause in ETPI's articles of incorporation. programs or practices of said corporation. 49 (Italics supplied) The Sandiganbayan proceeded to quote the following pronouncement of this Court in PCGG v. Jr.5 percent 2.R. Manuel Nieto.845. 48 As stated early on.00 is due them for 1987. for a grand total of P405.000. cash dividends to the BAN Group.185.00 as "professional fees" and Manuel H. Likewise in 1987. We find the general injunction imposed by it on the PCGG to desist and refrain from calling a stockholders meeting for the purpose of electing a new Board of Directors of effecting substantial changes in the policy. G." Clearly. No. Africa as Chairman and his son. Indeed. however. In its therein assailed Order. Universal Molasses. program or practice of the corporation to be too broad as to taint said order with grave abuse of discretion. 82188. The Sandiganbayan should have limited itself to restraining the calling and holding of the stockholders meeting and voting the shares for the sole purpose of amending the "right of first refusal" clause.00 as "allowances". promulgated June 30.000. Nieto's relatives 3. Africa P1.000. Cash dividends paid to them as of 1986 had amounted to P225. As to the latter issue.00. in the amount of $1M were remitted to the United States. ETPI paid to Jose L. Requests for employment of family relatives and high salaries for them were made.00 even as another P180.000. 17. its corporations and relatives had grown to the astronomical sum of P784. The BAN Group likewise placed the majority of their individual stockholdings in three separate companies. and Polygon. Nieto.group also started to intervene in the corporation's operations and management. rendering it virtually helpless in the exercise of its power of conserving and preserving the assets of the corporation. Such reliance on the Sandiganbayan's ruling is misplaced because the issue is not whether there is prima facie evidence to warrant sequestration of the shares. the Sandiganbayan held in the affirmative in this wise: . this Court merely recognized "that situations may arise wherein only through an act of strict ownership can the PCGG be able to prevent the dissipation of the assets of the sequestered corporation or business. the foregoing narration does not constitute a finding of fact. SEC: But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from holding the stockholders meeting for the specified purpose of amending the "right of first refusal" clause in ETPI's Articles of Incorporation and By-Laws.00. the temporary restraining order was too broad. It was thus necessary for this Court to make the underscored ruling above.

Mario E. this Court would not have bothered. and (6) This Court has no jurisdiction over the motion to cite the PCGG and "its accomplices" in contempt and to nullify the stockholders meeting of March 17. (5) Members of the Sandiganbayan shall not participate in the stockholders meeting for the election of the ETPI Board of Directors. this Court Resolved to REFER the petitions at bar to the Sandiganbayan for reception of evidence to determine whether there is a prima facie evidence showing that the sequestered shares in question are ill-gotten and there is an imminent danger of dissipation to entitle the PCGG to vote them in a stockholders meeting to elect the ETPI Board of Directors and to amend the ETPI Articles of Incorporation for the sole purpose of increasing the authorized capital stock of ETPI. In its petition. Calpo. Mendoza for E. (4) The safeguards laid down in the case of Cojuangco v. The PCGG may not register the transfer of the Malacañang and the Nieto shares in the ETPI Stock and Transfer Book. December 14. 1 EDUARDO M. supra. (3) The PCGG is entitled to vote the shares ceded to it by Roberto S.. COCOFED et al. SYNOPSIS The first Division of the Sandiganbayan in Civil Case Nos. petitioner. & Ballares. contended that respondent Sandiganbayan committed grave abuse of discretion in enjoining them from voting the sequestered shares of stock in UCPB . et al. 1997. the Sandiganbayan. (2) The ETPI Stock and Transfer Book should be the basis for determining which persons have the right to vote in the stockholders meeting for the election of the ETPI Board of Directors. et al. WHEREFORE. Abello Concepcion Regala & Cruz for COCOFED. et al. the Republic of the Philippines. and to perform such acts as will normally follow in the exercise of these rights as registered stockholders. the election of the ETPI Board of Directors. as well as Eduardo Cojuangco. This lapse by the Sandiganbayan leaves this Court with no other choice but to remand these questions to it for proper determination.. acknowledged registered stockholders of the United Coconut Planters Bank (UCPB) and all other registered stockholders of the bank. The Solicitor General for petitioners.. but not before. Sycip Salazar Hernandez & Gatmaitan for UCPB. Neither shall a Clerk of Court be appointed to call such meeting and issue notices thereof.] REPUBLIC OF THE PHILIPPINES. The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt of this Resolution and in conformity herewith. like in Africa's motion to hold a stockholders meeting (to elect a board of directors). Estelito P. to exercise their right to vote their shares of stock and themselves to be voted upon in the UCPB at the scheduled Stockholders' Meeting on March 6. if. it may vote the same as conservator provided that the PCGG satisfies the two-tiered test devised by the Court in Cojuangco v. and the SANDIGANBAYAN (First Division) respondents. as the Sandiganbayan assumed. represented by the Presidential Commission on Good Government (PCGG). COJUANGCO JR. in the PCGG's petition to hold a stockholders meeting (to amend the articles of incorporation to increase the authorized capital stock). and Ballares. Nos. 2001 or on any subsequent continuation or resetting thereof. et al. On such determination hinges the validity of the votes cast by the PCGG in the stockholders meeting of March 17. again failed to apply the two-tiered test.Moreover. Jr. vs. Roxas shall be incorporated in the ETPI Articles of Incorporation substantially contemporaneous to. this Court had come to a conclusion in the SEC case that the BAN Group was guilty of dissipation and that. IEcaHS SO ORDERED. in its Resolution of May 7. represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG). however. 0033-B and 0033-P allowed respondents COCOFED. Cojuangco.R. or the parties may agree to constitute. 147062-64. 2001. Benedicto and his controlled corporations under the Compromise Agreement. 52 This Court notes that. provided that the shares are first registered in the name of the PCGG. this Court rules that: (1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend the Articles of Incorporation for the purpose of increasing the authorized capital stock unless there is a prima facie evidence showing that said shares are ill-gotten and there is an imminent danger of dissipation. IN SUM. 1997 filed by Victor Africa is DENIED for lack of jurisdiction. [G. The motion to cite the PCGG and its "accomplices" and to nullify the ETPI Stockholders Meeting of March 17. Ongkiko for petitioners-intervenors.M. Catapang Guzman Tiongco & Torres for UCPB & 14 CIIF Holding Co. send notices and preside at the meeting for the election of the ETPI Board of Directors. and BALLARES et al. The Sandiganbayan shall appoint. et al. 1996. the PCGG was entitled to vote the sequestered shares. a committee of competent and impartial persons to call. 0033-A. to direct said court to decide whether the PCGG has the right to vote in the stockholders meeting for the purpose of increasing ETPI's authorized capital stock. 1997. consequently..

b) it is imposed by the State by virtue of its sovereignty. THE SUBJECT SHARES BELONG. TO THE GOVERNMENT. One of the recognized rights of an owner is the right to vote at meetings of the corporation. Cojuangco Jr. prima facie public funds. coconut levy funds satisfy this general definition of public funds. The right to vote is classified as the right to control. amending a charter. ID. Voting rights may be for the purpose of. in general. Public funds are those moneys belonging to the State or to any political subdivision of the State. — Having shown that the coconut levy funds are not only affected with public interest. at the very least. among others. SEQUESTERED SHARES OF STOCK ARE VOTED BY THE REGISTERED HOLDER... the government becomes their prima facie beneficial and true owner. coconut levy funds partake of the nature of taxes which. if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v.. No. exercise acts of dominion. this Court will even be more categorical and positive than its earlier pronouncements: the coconut levy funds are not only affected with public interest. COCONUT LEVY FUNDS ARE PRIMA FACIE PUBLIC FUNDS. The right to vote is classified as the right to control. Ownership has been aptly described as the most comprehensive of all real rights and the right to vote shares is a mere incident of ownership. SAID FUND SATISFY THE GENERAL DEFINITION OF PUBLIC FUNDS. a tax has three elements. ID. ID:. thus. ID. more specifically. EXCEPTION TO THE RULE. HAVING BEEN ACQUIRED WITH PUBLIC FUNDS. as follows: (1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State? (2) Is there an imminent danger of dissipation.. The exceptions are based on the common-sense principle that legal fiction must yield to truth. ID. 4. they are. ID. Voting rights may be for the purpose of. ID.. — It is necessary to restate the general rule that the registered owner of the shares of a corporation exercises the right and the privilege of voting. "affected with public interest. In the present case. v. PCGG (hereinafter "Baseco") and Cojuangco Jr. — Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies. namely: a) it is an enforced proportional contribution from persons and properties. in fact.. — To avoid misunderstanding and confusion. ID. SEQUESTERED SHARES ACQUIRED WITH PUBLIC FUNDS. Because the subject UCPB shares were acquired with government funds. ID. MERCANTILE LAW. and that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of ownership. ID. taxes.R. Because the subject UCPB shares were acquired with government funds. 3. exacted by the State by virtue of its sovereignty for the support of government and for all public needs. COCONUT LEVY FUNDS ARE AFFECTED WITH PUBLIC INTEREST." and because they belong to it as the prima facie beneficial and true owner thereof.despite the fact that the sequestration share were purchased with coconut levy funds (which were declared public in character) and the continuing effectivity of Resolution dated February 16. it should be allowed the rights and privileges flowing from such fact. because they belong to it as the prima facie beneficial and true owner. and c) it is levied for the support of the government. On the other hand.. Roxas ("Cojuangco-Roxas") has provided two clear "public character" exceptions under which the government is granted the authority to vote the shares: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names. The coconut levy funds fall squarely into these elements. Ownership includes the right to enjoy.. The Court held that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds — funds that are prima facie public in character or. as a general rule. that public property registered in the names of non-owners is affected with trust relations. electing or removing directors. the government has been shown to be the prima facie owner of the funds used to purchase the shares. ECDaAc The Supreme Court uphold the contention of the PCGG ands set aside the assailed order of the Sandiganbayan. are enforced proportional contributions from persons and properties. CORPORATION CODE. at the very least. ID. it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly illgotten wealth. herein private respondents — even if they are the registered shareholders — cannot be accorded the right to vote them. Voting is an act of dominion that should be exercised by the share owner. 1993 in G. while the main issue is pending with the Sandiganbayan? CTHaSD 2. electing or removing directors. Calpo and PCGG v. ID.. Hence. voting is an act of dominion that should be exercised by the share owner. One of the recognized rights of an owner is the right to vote at meetings of the corporation. exclude and recover a thing without limitations other than those established by law or by the owner. This principle applies even to shares that are sequestered by the government. ID.. PRIMA FACIE. Undeniably. — The Court in Baseco v.. As stated at the beginning. Based on this definition. this Court believes that the government should be allowed to vote the questioned shares. we hold that these funds and shares are. the government becomes their prima . Sandiganbayan stated that coconut levy funds were "clearly affected with public interest". CcEHaI 5. COCONUT LEVY FUND RAISED THROUGH STATE'S POLICE AND TAXING POWER. or making or amending bylaws." The Resolution issued by the Court on February 16. 96073 which allows the PCGG to vote said sequestered shares. are "clearly affected withy public interest. 6. GENERAL RULE.. ID. thus necessitating their continued sequestration and voting by the PCGG. over which the PCGG as a mere conservator cannot. customs duties and moneys raised by operation of law for the support of the government or for the discharge of its obligations. amending a charter or making or amending by laws. — Indeed. dispose of... 1993 in Republic v. and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. HCSEcI SYLLABUS 1. among others. but are in fact prima facie public funds. SHARES OF STOCK.

ID. whereby the PCA purchased with funds from the CCSF the aforesaid UCPB shares from Eduardo Cojuangco. . Indeed.. did not change the character of the UCPB shares." TSIDEa 8. should still be resolved in order to fully adjudicate the main issue. separate opinion: 1. — The main issue of who may vote the shares cannot be determined without passing upon the question of the public/private character of the shares and the funds used to acquire them. J. this Court has "the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors properly assigned depend. the 1987 Constitution. . THE LAW OR EXISTING JURISPRUDENCE. ID. In one case. GRAVE ABUSE OF DISCRETION MAY ARISE WHEN A LOWER COURT OR TRIBUNAL VIOLATES OR CONTRAVENES THE CONSTITUTION. COCOFED." Therefore. By way of a financial assistance to the selling coconut farmers. were ultimately given to the farmers. the government has been shown to be the prima facie owner of the funds used to purchase the shares. treats the proceeds as a special fund to be paid out for such purpose. at two hundred pesos (Php200. and unmistakably a very grave abuse of discretion. the Court has the authority to include them in its discussion of the controversy as well as to pass upon them. In the latter agreement. PURCHASE BY THE COCONUT INDUSTRY INVESTMENT FUND COMPANIES OF THE COCONUT FARMER'S SHARE IN UNITED COCONUT PLANTERS BANK DID NOT CHANGE THE PUBLIC CHARACTER OF THE SHARES. grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution.. amounting to 72.16 of said shares were distributed to the farmers... Indeed. no positive relief can be given them now. COCOFED. ID. ID.84 shares registered in the name of COCOFED which. where he appeared to have exercised his option to acquire the UCPB shares of stock owned by the family of the late Don Jose Cojuangco. "where the issues already raised also rest on other issues not specifically presented as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record. THEIR RIGHT IS DEPENDENT UPON THE SANDIGANBAYAN'S RESOLUTION ON THE ACTION FOR THE RECOVERY OF THE SEQUESTERED SHARES. the balance. that purpose has been fulfilled or is no longer forthcoming. ID. 232. Jr.852. NO POSITIVE RELIEF FOR INTERVENORS... in their Memorandum. Still there remained 15. whether public or private." 9. restating another general principle. CERTIORARI. — We cannot rule on intervenors' alleged right to vote at this time and in this case. in 1975. was designated by the Philippine Coconut Authority ("PCA") as being the implementing agency for the free distribution of the shares of stock of the UCPB to the coconut farmers. Hence. exclude and recover a thing without limitations other than those established by law or by the owner. If.. — To account for their equity holdings in the bank. REMEDIAL LAW. These transactions. which may either be a general public purpose to support the existence of the state or a special public purpose to pursue certain legitimate objects of government in the exercise of police power. a substantial number of the coconut farmers sold their shares in the bank at prices below par value. a private national association of coconut producers. which may thereafter be appropriated by Congress and expended for any legitimate purpose within the scope of the general fund. shall then be transferred to the general funds of the government.. Sr. And the right to vote shares is a mere incident of ownership. — Respondent Eduardo Cojuangco.. would advance that. however. nevertheless. MERCANTILE LAW. Prior to June 1986." dated 25 May 1975. if any. the UCPB Board of Directors authorized the CIIF companies to purchase their holdings in the bank at par value. advanced two documents — an agreement in May 1975. As a measure to ensure the proper utilization of money collected for a specified public purpose.619.. like its counterparts in the 1935 and the 1973 Constitution.." The fundamental rule is that tax proceeds may only be used for a public purpose. and the "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines.00) per share. Ownership includes the right to enjoy. according to it. caIACE 7. Jr. JR. Ownership has been aptly described as the most comprehensive of all real rights. PUBLIC CHARACTER OF SHARES IS A VALID ISSUE.. Hence. SHARES OF STOCK. although not specifically raised in the Court a quo. PENDING A CONCLUSIVE DETERMINATION ON THE LEGALITY OF THE 10% EQUITY RETENTION STANDING IN THE NAME OF RESPONDENT EDUARDO COJUANGCO. in claiming ownership over a portion of the sequestered UCPB shares. CORPORATION CODE. In the present case. their asserted rights cannot be ruled upon in the present proceedings.. capriciously and arbitrarily depriving the government of its right to vote sequestered shares purchased with coconut levy funds which are prima facie public funds. it should be allowed the rights and privileges flowing from such fact. ID. An entity. dispose of.419.00) per share. these having been bought with coconut levy funds which the Court distinctly characterized to be "clearly affected with public interest" and "raised such as they were by the State's police and taxing powers. the law or existing jurisprudence. TICDSc VITUG..805. Thus. and none other. mandates that no money shall be paid out of the national treasury except in pursuance of an appropriation made by law. By 02 May 1981. SPECIAL CIVIL ACTIONS. That right is dependent upon the Sandiganbayan's resolution of their action for the recovery of said sequestered shares. upon the other hand. et al.facie beneficial and true owner. ID. The latter issue.2% equity holding in the bank. also at two hundred pesos (Php200. this Court ruled that the lower court's resolution was "tantamount to overruling a judicial pronouncement of the highest Court . except insofar as they join petitioner in barring private respondents from voting the subject shares. Given the patent fact that intervenors are not registered stockholders of UCPB as of the moment. it was stipulated .. the 1987 Constitution. SECHIA 2. the power to dispose of such money being vested in the legislature. IT WOULD BE NEITHER RIGHT NOR JUST TO DEPRIVE HIM FROM MEANWHILE EXERCISING HIS RIGHT TO AT LEAST VOTE THE SAME. ID. which holds the tax money has no authority to disburse it or to pay any of it to anyone. — We hold that the Sandiganbayan gravely abused its discretion when it contravened the rulings of this Court in Baseco and Cojuangco-Roxas — thereby unlawfully. ID.

ACCOUNTING. Moreover. Too. ID. Eduardo M. ID.. In passing. 961 and 1468 have not been repealed. or declared unconstitutional.. have been PCGG nominees.. Note should also be taken of the fact that the determination of whether the coconut levy funds are public funds involves the ascertainment of the constitutionality of Section 5. since 1986.that as compensation for exercising his personal and exclusive option to acquire the UCPB shares and for transferring such shares to the PCA. therefore belong to the government. Eduardo Cojuangco. the issue involved herein is whether or not the Sandiganbayan committed grave abuse of discretion when it issued the disputed order allowing respondents to vote the UCPB shares of stock registered in their names. 961 and Section 5. hence they are presumed valid and binding. 2d. that sequestration does not mean the vesting of title in the hands of the sequestering authority. the Court denied the same in a Resolution dated March 26. dissenting opinion: 1. The question of whether the coconut levy funds are public funds is not in issue here. pending a conclusive determination on the legality of such a retention. 1468 as unconstitutional. the judgment may be implemented. 961 and 1468 have not been raised by the PCGG during the proceedings before the Sandiganbayan. Notwithstanding the lapse of more than 14 years. THE QUESTION OF WHETHER THE COCONUT LEVY FUNDS ARE PUBLIC FUNDS IS NOT IN ISSUE IN THE PRESENT CASE. In sum. correlating the two agreements. the actuations of PCGG with regard to the sequestered shares partake more of deprivation rather than preservation. and as mentioned earlier. Without a previous declaration of unconstitutionality. the shares of stock in UCPB were sequestered in 1986. 033. Civil Case No.. Cojuangco. would receive one (1) share for every nine (9) shares acquired by the PCA and additional equity in the bank.. citing cases). CORPORATION LAW. the term implies the preservation of assets. the Sandiganbayan did not rule on the nature of the fund.. I should like to state my understanding of the ruling of the Court. the constitutionality of Presidential Decrees No. the validity of the acquisition by Cojuangco Jr. ID. the proceedings have barely gone beyond the pre-trial stage. and. could be assailed. Jr. the UCPB shares of stock and was filed to maintain the effectivity of the writs of sequestration pursuant to Section 26. J. THE DETERMINATION OF WHETHER THE COCONUT LEVY FUNDS ARE PUBLIC FUNDS INVOLVES THE ASCERTAINMENT OF THE CONSTITUTIONALITY OF SECTION 5 OF ARTICLE III OF PRESIDENTIAL DECREE NO.. Jr. Article III of Presidential Decree No. would contend. the coconut levy funds may not thus be characterized as prima facie belonging to the government.. a state of affairs not within the contemplation of "sequestration" as a means of preservation of assets. DAaIHT 2. 96073. accounting. the nature of the funds used is a matter which should be decided first-hand by the Sandiganbayan when it resolves the merits of Civil Case No. 859. in G. Neither ownership nor rights thereover are acquired or lost by virtue alone of sequestration — a mere ancillary remedy to secure a disputed asset. Also. The stockholders' meeting scheduled on March 6. rather. in effect. the argument that the coconut levy funds used to purchase the sequestered UCPB shares of stock are public funds does not appear to have been raised before the Sandiganbayan. aESIDH 3. Verily. MERCANTILE LAW. For the foregoing reasons. it would be premature. REVERSION AND RESTITUTION FILED BY THE PCGG WITH THE SANDIGANBAYAN. TCaAHI MELO. the issue of whether or not coconut levy funds are public funds not having been raised before it. In the instant case. filed a motion to declare the coconut levies collected pursuant to the various issuances as public funds and to declare Section 5.. Corporations 2d Section 1065. ID. — Moreover. Jur. consequently. et al. As pointed out by respondents.. "Preservation. No. TO RULE ON THE MATTER WOULD BE TO PREEMPT SAID COURT. however. I vote to grant the petition in part and to deny it insofar as the shares of stock pertaining to the 10% of the 72% equity retention standing in the name of Eduardo Cojuangco. are concerned. reversion. to rule on this point at this time. however. That issue must first be resolved by the Sandiganbayan. only one (1) stockholders' meeting of UCPB has been held. it would neither be right nor just to deprive him from meanwhile exercising his right to at least vote the same. At this meeting. In fact. however. — And if it is to be recalled. is its essence. p. judgment is rendered in favor of the petitioner. may very well turn out to be correct." not "deprivation" before judgment. THE VALIDITY OF THE ACQUISITION OF THE UNITED COCONUT PLANTERS BANK SHARES IS THE VERY LIS MOTA OF THE ACTION FOR RECONVEYANCE. Jr. as a result of which all members of the Board of UCPB. DHATcE . This action included. Presidential Decrees No. when the Solicitor General. 0033-A. replacements are installed by the remaining members of the Board — on nomination of the PCGG. — The view expressed by the majority that the UCPB shares. Article XVIII of the Constitution. Article III of Presidential Decree No.. However.R. revoked. among other things. 1987. PCGG's exercise of the right to vote the sequestered shares of stock for a period of 14 years constitutes effectively a deprivation of a property right belonging to the registered stockholders (18 Am. of their UCPB shares is the very lis mota of the action for reconveyance.. It would be absurd to hold that the Sandiganbayan gravely abused its discretion in not holding that the sequestered shares belong prima facie to the government. 2001 would have been the first stockholders' meeting since 1986 at which registered stockholders would exercise their right to vote and by their vote elect the members of the Board of Directors. ID. Article III of Presidential Decree No. SHARES OF STOCK. 1468." was instituted before the Sandiganbayan on July 30. ID. I must first clarify. since these issues are still pending litigation at the Sandiganbayan. PCGG voted all of the shares. since 1986 to the present. Jr. In fact. it should be pointed out that the avowed purpose of sequestration is to preserve the assets sequestered to assure that if. 1996. and restitution filed by the PCGG with the Sandiganbayan. To rule on this matter would be to preempt said court. and when. I submit. 1468. having been acquired with the use of coconut levy funds. Eduardo Cojuangco. Jr.. Even if it were to be conceded that the said 10% holding in UCPB of Eduardo Cojuangco. that he retained title over roughly 10% equity holding in the bank and established his prima facie right over the corresponding shares independently sourced from the coconut levy funds. The civil action "Republic of the Philippines v. When vacancies in the Board occur because of resignation.

the Sandiganbayan has been given by the Court full discretion to evaluate and to allow or disallow the duly registered stockholders of the UCPB shares to exercise the right to vote the said shares in the UCPB elections and/or appointment/replacement of its directors. as in the case at hand. IDASHa . 1993. the Sandiganbayan. in the exercise of its sound discretion and for justifiable reasons cited in its assailed Order of February 28.. 2001 Order 2 of the First Division of the Sandiganbayan 3 in Civil Case Nos. thus necessitating their continued sequestration and voting by the government until a decision. his immediate family. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character. Hence. should be addressed to the Sandiganbayan. 0033-A." Thus. 2001 or on any subsequent continuation or resetting thereof. and FIFTY THOUSAND PESOS (P50. until further orders from this Court. at least.) Nos. ruling with finality on their ownership. estates. condominiums. the right of the movants to exercise their right as abovementioned will be subject to the posting of a nominal bond in the amount of FIFTY THOUSAND PESOS (P50. J P: The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-gotten wealth shall. one would simply be at a loss to understand how such action could be said to be tainted with grave abuse of discretion. be exercised by the registered owner. The pertinent portions of the assailed Order read as follows: “In view hereof. For another. in effect.O. trust accounts.. et al. et al. et al.O. as are all other registered stockholders of the United Coconut Planters Bank.. 1 and 2. the COCOFED elections. are not the subject of the case relied upon. as well as all other registered stockholders of sequestered shares in that bank. 9 Executive Order No. The PCGG may. Marcos. Rather. In sum. et al. mansions. 2001. and Ballares. and the replacement of directors. be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten.” 8 Executive Order No. shopping centers. shares of stocks. SHIETa DECISION PANGANIBAN.000. 14. what is invoked by petitioner is. For one. not the “two-tiered” one.. and more importantly. PCGG (178 SCRA 236 [1989]) wherein it was held that "the incidents concerning the voting of the sequestered shares. et al.’ the Presidential Commission on Good Government (PCGG) was created by Executive Order No. Nos. inter alia. 1 to assist the President in the recovery of the ill-gotten wealth thus accumulated whether located in the Philippines or abroad. in Republic of the Philippines vs. merely a restraining order which was not re-affirmed by the Court when we rendered the main decision in the said consolidated sequestration cases..00) for Eduardo Cojuangco. ID. the Resolution therein could not have referred to or covered said shares. the “public character” test. who were acknowledged to be registered stockholders of the UCPB are authorized. 5 2 6 and 14. — I regret to say that I find unacceptable the contention that the "law of the case" herein should be the Resolution dated February 16.00) jointly for the defendants COCOFED. et al. as well as Eduardo Cojuangco. 1.4. to file and prosecute all cases investigated by it under E.. allowed herein private respondents to vote the sequestered shares in question. to answer for any undue damage or injury to the United Coconut Planters Bank as may be attributed to their exercise of their rights as registered stockholders. “Since by way of form. ID. applies in the instant controversy. the foregoing “two-tiered” test does not apply when the sequestered stocks are acquired with funds that are prima facie public in character or. and to perform such acts as will normally follow in the exercise of these rights as registered stockholders. 2 states that the ill-gotten assets and properties are in the form of bank accounts. empowered the PCGG. 0033-B and 0033-F. et al. Immediately after the 1986 EDSA Revolution. and close associates both here and abroad. buildings. are affected with public interest. The Case Before us is a Petition for Certiorari with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction under Rule 65 of the Rules of Court.000. relatives. Sandiganbayan. with the assistance of the Office of the Solicitor General and other government agencies. is promulgated by the proper court. deposits. the UCPB shares of stock of respondents COCOFED. and Ballares. residences. INCIDENTS CONCERNING THE VOTING OF THE SEQUESTERED SHARES BEING MATTERS INCIDENTAL TO THE SEQUESTRATION SHOULD BE ADDRESSED TO THE SANDIGANBAYAN. cdasia However. the movants COCOFED. If. and Ballares. and (2) demonstrate imminent danger of dissipation of the assets. et al. then the right to vote them shall be exercised by the PCGG. Jr. as a rule. and other kinds of real and personal properties in the Philippines and in various countries of the world. seeking to set aside the February 28. the pleadings herein had been labeled as praying for an injunction.” 4 The Antecedents The very roots of this case are anchored on the historic events that transpired during the change of government in 1986. on the other hand. Aquino issued Executive Order (E. being matters incidental to the sequestration. what I believe is truly applicable herein is the Court's decision in COCOFED vs. to exercise their rights to vote their shares of stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled Stockholders’ Meeting on March 6. 7 “On the explicit premise that ‘vast resources of the government have been amassed by former President Ferdinand E. however. et al. then President Corazon C.

” 13 The dispositive portion of the said Resolution reads as follows: “IN VIEW OF THE FOREGOING. lifted the sequestration of the subject UCPB shares. assets and properties. 1993. 19 The case had initially been raffled to this Court’s Third Division which. Furthermore. upon Motion 11 of Private Respondent COCOFED. restitution and damages docketed as Case No. (hereinafter “Cojuangco”). nullifying and setting aside the November 15. In response. 1990 Resolution of the Sandiganbayan which. the antigraft court ordered the holding of elections for the Board of Directors of UCPB. accounting.” the so-called Coconut Industry Investment Fund companies (CIIF companies) and Private Respondent Eduardo Cojuangco Jr. reversion. electing the board of directors. and Ballares. On March 7. it allowed the sequestered shares to be voted by their registered owners. freeze orders and provisional takeovers of allegedly ill-gotten companies. the PCGG applied for and was granted by this Court a Restraining Order enjoining the holding of the election. 2001.R. demanding the holding of a stockholders’ meeting for the purpose of. suspends the effectivity of the lifting of the sequestration decreed by the Sandiganbayan on November 15. instituted an action for reconveyance. the Court rendered its final Decision in G. acting on the solicitor general’s Motion for Clarification/Manifestation. real or personal. 1992 and. The express impleading of herein Respondents COCOFED et al. On February 23. issued the assailed Order. 96073 in this Court. the PCGG — pursuant to an Order of the Sandiganbayan — subdivided Case No. 0033 into eight Complaints and docketed them as Case Nos. On November 15. 20 issued a Resolution 21 requiring the parties to maintain the status quo existing before the issuance of the questioned Sandiganbayan Order dated February 28. Subsequently. the Court recalls and sets aside the Resolution dated March 3. on July 31. 0033-A. 1987 provided under Section 26. and “2. The Sandiganbayan ruled that the Writ of Sequestration issued by the Commission was automatically lifted for PCGG’s failure to commence the corresponding judicial action within the six-month period ending on August 2. CaDEAT Six years later. 1987. moved that the instant Petition be heard by the Court en banc. Until that is done. Respondent COCOFED et al. the Sandiganbayan issued a Resolution 12 lifting the sequestration of the subject UCPB shares on the ground that herein private respondents — in particular. 96073. issued a Resolution on February 16. the Court lifted the Restraining Order and ordered the UCPB to proceed with the election of its board of directors. “COCOFED.Pursuant to these laws. 1990. and until further orders. 0033-B and 0033-F. 1990. the board approved a Resolution calling for a stockholders’ meeting on March 6. The victory of the registered shareholders was fleeting because the Court. accounting. reversion. as earlier stated. upon motion of Cojuangco. The anti-graft court noted that though these entities were listed in an annex appended to the Complaint. 1987 Complaint for reconveyance. 1995. 0033-A to 0033-H. 0033 in the Sandiganbayan. Article XVIII of the 1987 Constitution. no cause of action against them and no ground to implead them as defendants in said case. 2001 at three o’clock in the afternoon.” filed the “Class Action Omnibus Motion” 17 referred to earlier in Sandiganbayan Civil Case Nos. declaring that “the right of petitioners *herein private respondents+ to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. In connection with the sequestration of the said UCPB shares. the PCGG. COCOFED and the so-called CIIF companies — had not been impleaded by the PCGG as parties-defendants in its July 31. asking the court a quo: “1. respondent court. in principle. 2001. so as to allow the PCGG to continue voting the shares of stock under sequestration at the meetings of the United Coconut Planters Bank. That right still has to be established by them before the Sandiganbayan. 22 The Motion was unanimously granted by the Third Division. and directs the restoration of the status quo ante.” 15 Furthermore. the companies “are simply the res in the actions for the recovery of illegally acquired wealth.R. et al.” 18 On February 28. . and there is. No. on February 13. To enjoin the PCGG from voting the SMC shares registered in the names of the 14 CIIF holding companies including those registered in the name of the PCGG. Hence. However. No. was deemed unnecessary because “the judgment may simply be directed against the shares of stock shown to have been issued in consideration of illgotten wealth. restitution and damages.” 14 On January 23. they had not been named as parties-respondents. by a vote of 3-2. et al. the PCGG issued and implemented numerous sequestrations. Meanwhile. 10 Among the properties sequestered by the Commission were shares of stock in the United Coconut Planters Bank (UCPB) registered in the names of the alleged “one million coconut farmers. the Board of Directors of UCPB received from the ACCRA Law Office a letter written on behalf of the COCOFED and the alleged nameless one million coconut farmers. this Petition by the Republic of the Philippines represented by the PCGG. To enjoin the PCGG from voting the UCPB shares of stock registered in the respective names of the more than one million coconut farmers. 2001. after hearing the parties on oral argument. 2001. This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari docketed as G. pending resolution on the merits of the action at bar. among others. 2001.” 16 A month thereafter. they cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to vote them.

with grave abuse of discretion. the gut substantive issue to be resolved in the present Petition is: “Who may vote the sequestered UCPB shares while the main case for their reversion to the State is pending in the Sandiganbayan?” This Court holds that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds — funds that are prima facie public in character or. the Court in Baseco v. 28 as follows: (1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State? (2) Is there an imminent danger of dissipation. No. exercise acts of dominion.. Inter alia. the Court en banc resolved to accept the Third Division’s referral. 26 On the other hand. it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten wealth. that public property registered in the names of non-owners is affected with trust relations. The Respondent Sandiganbayan violated petitioner’s right to due process by taking cognizance of the Class Action Omnibus Motion dated 23 February 2001 despite gross lack of sufficient notice and by issuing the writ of preliminary injunction despite the obvious fact that there was no actual pressing necessity or urgency to do so. v. The exceptions are based on the common-sense principle that legal fiction must yield to truth. while the main issue is pending with the Sandiganbayan? Sequestered Shares Acquired with Public Funds Are an Exception From the foregoing general principle. Calpo 27 and PCGG v. Cojuangco Jr. 23 It heard the case on Oral Argument in Baguio City on April 17. was placed under sequestration by the PCGG. the Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa ng Niyugan (PKSMMN). as a general rule. 96073 which allows the PCGG to vote said sequestered shares. it admitted the intervention of a group of coconut farmers and farm worker organizations. Explained the Court: . 2001. and that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of ownership. it is necessary to restate the general rule that the registered owner of the shares of a corporation exercises the right and the privilege of voting. issued its Order dated February 28. 2001 enjoining PCGG from voting the sequestered shares of stock in UCPB. “B. and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. Roxas 30 (“Cojuangco-Roxas”) has provided two clear “public character” exceptions under which the government is granted the authority to vote the shares: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names.” General Rule: Sequestered Shares Are Voted by the Registered Holder At the outset.R. at the very least. In Baseco.On March 13. 2001. 1993 in G. a private corporation known as the Bataan Shipyard and Engineering Co. the Court defined the issue to be resolved in the instant case simply as follows: “Did the Sandiganbayan commit grave abuse of discretion when it issued the disputed Order allowing respondents to vote UCPB shares of stock registered in the name of respondents?” This Court’s Ruling The Petition is impressed with merit. if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v. Respondent Sandiganbayan. Main Issue: Who May Vote the Sequestered Shares of Stock? Simply stated. thus necessitating their continued sequestration and voting by the PCGG. PCGG 29 (hereinafter “Baseco”) and Cojuangco Jr. are “clearly affected with public interest. The coalition claims that its members have been excluded from the benefits of the coconut levy fund. over which the PCGG as a mere conservator cannot. 2001. Issues Petitioner submits the following issues for our consideration: 24 “A. During the hearing. Despite the fact that the subject sequestered shares were purchased with coconut levy funds (which were declared public in character) and the continuing effectivity of Resolution dated February 16. it joined petitioner in praying for the exclusion of private respondents in voting the sequestered shares.” In its Resolution dated April 17. 25 This principle applies even to shares that are sequestered by the government.

” 34 (Italics supplied) The exception was cited again by the Court in Cojuangco-Roxas 35 in this wise: “The rule in this jurisdiction is. as already adverted to.” 39 In short. Rather. where as in this case.” 33 (Italics supplied) The Court granted PCGG the right to vote the sequestered shares because they appeared to be “assets belonging to the government itself. to have been (1) originally government shares. Herbosa. when sequestered shares registered in the names of private individuals or entities are alleged to have been acquired with ill-gotten wealth. The PCGG cannot perform acts of strict ownership of sequestered property.’ and that it was by and through the same means. however.” 32 Citing an earlier Resolution. explained this principle as follows: “I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to the government or whose capitalization comes from public funds but which. . do you agree with that? “Atty. Sandiganbayan. particularly. as in the case of BASECO. . the PCGG may in this case exercise some measure of control in the operation. the Court discussed PCGG’s right over BASECO in the following manner: “Now. 2001 in Baguio City. Feliciano. (its) disposal or dissipation. or (2) purchased with public funds or those affected with public interest. It is a mere conservator. the government shall vote the shares. in Antiporda v. Teresita J. it is not disputed that the money used to purchase the sequestered UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF). Roxas prevail. the public character exceptions in Baseco v. caution and prudence should be exercised in the case of sequestered shares of an on-going private business enterprise. since the true and real ownership of said shares is yet to be determined and proven more conclusively by the Courts. properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation. running. specially the sensitive ones. However. PCGG and Cojuangco Jr. then the two-tiered test does not apply. when the sequestered shares in the name of private individuals or entities are shown. and other government-owned or controlled entities.’ the PCGG is given power and authority. Inc. something more than mere physical custody is connoted. or management of the business itself. v. then the two-tiered test is applied. UCPB Shares Were Acquired With Coconut Levy Funds In the present case before the Court. clear. This fact was plainly admitted by private respondent’s counsel. . by taking undue advantage of his public office and/or using his powers. To my mind. The only conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds. or influence. as follows: “It is thus important to determine first if the sequestered corporate shares came from public funds that landed in private hands. that is. Your Honor. 38 this Court said that in determining the issue of whether the PCGG should be allowed to vote sequestered shares. Melencio-Herrera.. during the Oral Arguments held on April 17. through its designated directors. in which she was joined by Justice Florentino P. it ruled further: “ ‘Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President . xxx xxx xxx . as follows: “Justice Panganiban: “In regard to the theory of the Solicitor General that the funds used to purchase *both+ the original 28 million and the subsequent 80 million came from the CCSF. that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co. . otherwise known as the coconut levy funds.” 36 (Italics supplied) The “public character” test was reiterated in many subsequent cases. Coconut Consumers Stabilization Fund. most recently. therefore.’ and since the term is obviously employed in reference to going concerns. prima facie..“The facts show that the corporation known as BASECO was owned and controlled by President Marcos ‘during his administration. somehow. it was crucial to find out first whether these were purchased with public funds. in the special instance of a business enterprise shown by evidence to have been ‘taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos. to ‘provisionally take (it) over in the public interest or to prevent . or business enterprises in operation. 37 Expressly citing Cojuangco-Roxas.” 31 Given this factual background. It may not vote the shares in a corporation and elect the members of the board of directors. 1986. (to the PCGG) dated June 26. the government can.” The Concurring Opinion of Justice Ameurfina A. authority. Herbosa: “Yes. landed in the hands of private persons. but which landed in private hands as in BASECO. through nominees. Atty.

PCGG. it was supposedly interlocutory in character and became functus oficio when this Court decided G. however. “This being so. Your Honor.” 44 (Italics supplied) It is however contended by respondents that this Resolution was in the nature of a temporary restraining order. the lifting of sequestration to be correct. It is. dissipation.” The Resolution issued by the Court on February 16. We quote the said Resolution in part. and Cojuangco v. or that those stockholders who had had some part in the collection. which measures include the sequestration and other orders of the PCGG complained of. are certainly the concern of the Government. LexLib This argument is aptly answered by petitioner in its Memorandum. No. That right still has to be established by them before the Sandiganbayan. the right of the *petitioners+ to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. Nos. at the very least.O. and all assets acquired therefrom should also be regarded as ‘clearly affected with public interest. supra. administration. It is still the truth today: “the coconut levy funds are clearly affected with public interest. “affected with public interest. 1975. 1. the State’s concern to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability.’ ” 43 xxx xxx xxx the acquisition by private persons of their interest therein. 1993 Resolution. we hold that these funds and shares are. PCGG. therefore. 96073 on January 23. 41 this Court categorically declared that the UCPB was acquired “with the use of the Coconut Consumers Stabilization Fund in virtue of Presidential Decree No. they must prima facie and by reason of the circumstances in which they were raised and accumulated be accounted subject to the measures prescribed in E. Until that is done. and freed from any doubt or suspicion that they had taken advantage of their special or fiduciary relation with the agencies in charge of the coconut levies and the funds thereby accumulated? The obvious answer to each of the questions is a negative one. may it also be assumed that the lifting of sequestration removed the character of the coconut levy companies of being affected with public interest. As such.” That was the truth in 1989 as quoted by this Court in its February 16. It cannot be denied that it was the welfare of the entire nation that provided the prime moving factor for the imposition of the levy. or disposition of the coconut levy funds are now deemed qualified to acquire said stock. The coconut levy funds are clearly affected with public interest. Roxas. It seems plain that the lifting of sequestration has no relevance to the nature of the coconut levy companies or their stock or property. as follows: “The coconut levy funds being ‘clearly affected with public interest. the truth remains: the coconut levy funds are still “clearly affected with public interest. they cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to vote them. herein private respondents — even if they are the registered shareholders — cannot be accorded the right to vote them.” Coconut Levy Funds Are Affected With Public Interest Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies.” Private respondents have not “demonstrated satisfactorily that they have legitimately become private funds. raised as they were by the State’s police and taxing powers. and 14 to prevent their concealment. for purposes of argument merely. 755. Said the Court in 1989: “The utilization and proper management of the coconut levy funds. supra. 1993 in Republic v.” “Assuming. Sandiganbayan 42 stated that coconut levy funds were “clearly affected with public interest”.. 1995. etc. It cannot be denied that the coconut industry is one of the major industries supporting the national economy.R. PCGG supra. Herbosa: “Yes. promulgated on July 29. Until it is demonstrated satisfactorily that they have legitimately become private funds. Its jurisprudential bases remain. Baseco v. or to the legality of . thus.“Justice Panganiban: “So it seems that the parties *have+ agreed up to that point that the funds used to purchase 72% of the former First United Bank came from the Coconut Consumers Stabilization Fund? “Atty.” 40 Indeed in Cocofed v. it follows that the corporations formed and organized from those funds.” 45 (Italics supplied) Granting arguendo that the Resolution is interlocutory. 2. and so it is today. Therefore it is of no moment that the Resolution dated 16 February 1993 has not been ratified. which we quote: “The ruling made in the Resolution dated 16 February 1993 confirming the public nature of the coconut levy funds and denying claimants their purported right to vote is an affirmation of doctrines laid down in the cases of COCOFED v. the foregoing juridical situation has not changed.” 46 (Italics supplied) To repeat. so that they and their stock and assets may now be considered to be of private ownership? May it be assumed that the lifting of sequestration operated to relieve the holders of stock in the coconut levy companies — affected with public interest — of the obligation of proving how that stock had been legitimately transferred to private ownership. or to the latter’s capacity or disqualification to acquire stock in the companies or any property acquired from coconut levy funds.

exacted by the State by virtue of its sovereignty for the support of government and for all public needs. 2001. We did so on his representation that he had acquired them with borrowed funds and upon failure of the PCGG to satisfy the “two-tiered” test. customs duties and moneys raised by operation of law for the support of the government or for the discharge of its obligations. and (2) through their Omnibus Motion dated February 23. This test was. b) it is imposed by the State by virtue of its sovereignty. it is anchored on the grossly mistaken application of the two-tiered test mentioned earlier in this Decision.” Neither is it based on the alleged lifting of the TRO issued by this Court on February 16.A. effective at the start of business hours on August 10. The very laws governing coconut levies recognize their public character. with the acquiescence of private respondents. by parity of reasoning. Cojuangco. P. this Court will even be more categorical and positive than its earlier pronouncements: the coconut levy funds are not only affected with public interest. Thus.00 per 100 kilograms of copra resecada or its equivalent in other coconut products. 1973. 3. Sandiganbayan (G. No. 96073. the sequestered UCPB shares are confirmed to have been acquired with coco levies. A levy. coconut levy funds satisfy this general definition of public funds. however. 2001 — allowing private respondents to vote the sequestered shares — is not based on any finding that the coconut levies and the shares have “legitimately become private funds. The coconut levy funds fall squarely into these elements for the following reasons: (a) They were generated by virtue of statutory enactments imposed on the coconut farmers requiring the payment of prescribed amounts.” 50 . because of the following reasons: 1. in PCGG v. Hence. they are. a tax has three elements. must first be determined. Coconut levy funds are raised with the use of the police and taxing powers of the 2. “The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund. addressed to the UCPB Board of Directors. Public funds are those moneys belonging to the State or to any political subdivision of the State. in accordance with the mechanics established under R. mandated the following: “a. not with alleged ill-gotten wealth. Respondents have judicially admitted that the sequestered shares were purchased with public funds. Sandiganbayan cited earlier. in fact. 48 Undeniably.D. Coconut Levy Funds Are Raised Through the State’s Police and Taxing Powers. if they even half believed their submission now — that they already had such right in 1995 — why are they suddenly and imperiously claiming it only now? It should be stressed at this point that the assailed Sandiganbayan Order dated February 28. To stress. taxes. 1995) granted them the right to vote. 276. Rather.R. in general. prima facie public funds. Coconut Levy Funds Are Prima Facie Public Funds To avoid misunderstanding and confusion. not applied to sequestered SMC shares that were purchased with coco levy funds. initially. namely: a) it is an enforced proportional contribution from persons and properties. has treated them as public funds. The Bureau of Internal Revenue (BIR). The Commission on Audit (COA) reviews the use of coconut levy funds. 2001. which created the Coconut Consumers Stabilization Fund (CCSF). 5. coconut levy funds partake of the nature of taxes which. shall be imposed on every first sale. They are levies imposed by the State for the benefit of the coconut industry and its farmers. State. which per Antiporda v. 2001 filed in the court a quo. Hence. as a separate trust fund which shall not form part of the general fund of the government. DHcESI In the present case. 47 we allowed Eduardo Cojuangco Jr. 49 Based on this definition. We shall now discuss each of the foregoing reasons. of P15. 6260. are enforced proportional contributions from persons and properties. 1. 6. No.If private respondents really and sincerely believed that the final Decision of the Court in Republic v. 1993. and c) it is levied for the support of the government. Indeed. to vote the sequestered shares of the San Miguel Corporation (SMC) registered in his name but alleged to have been acquired with illgotten wealth. the two-tiered test is applied only when the sequestered asset in the hands of a private person is alleged to have been acquired with ill-gotten wealth. any one of which is enough to show their public character. why did they wait for the lapse of six long years before definitively asserting it (1) through their letter dated February 13. the right to vote them is not subject to the “two-tiered test” but to the public character of their acquisition. demanding the holding of a shareholders’ meeting on March 6. 4. more specifically. promulgated on January 23. seeking to enjoin PCGG from voting the subject sequestered shares during the said stockholders’ meeting? Certainly.

No. as provided under P. the CCSF was collected under P. The collections made accrue to a ‘Special Fund. or any rule or regulation legally promulgated hereunder by the Authority. issued by former President Ferdinand E. and/or purchased by. on every one hundred kilos of copra resecada. and coconuts and their by products occupy a leading position among the country’s export products. Marcos who was then exercising legislative powers. in the case of a naturalized citizen. No. Orbos. In fact. copra exporters. Just like the sugar levy funds. desiccators and other end-users of copra or its equivalent in other coconut products. planters and producers for a special purpose — that of ‘financing the growth and development of the sugar industry and all its components.00 and by imprisonment of not more than five years. the person or persons responsible for such violation shall be punished by a fine of not more than P20. 276: “3. 56 (c) They were clearly imposed for a public purpose. or its equivalent in other coconut products delivered to.000.” 60 The Court continued: “. or both.. but also to provide means for the rehabilitation and the stabilization of a threatened industry. as held in Caltex Philippines v. oil millers. the penalty shall be imposed on the officer or officers authorizing.” 55 (b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative authorities of the State. 1468 52 — in this wise: “The Authority (Philippine Coconut Authority) is hereby empowered to impose and collect a levy. Aliens found guilty of any offenses shall.’ a ‘Development and Stabilization Fund. The tax collected is not in a pure exercise of the taxing power. . 7[b].D. (Lutz vs.500 or more than P10. Republic Planters Bank. in addition to penalties already prescribed under existing administrative and special law.” 53 Like other tax measures. the funds were even used to organize and finance State offices. They constitute sugar liens (Sec. Indeed. 98 Phil. that it gives employment to thousands of Filipinos. In Cocofed v. Executive Order No. . They were enforced contributions exacted on pain of penal sanctions. If the offender be a corporation. It is levied with a regulatory purpose. 481 dated May 1.000. Araneta. that it is a great source of the State’s wealth. There is absolutely no question that they were collected to advance the government’s avowed policy of protecting the coconut industry. they were not voluntary payments or donations by the people. pay a fine of not less than P2. at the discretion of the Court. specifically P. The sugar levy funds. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its Farmers. . COA 57 and Osmeña v. thus. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. shall.D.” 61 2. 59 the Court observed that certain agencies or enterprises “were organized and financed with revenues derived from coconut levies imposed under a succession of laws of the late dictatorship . 58 Even if the money is allocated for a special purpose and raised by special means. the coconut levy funds constitute state funds even though they may be held for a special public purpose.” 54 Such penalties were later amended thus: “Whenever any person or entity willfully and deliberately violates any of the provisions of this Act.The coco levies were further clarified in amendatory laws. . No. The levy shall be paid by such copra exporters. Taxation is done not merely to raise revenues to support the government.D. the State’s concern to make it a strong and secure source not only of the livelihood of a significant segment of the population. 62 from which we quote: “The stabilization fees collected are in the nature of a tax which is within the power of the State to impose for the promotion of the sugar industry (Lutz vs. oil millers. therefore. Any person or firm who violates any provision of this Decree or the rules and regulations promulgated thereunder. to provide means for the stabilization of the sugar industry. P.D. partnership or a juridical person. both being special public funds acquired through the taxing and police powers of the State. 1998 specifically likens the coconut levy funds to the sugar levy funds. No. which is so affected with public interest as to be within the police power of the State. after having served his sentence. be immediately deported and. which are strikingly similar to the coconut levies in their imposition and purpose. the current levy being collected shall be continued. supra. The levy is primarily in the exercise of the police power of the State. Araneta. permitting or tolerating the violation. pivotal in the plans of a government committed to a policy of currency stability. Until otherwise prescribed by the Authority. . 276. his certificate of naturalization shall be cancelled. it is still public in character. .D. 388).’ almost identical to the ‘Sugar Adjustment and Stabilization Fund’ created under Section 6 of Commonwealth Act 567. and that it is one of the important sources of foreign exchange needed by our country and. were declared public funds by this Court in Gaston v.)” 63 The Court further explained: 64 “The stabilization fees in question are levied by the State upon sugar millers. with deposed Ferdinand Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting coconut industry monopoly. It is. desiccators and other end-users of copra or its equivalent in other coconut products under such rules and regulations as the Authority may prescribe. This Court takes judicial notice of the fact that the coconut industry is one of the great economic pillars of our nation. stabilization of the domestic market including the . 148). . . but also of export earnings the sustained growth of which is one of the imperatives of economic stability. No. In the case before us. 961 51 and P. to be known as the Coconut Consumers Stabilization Fund Levy. PCGG. or suffer cancellation of licenses to operate.

The investment in shares of respondent Bank is not alien to the purpose intended because of the Bank’s character as a commodity bank for sugar conceived for the industry’s growth and development. Article VI. As shown by the attachments to their pleadings. Sec. of note is the fact that one-half (1/2) or P0. those funds will come from well-nigh every town and barrio of Luzon. . moneys from which may be paid out only in pursuance of an appropriation made by law (1987 Constitution. The funds here involved are public in another very real sense: they will belong to the PCSO. . In his words: “. 3. cited in 42 Am. that the OPSF is a special fund is plain from the special treatment given it by E. Sec.. 137.’ the industry being of vital importance to the country’s economy and to national interest. 1973 Constitution.. ‘and all its components. . the practice is not without precedent. .D. ‘administered in trust’ for the purpose intended.e.’ Indeed. Sec.O. not just for any governmental purpose. they are prima facie public funds. It is segregated from the general fund. VI. a government owned or controlled corporation and an instrumentality of the government and are destined for utilization in social development projects which.. 29[3]. 388 is to be utilized for the ‘payment of salaries and wages of personnel. 582 mandatorily requires that the same should be spent exclusively for the establishment. . is to be transferred to the general funds of the Government.. it seems clear that while the funds collected may be referred to as taxes.. Sec. and while it is placed in what the law refers to as a ‘trust liability account. It is but rational that the fees be collected from them since it is also they who are to be benefited from the expenditure of the funds derived from it. tariff and customs duties. the funds involved are clearly public in nature. Once the purpose has been fulfilled or abandoned. American Surety Co. The funds to be generated by the proposed lottery are to be raised from the population at large. for a definite purpose. Equally important as the fact that the coconut levy funds were raised through the taxing and police powers of the State is respondents’ effective judicial admission that these levies are government funds. the revenues collected are to be treated as a special fund. unlike other taxes that the Government levies and collects such as income tax. as well as the monies generated by the On-line Lottery System — are funds exacted by the State. 68 respondents concede that the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment Development Fund “constitute government funds .50 per picul. go only to the uses directed and permitted by law is as real and personal and substantial as the interest of a private taxpayer in seeing to it that tax monies are not intercepted on their way to the public treasury or otherwise diverted from uses prescribed or allowed by law. and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the beneficial owners of the shares so purchased.. Guingona. Jur. The interest of a private citizen in seeing to it that public funds. fringe benefits and allowances of officers and employees of PHILSUCOM’ thereby immediately negating the claim that the entire amount levied is in trust for sugar. Should the proposed operation be as successful as its proponents project. at least in principle. “To rule in petitioners’ favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. planters and millers. Moreover. (Italics supplied) “The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are deposited in the Philippine National Bank and not in the Philippine Treasury. the balance. for the benefit of coconut farmers. P.’ The fact that the State has taken possession of moneys pursuant to law is sufficient to constitute them as state funds. That is the essence of the trust intended (see 1987 Constitution. Art. 66 Justice Florentino P. .” In the same manner. if any.’ the fund nonetheless remains subject to the scrutiny and review of the COA. 294 ALR 535.” “Collections on both levies constitute government funds. Furthermore. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry. 263 Mich 586.D. It ruled in this wise: “Hence. etc. Article VIII. by express provision of the laws imposing them. they are exacted in the exercise of the police power of the State. the coconut levy funds — like the sugar levy and the oil stabilization funds. However. are designed to benefit the general public. As stated above part of the collections on the CCSF levy should be spent for the benefit of the coconut farmers. the collections on the CCSF and CIDF are. p. this Court has also ruled that the oil stabilization funds were public in character and subject to audit by COA. It is also pertinent to note that the more successful the government is in raising revenues by non-traditional methods such as PAGCOR operations and privatization measures. from whatever source they may have been derived. 23[1]. Sec. Feliciano explained that the funds raised by the On-line Lottery System were also public in nature. 29[1]. even though they are held for a special purpose (Lawrence v. producers. 718). operation and maintenance of a hybrid . In the case presently before the Court. 2. lifted from the 1935 Constitution. the pocket books of individual taxpayers and importers. planters and millers. No. Having been levied for a special purpose.foreign market. 18[1]). Article VI.” 65 In his Concurring Opinion in Kilosbayan v. in the language of the statute. i. Being enforced contributions. to be. stabilization of the domestic market including the foreign market. The Court is satisfied that these measures comply with the constitutional description of a ‘special fund..” 67 Thus. the lesser will be the pressure upon the traditional sources of public revenues. Respondents Judicially Admit That the Levies Are Government Funds. And in respect of the collections on the CIDF levy. “That the fees were collected from sugar producers. of the amount levied under P. .

struck off the phrase which is a private fund of the coconut farmers from the original copy of Executive Order No. which is the private fund of the coconut farmers (deleted). administered and managed as public funds consistent with the uses and purposes under the laws which constituted them and the development priorities of the government. for free. the Government. 86-9470 dated April 15. interests. Thus. sugar industry. but is in the nature of a tax and. 277. the powers of the COA are as follows: “The Commission on Audit shall have the power. No. agencies.” 69 4. . acts of the executive branch are prima facie valid and binding. which include all income. utilized.D. properties and shares of stocks procured or obtained with Having shown that the coconut levy funds are not only affected with public interest.” 74 (Italics supplied) Doctrinally. expressly require that the collections on those levies be spent exclusively for the benefit of the industry concerned. And if the enabling law thus so provide. 504 dated May 31. and settle all accounts pertaining to the revenue and receipts of. essential coconut-based products are made available to household consumers at socialized prices. 1234 specifically declared the CCSF as a special fund for a special purpose. . 276 treats them as special funds for a specific public purpose. audit. On the other hand. Laws Governing Coconut Levies Recognize Their Public Nature. The COA Audit Shows the the use of such funds. there can be no other conclusion than that they are prima facie public in character.coconut seed garden and the distribution. Finally and tellingly. 6. IDAESH “On the other hand. the very laws governing the coconut levies recognize their public character. Furthermore. as the sole legislative/executive authority during the martial law years. the Bureau of Internal Revenue has affirmed that these funds are public in character. authority. TcEaDS Moreover. No. Prima Facie. which should be treated as a special account in the National Treasury. by their terms. etc. . administration and management of the coconut levy funds. . This deletion. directed the mode of treatment.D. 70 the COA reviewed the expenditure and use of the coconut levies allocated for the acquisition of the UCPB. to the Government Furthermore. 1986. not private. because they belong to it as the prima facie beneficial and true owner. utilization. Executive Order No.” 73 . including the government’s coconut productivity. public funds that are subject to government administration and disposition. It provided as follows: ‘(a) The coconut levy funds. P. the laws which impose special levies on specific industries. or pertaining to. as well as all assets. Public Nature of the Funds. research extension. 75 was a categorical legislative intent to regard the CCSF as public. but are in fact prima facie public funds. therefore. proceeds or profits derived therefrom. farmers organizations. issued on September 24. 5. for example on the mining industry. Having Been Acquired With Public Funds. In response to a query posed by the administrator of the Philippine Coconut Authority regarding the character of the coconut levy funds. P. to the coconut farmers of the hybrid coconut seednuts produced from that seed garden. the fact remains that the governmental agency entrusted with the duty of implementing the purpose for which the levy is imposed is vested with the discretionary power to determine when and how the collections should be appropriated. the third Whereas clause of P. 711 transferred to the general funds of the State all existing special and fiduciary funds including the CCSF. 1995. funds. Thus. rehabilitation. and expenditures or uses of funds and property.D. or any of its subdivisions. shall be treated. UCPB Shares Belong. . do not. or instrumentalities . this Court believes that the government should be allowed to vote the questioned shares. owned or held in trust by. 71 Under the 1987 Constitution.” 72 Because these funds have been subjected to COA audit. Under COA Office Order No. former President Marcos. unless declared unconstitutional or contrary to law. No. The BIR Has Pronounced That the The phrase in bold face — which is the private fund of the coconut farmers — was crossed out and duly initialed by its author. the executive branch treats the coconut levies as public funds. 1978. and duty to examine. which are designed to advance the development of the coconut industry and the welfare of the coconut farmers. It held as follows: “*T+he coconut levy is not a public trust fund for the benefit of the coconut farmers. and we quote: “WHEREAS. by means of the Coconut Consumers Stabilization Fund (‘CCSF’). . timber industry.” (Italics supplied) Coconut Levy Funds Are Taxes. even President Marcos himself. clearly visible in “Attachment C” of petitioner’s Memorandum.. and market promotions programs. The audit was aimed at ascertaining whether these were utilized for the purpose for which they had been intended.

or making or amending bylaws. And paraphrasing Cocofed v. the government becomes their prima facie beneficial and true owner. among others. they were and are public in nature because they were acquired with coco levy funds which are public in character. PCGG. although not specifically raised in the Court a quo. 77 Because the subject UCPB shares were acquired with government funds. 85 In that case. that “they *the sequestered UCPB shares+ have legitimately become private. dispose of. Ownership includes the right to enjoy. Indeed. In the present case. no positive relief can be given them now. the main issue of who may vote the shares cannot be determined without passing upon the question of the public/private character of the shares and the funds used to acquire them. Given the patent fact that intervenors are not registered stockholders of UCPB as of the moment. it should be allowed the rights and privileges flowing from such fact. electing or removing directors. “where the issues already raised also rest on other issues not specifically presented as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record.” 84 No Positive Relief For Intervenors Intervenors anchor their interest in this case on an alleged right that they are trying to enforce in another Sandiganbayan case docketed as SB Case No. By ruling that the two-tiered test should be applied in evaluating private respondents’ claim of exercising voting rights over the sequestered shares. 0187. the law or existing jurisprudence. 81 this Court ruled that the lower court’s resolution was “tantamount to overruling a judicial pronouncement of the highest Court . in the main cases pending before the Sandiganbayan. 80 We disagree. amending a charter. The latter issue. grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution. except insofar as they join petitioner in barring private respondents from voting the subject shares. and that quite the contrary. should still be resolved in order to fully adjudicate the main issue. The right to vote is classified as the right to control. The purported rights they are invoking are mere expectancies wholly dependent on the outcome of that case in the Sandiganbayan. the Office of the Solicitor General countered that the shares were not private in character.” Procedural and Incidental Issues: Grave Abuse of Discretion. Improper Arguments and Intervenors’ Relief Procedurally. In one case. already cited earlier.As stated at the beginning. One of the recognized rights of an owner is the right to vote at meetings of the corporation. In short. Indeed. Clearly. Hence. the government has been shown to be the prima facie owner of the funds used to purchase the shares. the Republic should continue to vote those shares until and unless private respondents are able to demonstrate. respondents argue that petitioner has failed to demonstrate that the Sandiganbayan committed grave abuse of discretion. this Court has “the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors properly assigned depend. Thus. they seek the recovery of the subject UCPB shares from herein private respondents and the corporations controlled by them. the Court has the authority to include them in its discussion of the controversy as well as to pass upon them. the rights sought to be protected and the reliefs prayed for by intervenors are still being litigated in the said case. Again we disagree. to meet this issue. exclude and recover a thing without limitations other than those established by law or by the owner. 78 Ownership has been aptly described as the most comprehensive of all real rights. 76 Voting rights may be for the purpose of. Hence. the Sandiganbayan effectively held that the subject assets were private in character. . . a demonstration required in every petition under Rule 65. it could not be taken up before this Court. That right is dependent upon the Sandiganbayan’s resolution of their action for the recovery of said sequestered shares. voting is an act of dominion that should be exercised by the share owner. We hold that the Sandiganbayan gravely abused its discretion when it contravened the rulings of this Court in Baseco and Cojuangco-Roxas — thereby unlawfully. we cannot rule on intervenors’ alleged right to vote at this time and in this case.” 82 The Public Character of Shares Is a Valid Issue Private respondents also contend that the public nature of the coconut levy funds was not raised as an issue before the Sandiganbayan. and unmistakably a very grave abuse of discretion. their asserted rights cannot be ruled upon in the present proceedings. Hence. capriciously and arbitrarily depriving the government of its right to vote sequestered shares purchased with coconut levy funds which are prima facie public funds. Therefore. 79 And the right to vote shares is a mere incident of ownership.” 83 Therefore. .

that defendant holds more than 50 per cent of the stocks of said corporation and also is and always has been the president. Inc. particularly in reference to the ownership of the subject shares. This matter involving the coconut levy funds and the sequestered UCPB shares has been straddling the courts for about 15 years. RAFAEL SANTOS. and treasurer thereof. — The facts in this case show that the objection to the venue is well-founded. Every effort. on pain of contempt. EVANGELISTA ET AL. is just an incident of the main cases which are pending in the anti-graft court — the cases for the reconveyance. The fact that defendant was sojourning in Pasay at the time he was served with summons does not make him a resident of that place for purposes of venue. Philippines. In making this ruling. Having been served with summons at that place. to disappear. It shall report to this Court on the progress of the said cases every three (3) months. and should not bar the anti-graft court from making a final ruling. trucks. SYLLABUS 1.R. L-1721. Benjamin H. in declaring the coco levy funds to be prima facie public in character. defendant filed a motion for the dismissal . 0033-B and 0033-F are finally and completely resolved. on the issues and prayers in the said civil cases. The complaint therefore prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them. but. for purposes of venue. among them machineries. plaintiffs-appellants. after proper trial and hearing. pending the final outcome of said cases. PLEADING AND PRACTICE. defendant-appellee. we are in no way preempting the proceedings the Sandiganbayan may conduct or the final judgment it may promulgate in Civil Case Nos. and that defendant. we hold that the Sandiganbayan committed grave abuse of discretion in grossly contradicting and effectively reversing existing jurisprudence. The Petition in Intervention is DISMISSED inasmuch as the reliefs prayed for are not covered by the main issues in this case. cTSHaE We also lay down the caveat that. The complaint does not give plaintiffs' residence. alleges that defendant resides at 2112 Dewey Boulevard. No costs. a Philippine corporation organized for the exploitation of a lumber concession in Zamboanga.] JUAN D. The complaint alleges that plaintiff's are minority stockholders of the Vitali Lumber Company. This factual matter should also be taken up in the final decision in the cited cases that are pending in the court a quo. 2. reversion and restitution to the State of these UCPB shares. Tirol for appellee. CORPORATION. J p: This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from his mismanagement of its affairs and misuse of its assets. The resolution of the main cases has indeed been long overdue.Epilogue In sum. What we are discussing in the present Petition. WHEREFORE. through fault. MERE SOJOURNING IN A PLACE DOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE.. Antonio Gonzales for appellants. the Sandiganbayan is ORDERED to decide with finality the aforesaid civil cases within a period of six (6) months from notice. the result of private enterprise. warehouses. IAEcCT SO ORDERED. The PCGG shall continue voting the sequestered shares until Sandiganbayan Civil Case Nos. corner Libertad Street. and in depriving the government of its right to vote the sequestered UCPB shares which are prima facie public in character. in such triple capacity. province of Rizal. 1950. should be exerted to finally settle this controversy. vs. buildings. 0033-A. pending the final outcome of the said civil cases. and abandonment allowed its lumber concession to lapse and its properties and assets. No. since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. Our determination here is merely prima facie. both by the parties and the Sandiganbayan. 0033-A. PARTIES. Suffice it to say that the public nature of the coco levy funds is decreed by the Court only for the purpose of determining the right to vote the shares.. [G. Again suffice it to say that the only issue settled here is the right of PCGG to vote the sequestered shares. as he claims. DECISION REYES. Furthermore. Pasay. 0033-B and 0033F. May 19. MISMANAGEMENT BY ITS OFFICER. the Petition is hereby GRANTED and the assailed Order SET ASIDE. etc. Plaintiffs also ask for such other remedy as may be just and equitable.. — The plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit. Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are. we stress. thus causing the complete ruin of the corporation and total depreciation of its stocks. we are not ruling in any final manner on their classification — whether they are general or trust or special funds — since such classification is not at issue here. neglect. and (3) to pay the costs of suit. VENUE. RIGHT OF STOCKHOLDERS TO BEING SUIT. manager.

". The finding is based on defendant's sworn statement not rebutted by any proof to the contrary. at first blush. "Civil action in Courts of First Instance may be commenced and tried where the defendant or any of the defendant resides or may be found. Vol. where members of his family who are studying in Manila live and where he himself is sojourning for the purpose of attending to his interests in Manila. I. which is one in personam.. for the lower court found after hearing that defendant had his residence in Iloilo. which provides:. which was an action brought in Manila by a nonresident against a corporation which had its residence for legal purposes in Baguio but whose President was found in Manila and there served with summons." But this phrase has already been held to have a limited application. at the election of the plaintiff. "While the service of the summons was good in either Baguio or Manila we are of the opinion that the objection of the defendant to the place of trial was proper in both cases and that the trial court should have held that the venue was improperly laid. 34 Phil. It is the same phrase used in section 377 of Act 190 from which section 1 of Rule 5 was taken. wherever he may be. But that belief proved erroneous. for the motion precisely denies that averment and alleges that his real residence is in Iloilo City. the regulation applicable is that contained in section 1 of Rule 5. Believing that defendant resided in the province of Rizal. and as construed by this Court it applies only to cases where defendant has no residence in the Philippine Islands. plaintiffs have appealed to this Court. Section 1 of Rule 5 may seem. As to the first question. The first refers to venue and the second. which refers exclusively to the place where the summons may be served. A defendant can not have a residence in one province and be 'found' in another.' i. This applies also to a domestic corporation. If the plaintiff is a nonresident the venue must be laid in the province of the defendant's residence. The venue must be laid in the province where one of the parties resides. This. Ltd. but residence is the vital thing when we deal with venue.. As long as he has a residence in the Philippine Islands he can be 'found. 2112 Dewey Boulevard. only in the province of his residence. (Moran's Comments on the Rules of Court.). If he is a nonresident then the venue may be laid in the province where he is 'found' at the time the action is commenced or in the province of plaintiff's residence. states that defendant is a resident of Iloilo City and not of Pasay. Objection to improper venue may be interposed at any time prior to the trial. Only one of the parties to the action resides here. In support of the objection to the venue. It must be in the province where the defendant resides. There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a hypothetical admission of the allegations of the complaint. in Baguio. e. its president being in that city where the service of summons was made? We think not. Pasay. p. the lower court rendered its order. the Court further said:. 526. but the venue cannot be laid wherever the defendant may be 'found. granting the motion for dismissal upon the two grounds alleged by defendant. that is a residence. The appeal presents two questions. The word 'found' as used in section 377 has a different meaning that belongs to it as used in section 394. no election by plaintiff as to the place of trial. herein plaintiffs brought their action in the Court of First Instance of that province. Plaintiffs opposed the motion for dismissal but presented no counter proof and merely called attention to the Sheriff's return showing service of summons on defendant personally at his alleged residence at No. to the right of the plaintiffs to bring this action for their benefit. and reconsideration of this order having been denied. or in any province where the plaintiff or one of the plaintiffs resides. As we have said a summons may be legally served on a defendant wherever he may be 'found.' The plaintiff in this action has no residence in the Philippine Islands. This Court there said: "Section 377 provides that actions of this character 'may be brought in any province where the defendant or any necessary party defendant may reside or be found. Was it 'found' in the city of Manila under section 377. in the eye of the law. After hearing. And in actions like the present. the motion. therefore. or where the plaintiff or any of the plaintiffs resides. at the election of the plaintiff. This was the construction adopted in the case of Cohen vs. 108. And elaborating on the point when the case came up for reconsideration. "The moving party contends that the venue was properly laid under section 377 in that it was laid in the province where the defendant was found at the time summons was served on its . and at the hearing of the motion defendant also presented further affidavit to the effect that while he has a house in Pasay. among them the averment that defendant is a resident of Rizal province. The matter is regulated by the Rules of Court. In such case the words 'residence' and 'found' are synonymous.of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in favor of plaintiffs. provided he be in the Philippine Islands.. 2nd ed.. which is under oath.". The defendant resides. it is important to remember that the laying of the venue of an action is not left to plaintiff's caprice. There can be. Benguet Commercial Co. Residence of the plaintiff or defendant does not affect the place where a summons may be served.' There is an element entering in section 377 which is not present in section 394. yet he has his permanent residence in the City of Iloilo where he is registered as a voter for election purposes and has been paying his residence certificate. defendant had the right to do in objecting to the court's jurisdiction on the ground of improper venue. to authorize the laying of the venue in the province where the defendant "may be found.' for the purposes of section 377. The venue can be laid in the province where defendant is 'found' only when defendant has no residence in the Philippine Islands.

123-124. supra. then in that case any one of the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations. Where the plaintiff is a nonresident and the contract upon which suit is brought was made in the Philippine Islands it may safely be asserted that the convenience of the defendant would be best served by a trial in the province where he resides. "The construction which the moving party asks us to place on that provision of section 377 above quoted would result in the destruction of the privilege conferred by the section upon a resident defendant which requires the venue to be laid in the province where he resides.". 459). p. as the plaintiff claimed. of what significance is a residence in Jolo? The phrases 'where the defendant *** may reside' and 'or be found' must be construed together and in such manner that both may be given effect. For the purposes of the discussion we assumed in the main case. 977-980). and plaintiffs witnesses are generally found where he resides or where the defendant resides. But while it is to the corporation that the action should pertain in cases of this nature. he having been found and served with process in the city of Manila. the laying of the venue in the city of Manila. If a defendant residing in the province of Rizal is helpless when the venue is laid in the province of Mindoro in an action in which the plaintiff is a nonresident or resides in Manila. and in no other province. We held that the word 'found' was applicable in certain cases. may be found at the time process is served on him. refuse to sue. so that the suit for the damages claimed should be by the corporation rather than by the stockholders (3 Fletcher. whereas the construction which we place upon these phrases permits both to have effect. but we also held that where he is a resident of the Philippine Islands the word 'found' has no application and the venue must be laid in the province where he resides. p. The fact that defendant was sojourning in Pasay at the time he was served with summons does not make him a resident of that place for purposes of venue. 85). however. something which cannot be legally done in view of section 16 of the Corporation Law. and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities. that the defendant was in fact and in law found in the city of Manila. the effect which it was intended by the legislature they should have. it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation. We do not deprive it of all significance and effect and do not eliminate it from the statute. 295). however.president. Ordinarily a defendant's witnesses are found where the defendant resides. the venue must be laid either in the province where the plaintiff resides or in the province where the defendant resides.. 19 Phil. in effect. so that such damages as may be recovered shall pertain to the corporation (Pascual vs. The injury complained of is thus primarily to the corporation. Secretary of Interior. This construction gives both phrases their proper and legitimate effect without doing violence to the spirit which informs all laws relating to venue and which insists always that the action shall be tried in the place where the greatest convenience of the parties will be served. Cyclopedia of Corporations. whenever absent for business or pleasure. But in that case it is the corporation itself and not the plaintiff stockholder that is the real party in interest. Del Saz Orosco. 977-980). for. or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation. the defendant is a nonresident the venue may be laid wherever defendant may be found in the Philippine Islands. which provides:. 61 Phil. Cyclopedia of Corporation pp. that did not justify. In other words. ***" (67 C. We declare that. pp. generally desirable to have the action tried where one of the parties resides. or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution. This is clear. Where. the place to which. even if the defendant were found in the city of Manila. 82. As to the second question. .. and in such cases gave it full significance and effect. "No corporation shall make or declare any stock or bond dividend or any dividend whatsoever except from the surplus profits arising from its business. if the officers of the corporation. we hold that the objection to the venue was correctly sustained by the lower court. then the provision that it shall be laid in the province where he resides is of no value to him. what is the value of a residence in Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because the defendant happens to be found there. which is the real party in interest (13 Fletcher. when the defendant is a resident of the Philippine Islands. In view of the foregoing. J. and proceeded to decide the cause upon the theory that. therefore. although a resident of some other province. it being alleged that defendant's maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. Residence is "the permanent home. We give it the only effect which can be given it and still accord with the other provisions of the section which give defendant the right to have the venue laid in the province of his residence. under the facts of the case. It is. is sound.) A man can have but one domicile at a time (Alcantara vs. the complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer. pp. and residence is synonymous with domicile under section 1 of Rule 5 (Moran's Comments. who are the ones called upon to protect their rights. 104). "We do not believe that the moving party's objection that our construction deprives the word 'found' of all significance and results. as the plaintiff could always elect to lay the venue in the province where the defendant was 'found' and not where he resided. in eliminating it from the statute. In such cases the venue may be laid wherever he may be found in the Philippine Islands at the time of the service of the process. We declared that it was applicable and effective in cases where the defendant is a nonresident. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by. The construction asked for by the moving party would deprive the phrase 'where the defendant *** may reside' of all significance. one intends to return. if the venue may be laid in any province where the defendant.

CAaSHI The Supreme Court denied the petition. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights. During the trial in the Metropolitan Trial Court (MeTC). Chua moved for reconsideration. the present petition. reserves the right to institute it separately or institutes the civil action prior to the criminal action. there was neither a waiver nor a reservation made. And the relief which is granted is a judgment against a third person in favor of the corporation. Ariel Bruno Rivera appeared as private prosecutors and presented Hao as their first witness. or are the ones to be sued. so that the same has to be dismissed. this cannot be done until all corporate debts. CONSTRUED. The Regional Trial Court (RTC) of Manila. the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action. No. Chua moved to exclude complainant's counsels as private prosecutors in the case on the ground that Hao failed to allege and prove any civil liability in the case. nor did the offended party institute a separate civil action. If there is no waiver or reservation of civil liability. SYNOPSIS Private respondent Lydia Hao. vs. evidence should be allowed in the criminal proceedings to establish the civil liability arising from the offense committed on the ground that every person criminally liable for a felony is also civilly liable. private prosecutors Atty. if a corporation has a defense to an action against it and is not asserting it. Under Section 36 of the Corporation Code. Hence. a stockholder may intervene and defend on behalf of the corporation. Appellants shall pay costs. It follows that evidence should be allowed in the criminal proceedings to establish the civil liability arising from the offense committed. DERIVATIVE SUIT. of four counts of falsification of public documents pursuant to Article 172 in relation to Article 171 of the Revised Penal Code. we said that a mere appeal in the civil aspect cannot be treated as a derivative suit because the appeal lacked the basic requirement that it must be alleged in the complaint that the shareholder is suing on a derivative cause of action for and in behalf of the corporation and other shareholders who wish to join. Ariel Bruno Rivera for private respondent. is not possible now.In the present case. While the Court ruled that the criminal complaint filed by private respondent including the civil aspect of the case is not considered a derivative suit because the corporation was not impleaded as an indispensable party. It results that plaintiffs' complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on that ground. The MeTC granted Chua's motion and ordered the complainant's counsels to be excluded from actively prosecuting Criminal Case No. Chua filed before the Court of Appeals a petition for certiorari. evidence should be allowed to establish the extent of injuries suffered. which was denied. So ordered. Dissatisfied. 150793. Hao filed a petition for certiorari in her own behalf and for the benefit of Siena Realty Corporation. Evelyn Sua-Kho and Atty. The order appealed from is therefore affirmed. we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer. read in relation to Section 23. however. respondents. The civil liability arising from the crime may be determined in the criminal proceedings if the offended party does not waive to have it adjudged or does not reserve the right to institute a separate civil action against the defendant. HAO. whenever the officials of the corporation refuse to sue. unless the offended party waives the civil action. Similarly. Branch 190 gave due course to the petition and reversed the . or hold the control of the corporation. CORPORATION CODE. filed a complaintaffidavit with the City Prosecutor of Manila charging petitioner Francis Chua and his wife. where a corporation is an injured party. MERCANTILE LAW. and the private offended party has the right to intervene through the private prosecutors. After Hao's testimony. with the corporation as the real party in interest. cDHCAE [G. The corporation is a necessary party to the suit. — In Western Institute. November 19. the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit. if there be any. its power to sue is lodged with its board of directors or trustees. Clearly. since the complaint has been filed in the wrong court. are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law. Hao moved for reconsideration but it was denied. 285721. MeTC Order. Such amendment. but without prejudice to the filing of the proper action in which the venue shall be laid in the proper province. for it alleged that petitioner falsified documents pertaining to projects of the corporation and made it appear that the petitioner was a stockholder and a director of the corporation. The Court of Appeals held that the action was a derivative suit. In such actions. SYLLABUS 1. The Court stressed that when a criminal action is instituted. treasurer of Siena Realty Corporation. since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. While plaintiffs ask for a remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first complied with. Elsa Chua. A derivative action is a suit by a shareholder to enforce a corporate cause of action. In the present case. the suing stockholder is regarded as a nominal party. petitioner. COURT OF APPEALS and LYDIA C.R. The appellate court promulgated its assailed Decision denying the petition. Martinez Martinez Alcudia Law Office for petitioner.] FRANCIS CHUA. 2004. HON.

if there is no waiver or reservation of civil liability. Siena Realty Corporation is an offended party. CIVIL PROCEDURE. Private respondent asserts that she filed a derivative suit in behalf of the corporation. of the Metropolitan Trial Court (MeTC) of Manila. 2001. ID. and (2) the individual member of the society whose person. of the Court of Appeals in CA-G. Siena Realty Corporation has a cause of action. are as follows: On February 28. — Generally. CIVIL LIABILITY. Private respondent was the one who instituted the action. 57070. ID. Thus. And the civil case for the corporate cause of action is deemed instituted in the criminal action. However. — We find that the recourse of the complainant to the respondent Court of Appeals was proper. right. The civil action involves the civil liability arising from the offense charged which includes restitution. The indemnity which a person is sentenced to pay forms an integral part of the penalty imposed by law for the commission of the crime. 1 dated June 14. DTISaH DECISION QUISUMBING. denying his Motion for Reconsideration. The civil liability arising from the crime may be determined in the criminal proceedings if the offended party does not waive to have it adjudged or does not reserve the right to institute a separate civil action against the defendant. whether done intentionally or negligently. When a person commits a crime he offends two entities namely (1) the society in which he lives in or the political entity called the State whose law he has violated. private respondent Lydia Hao. unless the offended party waives the civil action. and the private offended party has the right to intervene through the private prosecutors.2. the corporation is a proper party in the petition for certiorari because the proceedings in the criminal case directly and adversely affected the corporation. 2001. Accordingly. Additionally. Clearly. what gives rise to the civil liability is really the obligation and the moral duty of everyone to repair or make whole the damage caused to another by reason of his own act or omission. An act or omission is felonious because it is punishable by law. SP No. REMEDIAL LAW. the complaint was instituted by respondent against petitioner for falsifying corporate documents whose subject concerns corporate projects of Siena Realty Corporation.. CRIMINAL COMPLAINT FILED BY PRIVATE RESPONDENT INCLUDING THE CIVIL ASPECT OF THE CASE COULD NOT BE DEEMED A DERIVATIVE SUIT. In the criminal complaint filed by herein respondent. Branch 19. the basis of civil liability arising from crime is the fundamental postulate that every man criminally liable is also civilly liable.. of the Regional Trial Court (RTC) of Manila. and indemnification for consequential damages. — When the civil action is instituted with the criminal action. ID. 1999. CRIMINAL PROCEDURE. filed a complaint-affidavit with the City Prosecutor of Manila charging Francis Chua and his . evidence should be taken of the damages claimed and the court should determine who are the persons entitled to such indemnity. dated April 26. In Criminal Case No. the corporation was not a complainant in the criminal action. — Under the Revised Penal Code. the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action. it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. PROSECUTION OF CIVIL ACTIONS. but it is also the present rule that it must be served with process. It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party. IcHEaA 4. there was neither a waiver nor a reservation made. SINCE THERE WAS NEITHER A WAIVER NOR RESERVATION MADE. It follows that evidence should be allowed in the criminal proceedings to establish the civil liability arising from the offense committed. the criminal complaint including the civil aspect thereof could not be deemed in the nature of a derivative suit. This assertion is inaccurate. affirming the Order. PARTIES TO CIVIL ACTIONS. BASIS. The RTC reversed the Order. chastity or property has been actually or directly injured or damaged by the same punishable act or omission. reparation of the damage caused. CORPORATION IS A PROPER PARTY IN THE PETITION FOR CERTIORARI BECAUSE THE PROCEEDINGS IN THE CRIMINAL CASE DIRECTLY AND ADVERSELY AFFECTED THE CORPORATION. nor did the offended party institute a separate civil action. COMPLAINT DOES NOT STATE THAT PRIVATE RESPONDENT IS FILING THE SAME IN BEHALF AND FOR THE BENEFIT OF THE CORPORATION. ID. 285721. every person criminally liable for a felony is also civilly liable. 1999.. The judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. For a derivative suit to prosper. 1996. as culled from the records. When a criminal action is instituted. J p: Petitioner assails the Decision. reserves the right to institute it separately or institutes the civil action prior to the criminal action. 5. the board of directors of the corporation in this case did not institute the action against petitioner. In the case before us. NOR DID THE OFFENDED PARTY INSTITUTE A SEPARATE CIVIL ACTION. honor. Also challenged by herein petitioner is the CA Resolution. 3. Not every suit filed in behalf of the corporation is a derivative suit. 2 dated November 20.R. the subject of the falsification was the corporation's project and the falsified documents were corporate documents. Therefore. it gives rise to civil liability not so much because it is a crime but because it caused damage to another. Although. IT FOLLOWS THAT EVIDENCE SHOULD BE ALLOWED IN THE CRIMINAL PROCEEDINGS TO ESTABLISH THE CIVIL LIABILITY ARISING FROM THE OFFENSE COMMITTED AND THE PRIVATE OFFENDED PARTY HAS THE RIGHT TO INTERVENE THROUGH PRIVATE PROSECUTORS. Branch 22. Hence. CRIMINAL LAW. the corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res adjudicata against it.. evidence should be allowed to establish the extent of injuries suffered. treasurer of Siena Realty Corporation. The petition was brought in her own name and in behalf of the Corporation. nowhere is it stated that she is filing the same in behalf and for the benefit of the corporation. In other words. dated October 5. TcCDIS The facts.

Hao was never present during the Annual Stockholders Meeting held on April 30. the corporation was a necessary party to the petition filed with the RTC and even if private respondent filed the criminal case. 109. before Br. in her own behalf and for the benefit of Siena Realty Corporation v. by making or causing it to appear in said Minutes of the Annual Stockholders Meeting that one LYDIA HAO CHUA was present and has participated in said proceedings. when in truth and in fact. the RTC in an order reversed the MeTC Order. Hao moved for reconsideration but it was denied. to wit: the said accused prepared. for it alleged that petitioner falsified documents pertaining to projects of the corporation and made it appear that the petitioner was a stockholder and a director of the corporation. Chua filed before the Court of Appeals a petition for certiorari. Case No. Philippines. a derivative suit was allowed. IV and Series of 1994. of four counts of falsification of public documents pursuant to Article 172 3 in relation to Article 171 4 of the Revised Penal Code. as the said accused fully well knew that said Lydia C. Elsa Chua. IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO. After Hao's testimony. Page 22. the said accused. 285721. 285721 6 for falsification of public document. unlawfully and feloniously commit acts of falsification upon a public document. 22 [MeTC]. premises considered. The respondent Court is ordered to allow the intervention of the private prosecutors in behalf of petitioner Lydia C. Francis Chua. the City Prosecutor filed the Information docketed as Criminal Case No. The petition alleged that the lower court acted with grave abuse of discretion in: (1) refusing to consider material facts. Evelyn Sua-Kho and Atty. Hao in the prosecution of the civil aspect of Crim. Book No. her act should not divest the Corporation of its right to be a party and present its own claim for damages. Hao filed a petition for certiorari docketed as SCA No. before the Metropolitan Trial Court (MeTC) of Manila. 1994. 2001. Hence. EaCDAT Petitioner moved for reconsideration but it was denied in a Resolution dated November 20. 5 Thereafter. this petition alleging that the Court of Appeals committed reversible errors: I. SO ORDERED. the petition is GRANTED. and therefore. 285721. the petition is hereby DENIED DUE COURSE and DISMISSED. CONTRARY TO LAW. the appellate court promulgated its assailed Decision denying the petition. In an Order. 1999. 8 Chua moved for reconsideration which was denied.wife. The charge reads: That on or about May 13. 2001. did then and there willfully. being then a private individual. dated October 5. 99-94846 although it was not a party to the criminal complaint in Criminal Case No. 1999 as well as the Order. The Order. the MeTC granted Chua's motion and ordered the complainant's counsels to be excluded from actively prosecuting Criminal Case No. 1999. 99-94846. thus: WHEREFORE. and the Honorable Hipolito dela Vega. Ariel Bruno Rivera appeared as private prosecutors and presented Hao as their first witness. Chua moved to exclude complainant's counsels as private prosecutors in the case on the ground that Hao failed to allege and prove any civil liability in the case. dated December 3. According to the appellate court. Presiding Judge. . a public document. On June 14. Herein petitioner. The Court of Appeals held that the action was indeed a derivative suit. Respondent maintained that when the directors or trustees refused to file a suit even when there was a demand from stockholders. Branch 19. and falsified the Minutes of the Annual Stockholders meeting of the Board of Directors of the Siena Realty Corporation. duly notarized before a Notary Public. allowing Attys. and (3) effectively amending the information against the accused in violation of his constitutional rights. Garcia and entered in his Notarial Registry as Doc No. are hereby AFFIRMED in toto. Dissatisfied. Manila. Branch 22. 285721. against Francis Chua but dismissed the accusation against Elsa Chua. (2) allowing Siena Realty Corporation to be impleaded as co-petitioner in SCA No. Branch 22. Francis Chua. . SO ORDERED. 1999. certified. Metropolitan Trial Court of Manila. private prosecutors Atty. Evelyn Sua-Kho and Ariel Bruno Rivera to actively participate in the proceedings. in the City of Manila. During the trial in the MeTC. 9 Petitioner had argued before the Court of Appeals that respondent had no authority whatsoever to bring a suit in behalf of the Corporation since there was no Board Resolution authorizing her to file the suit. was arraigned and trial ensued thereafter. 1994 and neither has participated in the proceedings thereof to the prejudice of public interest and in violation of public faith and destruction of truth as therein proclaimed. respondent Hao claimed that the suit was brought under the concept of a derivative suit. dated April 26. TcDaSI The RTC gave due course to the petition and on October 5. Juanito G. before the Regional Trial Court (RTC) of Manila. . Atty. The dispositive portion reads: WHEREFORE. 7 entitled Lydia C. For her part. Hence. 285721 WAS IN THE NATURE OF A DERIVATIVE SUIT . Hao.

Siena Realty Corporation has a cause of action. 14 where a corporation is an injured party. For a derivative suit to prosper. In that case. [99-94846] III. the suing stockholder is regarded as a nominal party. . The judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which. . Clearly. 285721 was in the nature of a derivative suit. . 285721. can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit. Private respondent was the one who instituted the action. IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE THAT JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETION IN NOT DISMISSING THE PETITION IN SCA NO. 99-94846 despite the fact that the Corporation was not the private complainant in Criminal Case No. And the civil case for the corporate cause of action is deemed instituted in the criminal action. 18 When a criminal action is instituted. a stockholder may intervene and defend on behalf of the corporation. Not every suit filed in behalf of the corporation is a derivative suit. IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING LYDIA HAO'S COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS IN CRIMINAL CASE NO. 19 In Criminal Case No. or hold the control of the corporation. . On the first issue. . 15 An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights. every person criminally liable for a felony is also civilly liable. whenever the officials of the corporation refuse to sue. however. 20 It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party. 16 A derivative action is a suit by a shareholder to enforce a corporate cause of action. but it is also the present rule that it must be served with process. its power to sue is lodged with its board of directors or trustees. the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action. 17 Under the Revised Penal Code. if at all deserved. with the corporation as the real party in interest. 11 where the court said that an appeal on the civil aspect of a criminal case cannot be treated as a derivative suit. CDESIA Under Section 36 13 of the Corporation Code. unless the offended party waives the civil action. read in relation to Section 23. 285721 IV. considering that Siena Realty Corporation was not the private complainant. However. Petitioner misapprehends our ruling in Western Institute. Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate proceedings and cannot be made part of a criminal action. Similarly. The corporation is a necessary party to the suit. the complaint was instituted by respondent against petitioner for falsifying corporate documents whose subject concerns corporate projects of Siena Realty Corporation. Inc. 285721.II. in Western Institute. the civil aspect of a criminal case cannot be treated as a derivative suit. and (2) when it ruled that Criminal Case No. IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA REALTY WAS A PROPER PETITIONER IN SCA NO. . Petitioner asserts that in this case. 12 Moreover. or are the ones to be sued. . 285721. if a corporation has a defense to an action against it and is not asserting it. This assertion is inaccurate. reserves the right to institute it separately or institutes the civil action prior to the criminal action. 37097 and 37098" since the trial court's judgment of acquittal failed to impose civil liability against the private respondents. petitioner claims that the Court of Appeals erred when (1) it sustained the lower court in giving due course to respondent's petition in SCA No. . it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. . Siena Realty Corporation is an offended party. 9994846? and (3) Should private prosecutors be allowed to actively participate in the trial of Criminal Case No. And the relief which is granted is a judgment against a third person in favor of the corporation. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Hence. . . . . In other words. [9994846] FOR BEING A SHAM PLEADING. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. merely states that "this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. we said that a mere appeal in the civil aspect cannot be treated as a derivative suit because the appeal lacked the basic requirement that it must be alleged in the complaint that the shareholder is suing on a derivative cause of action for and in behalf of the corporation and other shareholders who wish to join. we said: Here. By no amount of equity considerations. Private respondent asserts that she filed a derivative suit in behalf of the corporation. in part. Salas. In such actions. v. He cites the case of Western Institute of Technology. 10 The pertinent issues in this petition are the following: (1) Is the criminal complaint in the nature of a derivative suit? (2) Is Siena Realty Corporation a proper petitioner in SCA No. the board of directors of the corporation in this case did not institute the action against petitioner.

"[w]hen a criminal action is instituted. even though it was not a party-in-interest in the civil case before the lower court. 29 The civil action involves the civil liability arising from the offense charged which includes restitution. reparation of the damage caused. 24 In a string of cases. CSTDIE We turn now to the third issue.the corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res adjudicata against it. Branch 22. 23 when a trial court commits a grave abuse of discretion amounting to lack or excess of jurisdiction. and the Honorable Hipolito dela Vega. chastity or property has been actually or directly injured or damaged by the same punishable act or omission. Court of Appeals. and (2) the individual member of the society whose person. 99-94846." Petitioner before us now claims that the corporation is not a private complainant in Criminal Case No. nowhere is it stated that she is filing the same in behalf and for the benefit of the corporation. Additionally. Did the Court of Appeals and the lower court err in allowing private prosecutors to actively participate in the trial of Criminal Case No. respondent claims that the complaint was filed by her not only in her personal capacity. v. 21 In the criminal complaint filed by herein respondent. the corporation is a proper party in the petition for certiorari because the proceedings in the criminal case directly and adversely affected the corporation. however. The indemnity which a person is sentenced to pay forms an integral part of the penalty imposed by law for the commission of the crime. When a person commits a crime he offends two entities namely (1) the society in which he lives in or the political entity called the State whose law he has violated. even a non-party may institute a petition for certiorari. 27 In the instant case. DaAETS We turn now to the second issue. that respondent's testimony in the inferior court did not establish nor prove any damages personally sustained by her as a result of petitioner's alleged acts of falsification. 285721. Court of Appeals 26 we held that if aggrieved. Gallardo. what gives rise to the civil liability is really the obligation and the moral duty of everyone to repair or make whole the damage caused to another by reason of his own act or omission. the offended party may not intervene in the prosecution of the offense. then the . Therefore. Metropolitan Trial Court of Manila. Petitioner's contention lacks merit. that in Pastor. she avers that she has exhausted all remedies available to her before she instituted the case. we held that the appellate court committed grave abuse of discretion when it sanctioned the standing of a corporation to join said petition for certiorari. 22 In Ciudad Real. right. the basis of civil liability arising from crime is the fundamental postulate that every man criminally liable is also civilly liable. whether done intentionally or negligently. The petition was brought in her own name and in behalf of the Corporation. Hao. Petitioner avers. Petitioner adds that since no personal damages were proven therein. the fastest and most feasible remedy since she could not intervene in the probate of her father-in-law’s estate. It is settled that the offended parties in criminal cases have sufficient interest and personality as "person(s) aggrieved" to file special civil action of prohibition and certiorari. it was ruled that the Court of Appeals committed grave abuse of discretion when it upheld the standing of Magdiwang Realty Corporation as a party to the petition for certiorari. we find that the recourse of the complainant to the respondent Court of Appeals was proper. and indemnification for consequential damages. Petitioner invokes the case of Ciudad Real & Dev’t. Additionally. however. 28 holding that where from the nature of the offense or where the law defining and punishing the offense charged does not provide for an indemnity. 31 Rule 111(a) of the Rules of Criminal Procedure provides that. In that case. cited by petitioner. Generally. 285721? Petitioner cites the case of Tan. it gives rise to civil liability not so much because it is a crime but because it caused damage to another. reserves the right to institute it separately. In the present case. petitioner was the holder in her own right of three mining claims and could file a petition for certiorari. we consistently ruled that only a party-in-interest or those aggrieved may file certiorari cases. Francis Chua. we find that the private prosecutors can intervene in the trial of the criminal action. is the corporation a proper party in the petition for certiorari under Rule 65 before the RTC? Note that the case was titled "Lydia C. Under Rule 65 of the Rules of Civil Procedure. Jr. or institutes the civil action prior to the criminal action. v. 25 In Ciudad Real. and thus cannot be included as appellant in SCA No. despite the finality of the trial court's denial of its Motion for Intervention and the subsequent Motion to Substitute and/or Join as Party/Plaintiff. Presiding Judge. Thus. nor did she reserve the right to institute it separately. in her own behalf and for the benefit of Siena Realty Corporation v. the offended party may intervene by counsel in the prosecution of the offense. Although. The aggrieved parties in such a case are the State and the private offended party or complainant. the person aggrieved can file a special civil action for certiorari. but likewise for the benefit of the corporation. Corporation v. Thus. 30 Under the Rules. the criminal complaint including the civil aspect thereof could not be deemed in the nature of a derivative suit. An act or omission is felonious because it is punishable by law. nor institute the civil action for damages arising from the offense charged. the subject of the falsification was the corporation's project and the falsified documents were corporate documents. where the civil action for recovery of civil liability is instituted in the criminal action pursuant to Rule 111. not only to claim damages for herself but also to recover the damages caused to the company. honor. Jr. the corporation was not a complainant in the criminal action." Private respondent did not waive the civil action. the civil action arising from the offense charged shall be deemed instituted with the criminal action unless the offended party waives the civil action. Note.

The rule is that compliance with the rule after the filing of the complaint.participation of her counsel as private prosecutors. . if there is no waiver or reservation of civil liability.. vs. for and on behalf of the said corporation.. there was neither a waiver nor a reservation made. in relation to Section 128 of the Corporation Code. by-law. evidence should be taken of the damages claimed and the court should determine who are the persons entitled to such indemnity. respondents. It follows that evidence should be allowed in the criminal proceedings to establish the civil liability arising from the offense committed. 2001. A RESIDENT AGENT OF A PRIVATE CORPORATION IS NOT AUTHORIZED TO EXECUTE THE REQUISITE CERTIFICATION AGAINST FORUM SHOPPING. Branch 19. are AFFIRMED. dated June 14. 1999. Under Section 127. dated November 20. RULE AGAINST FORUM SHOPPING. The certification is a peculiar and personal responsibility of the party. The reason was explained by the Court in National Steel Corporation v. 57070. Mario A. — In a case where the plaintiff is a private corporation. ID. this does not mean that he is authorized to execute the requisite certification against forum shopping. the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. ID. CIVIL PROCEDURE. or members acting in their stead. as follows: Unlike natural persons. of Metropolitan Trial Court (MeTC) of Manila. SP No. liabilities and incapacities as are agents of individuals and private persons. or statutory provisions. Aguinaldo is the resident agent of the respondent in the Philippines. or the dismissal of a complaint based on its non-compliance with the rule. FOR AND ON BEHALF OF THE SAID CORPORATION. . like its board chairman and president. the authority of the resident agent of . INC. of the Court of Appeals in CA-G. the private prosecutors are hereby allowed to intervene in behalf of private respondent Lydia Hao in the prosecution of the civil aspect of Criminal Case No. such as the petitioner. in exceptional circumstances. Even his counsel may be unaware of such facts. petitioner... and except so far as limitations or restrictions which may be imposed by special charter. SYLLABUS 1. 32 In the case before us. of whatever status or rank. For who else knows of the circumstances required in the Certificate but its own retained counsel. in respect to his power to act for the corporation. who were supposed to pursue the civil aspect of a criminal case. by a specifically authorized person. In turn. WHEREFORE. If the authority of a party's counsel to execute a certificate of non-forum shopping is disputed by the adverse party. .. . DAcaIE 4. The Decision. evidence should be allowed to establish the extent of injuries suffered. "All acts within the powers of a corporation may be performed by agents of its selection. Purita Hontanosas-Cortes for petitioner. Hence. the certification may be signed. and agents once appointed. ID. dated October 5." . THE CERTIFICATION MAY BE SIGNED. an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties. the court may allow subsequent compliance with the rule. is impermissible.R. Accordingly. No. — It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that the failure to comply with this requirement cannot be excused. the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation. issues and causes of action. BY A SPECIFICALLY AUTHORIZED PERSON. may not even know the details required therein. Court of Appeals. can be performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors.. ID. 2001. 285721 before Branch 22. ID. is not necessary and is without basis. However. . the certificate of non-forum shopping may be incorporated in the complaint or appended thereto as an integral part of the complaint. its officers and/or agents. affirming the Order. the former is required to show proof of such authority or representation. ID.] EXPERTRAVEL & TOURS. the requisite certification executed by the plaintiff's counsel will not suffice. EXCEPTION. corporations may perform physical actions only through properly delegated individuals. [G. Aguinaldo for private respondent. The corporation. Hence.R. Physical acts. nor did the offended party institute a separate civil action. COMPLIANCE THEREWITH AFTER THE FILING OF THE COMPLAINT IS IMPERMISSIBLE. ID. 3. COURT OF APPEALS and KOREAN AIRLINES. like the signing of documents. 152392. — While Atty. May 26.. Accordingly. and the Resolution. IHcTDA When the civil action is instituted with the criminal action. of the Regional Trial Court (RTC) of Manila. including its retained counsel. ID.. Costs against petitioner. Its regular officers. 2005. — Indeed. THIcCA SO ORDERED. has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. ID. a corporation exercises said powers through its board of directors and/or its duly-authorized officers and agents. are subject to the same rules.. and the private offended party has the right to intervene through the private prosecutors.. EcIaTA 2. the instant petition is DENIED. namely. who has personal knowledge of the facts required to be established by the documents. WHERE THE PLAINTIFF IS A PRIVATE CORPORATION. The civil liability arising from the crime may be determined in the criminal proceedings if the offended party does not waive to have it adjudged or does not reserve the right to institute a separate civil action against the defendant. REMEDIAL LAW. REQUISITE CERTIFICATION EXECUTED BY THE PLAINTIFF'S COUNSEL WILL NOT SUFFICE.

facts which are universally known. and (3) it must be known to be within the limits of the jurisdiction of the court. But a court cannot take judicial notice of any fact which. through Atty. it does not alter the complexity of group communication. . KAL. it may also be easier to miscommunicate. The principal guide in determining what facts may be assumed to be judicially known is that of notoriety. In general terms. ID. plus attorney's fees and exemplary damages. SR. THREE MATERIAL REQUISITES.. The verification and certification against forum shopping was signed by Atty. Aguinaldo.... On September 6. . Moreover. ID. 5. a judicially noticed fact must be one not subject to a reasonable dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial court. Atty. or they may be matters which are generally accepted by mankind as true and are capable of ready and unquestioned demonstration. ID. ID. EVIDENCE. Aguinaldo was not authorized to execute the verification and certificate of non-forum shopping as required by Section 5. Aguinaldo was also the corporate secretary of KAL. the courts may take judicial notice that business transactions may be made by individuals through teleconferencing. Aguinaldo was not specifically authorized to execute a certificate of non-forum shopping as required by Section 5. ETI filed a motion to dismiss the complaint on the ground that Atty. . for and in behalf of the foreign corporation. Appended to the said opposition was the identification card of Atty. on November 30. (2) computer conferencing — printed communication through keyboard terminals. in light of Republic Act No. ID. This type of group communication may be used in a number of ways. Aguinaldo. Although it may be easier to communicate via teleconferencing. Under the law. Mario Aguinaldo and his law firm. SP No.R. The Securities and Exchange Commission issued SEC Memorandum Circular No.. showing that he was the lawyer of KAL. such resident may not be aware of actions initiated by its principal. Hence. It was further alleged that Atty.a foreign corporation with license to do business in the Philippines is to receive. Thus. is dependent on the existence or non-existence of a fact of which the court has no constructive knowledge. they are of such universal notoriety and so generally understood that they may be regarded as forming part of the common knowledge of every person.. (ETI). Inc. are judicially noticed. and have three basic types: (1) video conferencing — television-like communication augmented with sound.. in part. BUSINESS TRANSACTIONS MAY BE MADE BY INDIVIDUALS THROUGH TELECONFERENCING. teleconferencing and videoconferencing of members of board of directors of private corporations is a reality. Aguinaldo was its resident agent and was registered as such with the Securities and Exchange Commission (SEC) as required by the Corporation Code of the Philippines.. whether in the Philippines against a domestic corporation or private individual. — Things of "common knowledge". for the collection of the principal amount of P260. JUDICIAL NOTICE. APPLICABLE TO THINGS OF "COMMON KNOWLEDGE". and (3) audio-conferencing — verbal communication via the telephone with optional capacity for telewriting or telecopying. 1999..00. it can be said that judicial notice is limited to facts evidenced by public records and facts of general notoriety. This is because while a resident agent may be aware of actions filed against his principal (a foreign corporation doing business in the Philippines). — In this age of modern technology.150. who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. provided. TELECONFERENCING CANNOT SATISFY THE INDIVIDUAL NEEDS OF EVERY TYPE OF MEETING. ID.. TEAICc 6. J p: Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) in CA-G. or in the country where such corporation was organized and registered. KAL opposed the motion. aITECD DECISION CALLEJO. ID. dictionaries or other publications. (2) it must be well and authoritatively settled and not doubtful or uncertain. Aguinaldo. providing the guidelines to be complied with related to such conferences. Teleconferencing is interactive group communication (three or more people in two or more locations) through an electronic medium. Rule 7 of the Rules of Court.. of which courts take judicial matters coming to the knowledge of men generally in the course of the ordinary experiences of life. In the Philippines. teleconferencing can only facilitate the linking of people. 8792. 7. As the common knowledge of man ranges far and wide. 2001. Rule 7 of the Rules of Court. against a Philippine registered corporation or a Filipino citizen. 8. 15. Teleconferencing cannot satisfy the individual needs of every type of meeting. a wide variety of particular facts have been judicially noticed as being matters of common knowledge. CASTDI The Antecedents Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and licensed to do business in the Philippines. ID. ID. filed a Complaint 2 against ETI with the Regional Trial Court (RTC) of Manila. 61000 dismissing the petition for certiorari and mandamus filed by Expertravel and Tours. contending that Atty.] . while its appointed counsel was Atty. and which may be found in encyclopedias. or (2) capable of accurate and ready determination by resorting to sources whose accuracy cannot reasonably be questionable. teleconferencing can bring people together under one roof even though they are separated by hundreds of miles. matters of judicial notice have three material requisites: (1) the matter must be one of common and general knowledge. — Generally speaking. — Indeed. ID. services and other legal processes in all actions and other legal proceedings against such corporation[. Its general manager in the Philippines is Suk Kyoo Kim.

IN WITNESS WHEREOF. KAL was given a period of 10 days within which to submit a copy of the said resolution. 25. worded as follows: SECRETARY'S/RESIDENT AGENT'S CERTIFICATE KNOW ALL MEN BY THESE PRESENTS: I. with office address at Ground Floor. 1999. Atty. Aguinaldo dated January 10. Page No. voted upon and approved the following resolution which is now in full force and effect. Makati City. Aguinaldo was sufficient compliance with the Rules of Court. a foreign corporation duly organized and existing under and by virtue of the laws of the Republic of Korea and also duly registered and authorized to do business in the Philippines. ANNEXES A AND B OF THE INSTANT PETITION? 7 The petitioner asserts that compliance with Section 5.) MARIO A. (Sgd.A. Book No. Philippines. Aguinaldo & Associates or any of its lawyers are hereby appointed and authorized to take with whatever legal action necessary to effect the collection of the unpaid account of Expert Travel & Tours. 1999. AGUINALDO Resident Agent SUBSCRIBED AND SWORN to before me this 10th day of January. Rule 7. 119. ADASA Notary Public Until December 31. HEREBY CERTIFY that during a special meeting of the Board of Directors of the Corporation held on June 25. giving credence to the claims of Atty. 1999. that Mario A. during which it approved a resolution as quoted in the submitted affidavit. 1999. Finally. 1999. the board of directors approved a resolution authorizing Atty. According to the appellate court. Mario A. ETI then filed a petition for certiorari and mandamus. On April 12. however. It was also averred that in that same teleconference. 2000. attend the Pre-Trial Proceedings and enter into a compromise agreement relative to the above-mentioned claim. sign and execute any document or paper necessary to the filing and prosecution of said claim in Court. defend. Aguinaldo claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during a special meeting held on June 25. Mario A. Atty. Aguinaldo had been duly authorized by the board resolution approved on June 25. HENRY D. issued on January 7. As such. KAL appended a certificate signed by Atty. Aguinaldo. which he and Atty. 2001. 14914545. assailing the orders of the RTC.. The trial court denied the motion in its Order 5 dated August 8. They are hereby specifically authorized to prosecute. the CA rendered judgment dismissing the petition. that the corporation had no written copy of the aforesaid resolution. 1999 at which a quorum was present. ruling that the verification and certificate of non-forum shopping executed by Atty. KAL submitted on March 6. comes to the Court by way of petition for review on certiorari and raises the following issue: DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION AND WHEN IT ISSUED ITS QUESTIONED RESOLUTION. XXIV Series of 2000. in the City of Manila. Atty. litigate. of legal age. ATTY. 2000. of the Rules of Court can be determined only from the contents of the complaint and not by documents or pleadings outside thereof. 2000. Salcedo Village. the trial court issued an Order 4 denying the motion to dismiss. which the trial court granted. Suk Kyoo Kim also alleged. 1999. Aguinaldo subsequently filed other similar motions.) Doc. TDESCa (Sgd. the trial court committed grave abuse of discretion amounting to . ETI. Aguinaldo exhibiting to me his Community Tax Certificate No. and was the resident agent of KAL. to wit: RESOLVED. the said Board unanimously passed. CAacTH ETI filed a motion for the reconsideration of the Order.During the hearing of January 28. I have hereunto affixed my signature this 10th day of January. 2000 PTR #889583/MLA 1/3/2000 6 On December 18. Filipino. contending that it was inappropriate for the court to take judicial notice of the said teleconference without any prior hearing. ETI filed a motion for reconsideration of the said decision. the RTC could not be faulted for taking judicial notice of the said teleconference of the KAL Board of Directors. Upon his motion. No. 124 Alfaro St. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. which the CA denied. 2000 an Affidavit 3 of even date. Aguinaldo and his law firm M. The trial court granted the motion. Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a teleconference on June 25. executed by its general manager Suk Kyoo Kim. now the petitioner. LPL Plaza Building. and duly elected and appointed Corporate Secretary and Resident Agent of KOREAN AIRLINES. In its comment on the petition. Philippines. 2000 at Manila. 2000. Aguinaldo attended. Hence. Thus. alleging that the board of directors conducted a special teleconference on June 25.

for and on behalf of the said corporation. unless otherwise provided. the requisite certification executed by the plaintiff's counsel will not suffice. as the resident agent and corporate secretary. the requirement is nevertheless satisfied if a party is allowed to file pleadings by way of comment or opposition thereto. the petitioner pointed out that there are no rulings on the matter of teleconferencing as a means of conducting meetings of board of directors for purposes of passing a resolution. The petitioner also maintains that the RTC cannot take judicial notice of the said teleconference without prior hearing. aDIHCT Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice. hence. a complete statement of the present status thereof. no such other action or claim is pending therein. The respondent. The petitioner reiterates its submission that the teleconference and the resolution adverted to by the respondent was a mere fabrication. 11 as follows: . it insists that Atty. If the acts of the party or his counsel clearly constitute willful and deliberate forum shopping. may take judicial notice thereof without need of hearings. the petitioner asserts. Rule 7 of the Rules of Court. upon motion and after hearing. The certification is a peculiar and personal responsibility of the party. this makes constant communication between a foreign-based office and its Philippine-based branches faster and easier. 10 In a case where the plaintiff is a private corporation. as well as a cause for administrative sanctions. the same shall be ground for summary dismissal with prejudice and shall constitute direct contempt. had provided a record of corporate conferences and meetings through FiberNet using fiber-optic transmission technology. 1999. It is settled that the requirement to file a certificate of non-forum shopping is mandatory 8 and that the failure to comply with this requirement cannot be excused. Aguinaldo. or other related corporate matters. The petition is meritorious. The submission of a false certification or non-compliance with any of the undertakings therein shall constitute indirect contempt of court. Certification against forum shopping. the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. whether in this country or elsewhere. as well as the Secretary's/Resident Agent's Certification and the resolution of the board of directors contained therein. Even his counsel may be unaware of such facts. without prejudice to the corresponding administrative and criminal actions. 1999 through teleconferencing where Atty. an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties. Rule 7 of the Rules of Court provides: SEC. The petitioner insists that the teleconference and resolution adverted to by the respondent in its pleadings were mere fabrications foisted by the respondent and its counsel on the RTC. or in a sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed any claim involving the same issues in any court. DHSaCA In its reply. It further proposes possible amendments to the Corporation Code to give recognition to such manner of board meetings to transact business for the corporation. Court of Appeals. allowing for cost-cutting in terms of travel concerns. the CA and this Court. It asserts that safeguards must first be set up to prevent any mischief on the public or to protect the general public from any possible fraud. The reason was explained by the Court in National Steel Corporation v. and that such technology facilitates voice and image transmission with ease. who has personal knowledge of the facts required to be established by the documents. on top of the board resolution approved during the teleconference of June 25. the certification may be signed.excess of jurisdiction. is authorized to sign and execute the certificate of non-forum shopping required by Section 5. and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending. Section 5. and the CA erred in considering the affidavit of the respondent's general manager. he shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed. it would be against the provisions of the Corporation Code not to have any record thereof. cannot be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. tribunal or quasi-judicial agency and. — The plaintiff or principal party shall certify under oath in the complaint or other initiatory pleading asserting a claim for relief. On the merits of the petition. Even assuming that there was such a teleconference. The petitioner further avers that the supposed holding of a special meeting on June 25. hence. such cannot be taken judicial notice of by the court. including its retained counsel. until and after teleconferencing is recognized as a legitimate means of gathering a quorum of board of directors. for its part. (b) if there is such other pending action or claim. until then. the courts may take judicial notice that the Philippine Long Distance Telephone Company." Hence. The respondent posits that the courts are aware of this development in technology. by a specifically authorized person. The respondent insists that "technological advances in this time and age are as commonplace as daybreak. to the best of his knowledge. Even if such hearing is required. Aguinaldo was supposedly given such an authority is a farce. as proof of compliance with the requirements of Section 5. issues and causes of action. teleconferencing cannot be the subject of judicial notice. avers that the issue of whether modern technology is used in the field of business is a factual issue. considering that there was no mention of where it was held. Inc. It points out that even the E-Commerce Law has recognized this modern technology. nor any motion therefor. It insists that the Corporation Code requires board resolutions of corporations to be submitted to the SEC. Rule 7 of the Rules of Court. 5. Hence. 9 Hence.

Unlike natural persons, corporations may perform physical actions only through properly delegated individuals; namely, its officers and/or agents. xxx xxx xxx

I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in accordance with law hereby deposes and say: THAT — 1. I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case and have caused the preparation of the above complaint; 2. I have read the complaint and that all the allegations contained therein are true and correct based on the records on files; 3. I hereby further certify that I have not commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency. If I subsequently learned that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any tribunal or agency, I will notify the court, tribunal or agency within five (5) days from such notice/knowledge. IEHTaA (Sgd.) MARIO A. AGUINALDO Affiant CITY OF MANILA SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant exhibiting to me his Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila, Philippines. (Sgd.) Doc. No. 1005; Page No. 198; ATTY. HENRY D. ADASA Notary Public Until December 31, 2000 PTR No. 320501 Mla 1/4/99 13

The corporation, such as the petitioner, has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its dulyauthorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors. "All acts within the powers of a corporation may be performed by agents of its selection; and except so far as limitations or restrictions which may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons." ECTSDa xxx xxx xxx

. . . For who else knows of the circumstances required in the Certificate but its own retained counsel. Its regular officers, like its board chairman and president, may not even know the details required therein. Indeed, the certificate of non-forum shopping may be incorporated in the complaint or appended thereto as an integral part of the complaint. The rule is that compliance with the rule after the filing of the complaint, or the dismissal of a complaint based on its noncompliance with the rule, is impermissible. However, in exceptional circumstances, the court may allow subsequent compliance with the rule. 12 If the authority of a party's counsel to execute a certificate of non-forum shopping is disputed by the adverse party, the former is required to show proof of such authority or representation. In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty. Aguinaldo to execute the requisite verification and certificate of non-forum shopping as the resident agent and counsel of the respondent. It was, thus, incumbent upon the respondent, as the plaintiff, to allege and establish that Atty. Aguinaldo had such authority to execute the requisite verification and certification for and in its behalf. The respondent, however, failed to do so. The verification and certificate of non-forum shopping which was incorporated in the complaint and signed by Atty. Aguinaldo reads:

Book No. XXI Series of 1999.

As gleaned from the aforequoted certification, there was no allegation that Atty. Aguinaldo had been authorized to execute the certificate of non-forum shopping by the respondent's Board of Directors; moreover, no such board resolution was appended thereto or incorporated therein.

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does not mean that he is authorized to execute the requisite certification against forum shopping. Under Section 127, in relation to Section 128 of the Corporation Code, the authority of the resident agent of a foreign corporation with license to do business in the Philippines is to receive, for and in behalf of the foreign corporation, services and other legal processes in all actions and other legal proceedings against such corporation, thus: SEC. 127. Who may be a resident agent. — A resident agent may either be an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. SEC. 128. Resident agent; service of process. — The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some persons who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the dulyauthorized officers of the foreign corporation as its home office. 14 Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of nonforum shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent may be aware of actions filed against his principal (a foreign corporation doing business in the Philippines), such resident may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered, against a Philippine registered corporation or a Filipino citizen. cDSAEI The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically authorized to execute the said certification. It attempted to show its compliance with the rule subsequent to the filing of its complaint by submitting, on March 6, 2000, a resolution purporting to have been approved by its Board of Directors during a teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of the respondent casts veritable doubt not only on its claim that such a teleconference was held, but also on the approval by the Board of Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping. In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of modern technology, persons in one location may confer with other persons in other places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondent's Board of Directors in South Korea on June 25, 1999.

The CA, likewise, gave credence to the respondent's claim that such a teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldo's certification. Generally speaking, matters of judicial notice have three material requisites: (1) the matter must be one of common and general knowledge; (2) it must be well and authoritatively settled and not doubtful or uncertain; and (3) it must be known to be within the limits of the jurisdiction of the court. The principal guide in determining what facts may be assumed to be judicially known is that of notoriety. Hence, it can be said that judicial notice is limited to facts evidenced by public records and facts of general notoriety. 15 Moreover, a judicially noticed fact must be one not subject to a reasonable dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial court; or (2) capable of accurate and ready determination by resorting to sources whose accuracy cannot reasonably be questionable. 16 Things of "common knowledge," of which courts take judicial matters coming to the knowledge of men generally in the course of the ordinary experiences of life, or they may be matters which are generally accepted by mankind as true and are capable of ready and unquestioned demonstration. Thus, facts which are universally known, and which may be found in encyclopedias, dictionaries or other publications, are judicially noticed, provided, they are of such universal notoriety and so generally understood that they may be regarded as forming part of the common knowledge of every person. As the common knowledge of man ranges far and wide, a wide variety of particular facts have been judicially noticed as being matters of common knowledge. But a court cannot take judicial notice of any fact which, in part, is dependent on the existence or non-existence of a fact of which the court has no constructive knowledge. 17 In this age of modern technology, the courts may take judicial notice that business transactions may be made by individuals through teleconferencing. Teleconferencing is interactive group communication (three or more people in two or more locations) through an electronic medium. In general terms, teleconferencing can bring people together under one roof even though they are separated by hundreds of miles. 18 This type of group communication may be used in a number of ways, and have three basic types: (1) video conferencing — television-like communication augmented with sound; (2) computer conferencing — printed communication through keyboard terminals, and (3) audioconferencing-verbal communication via the telephone with optional capacity for telewriting or telecopying. 19 A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was first introduced in the 1960's with American Telephone and Telegraph's Picturephone. At that time, however, no demand existed for the new technology. Travel costs were reasonable and consumers were unwilling to pay the monthly service charge for using the picturephone, which was regarded as more of a novelty than as an actual means for everyday communication. 20 In time, people found it advantageous to hold teleconferencing in the

course of business and corporate governance, because of the money saved, among other advantages include: 1. People (including outside guest speakers) who wouldn't normally attend a distant FTF meeting can participate. SDTcAH 2. Follow-up to earlier meetings can be done with relative ease and little expense.

8.

Informal, one-to-one, social interaction not possible. 22

Indeed, teleconferencing can only facilitate the linking of people; it does not alter the complexity of group communication. Although it may be easier to communicate via teleconferencing, it may also be easier to miscommunicate. Teleconferencing cannot satisfy the individual needs of every type of meeting. 23 In the Philippines, teleconferencing and videoconferencing of members of board of directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to such conferences. 24 Thus, the Court agrees with the RTC that persons in the Philippines may have a teleconference with a group of persons in South Korea relating to business transactions or corporate governance. Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along with the respondent's Board of Directors, the Court is not convinced that one was conducted; even if there had been one, the Court is not inclined to believe that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum shopping. The records show that the petitioner filed a motion to dismiss the complaint on the ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court. The respondent opposed the motion on December 1, 1999, on its contention that Atty. Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The respondent, however, failed to establish its claim that Atty. Aguinaldo was its resident agent in the Philippines. Even the identification card 25 of Atty. Aguinaldo which the respondent appended to its pleading merely showed that he is the company lawyer of the respondent's Manila Regional Office. The respondent, through Atty. Aguinaldo, announced the holding of the teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or until February 8, 2000, within which to submit the board resolution purportedly authorizing him to file the complaint and execute the required certification against forum shopping. The court granted the motion. 26 The respondent, however, failed to comply, and instead prayed for 15 more days to submit the said resolution, contending that it was with its main office in Korea. The court granted the motion per its Order 27 dated February 11, 2000. The respondent again prayed for an extension within which to submit the said resolution, until March 6, 2000. 28 It was on the said date that the respondent submitted an affidavit of its general manager Suk Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference on June 25, 1999, where the Board of Directors supposedly approved the following resolution: RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers are hereby appointed and authorized to take with whatever legal action necessary

3. Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter and more oriented to the primary purpose of the meeting. 4. Some routine meetings are more effective since one can audio-conference from any location equipped with a telephone. 5. 6. 7. Communication between the home office and field staffs is maximized. Severe climate and/or unreliable transportation may necessitate teleconferencing. Participants are generally better prepared than for FTF meetings.

8. It is particularly satisfactory for simple problem-solving, information exchange, and procedural tasks. 9. Group members participate more equally in well-moderated teleconferences than an FTF meeting. 21 On the other hand, other private corporations opt not to hold teleconferences because of the following disadvantages: 1. Technical failures with equipment, including connections that aren't made.

2. Unsatisfactory for complex interpersonal communication, such as negotiation or bargaining. 3. 4. skills. 5. Impersonal, less easy to create an atmosphere of group rapport. Lack of participant familiarity with the equipment, the medium itself, and meeting

Acoustical problems within the teleconferencing rooms.

6. Difficulty in determining participant speaking order; frequently one person monopolizes the meeting. 7. Greater participant preparation time needed. HCDAac

1999. for appellees. to avert the dismissal of its complaint against the petitioner. CUSI and AMPARO CUSI. Worse still. Nava requested the officers of the corporation to register the sale in the books of the corporation. On April 2. the complaint of the respondent. defend. Rolando M. its executive vice-president and secretary respectively. The respondents in their answer pleaded the defense that no shares of stock against which the corporation holds an unpaid claim are transferable in the books of the corporation. for appellant. 1999 never took place. RENATO R. 1999. 2000 that the respondent claimed. the petition is GRANTED. 2000 that the respondent alleged. 1966 Po sold to Ricardo A. Suk Kyoo Kim declared that the respondent "do[es] not keep a written copy of the aforesaid Resolution" because no records of board resolutions approved during teleconferences were kept.] RICARDO A. No certificate of stock was issued to him or. only to allege later that no written copy existed. The Regional Trial Court of Manila is hereby ORDERED to dismiss. Bacolod City Branch to compel the corporation and Renato R. Nava for two thousand pesos twenty of his eighty shares. [G. Aguinaldo in attendance) is incredible. November 25. On December 21. it appears that as early as January 10. Montalvo. as well as to its Compliance dated March 6. litigate. In the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers Marketing Corporation.R. that the meeting of the Board of Directors where the resolution was approved was held via teleconference.R. If the resolution had indeed been approved on June 25. which was filed on September 6. 1966 Nava filed this mandamus action in the Court of First Instance of Negros Occidental. no such resolution was appended to the said certificate. 29 But then. for the first time. It was only on January 26. it even represented to the Court that a copy of its resolution was with its main office in Korea. 61000 is REVERSED and SET ASIDE. that there was such a meeting of the Board of Directors held on June 25. vs. DECISION AQUINO. SP No.to effect the collection of the unpaid account of Expert Travel & Tours. it also did not explain its failure to append the said certificate to the complaint. 2000 motion for extension of time to submit the questioned resolution that it was in the custody of its main office in Korea. attend the Pre-trial Proceedings and enter into a compromise agreement relative to the above-mentioned claim. Medalla. L-28120. Aguinaldo. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Nava. without prejudice. 1999. However. Moreover. The Decision of the Court of Appeals in CA-G. ADHcTE The respondent's allegation that its board of directors conducted a teleconference on June 25. No. thus. long before the complaint was filed. 1999. to any incorporator. Atty. No such certificate was appended to the complaint. 2001 when the respondent filed its comment in the CA that it submitted the Secretary's/Resident Agent's Certificate 30 dated January 10. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. 2000). 1999. PEERS MARKETING CORPORATION. NAVA. This belied the respondent's earlier allegation in its February 10. DCAEcS SO ORDERED. or at least appended a copy thereof. sign and execute any document or paper necessary to the filing and prosecution of said claim in Court. . The Court is. more inclined to believe that the alleged teleconference on June 25. The respondent gave the trial court the impression that it needed time to secure a copy of the resolution kept in Korea. Aguinaldo as early as January 9. J p: This is a mandamus case. for that matter. the CA and this Court. IN LIGHT OF ALL THE FOREGOING. 1999. Suk Kyoo Kim stated in his affidavit that the resolution was embodied in the Secretary's/Resident Agent's Certificate signed by Atty. 2000. respondents-appellees. Jose Y. 1976. The respondent failed to do so. 2000. 1999 and approved the said resolution (with Atty. to register the said twenty shares in Nava's name in the corporation's transfer book. in the same affidavit. Aguinaldo had signed a Secretary's/Resident Agent's Certificate alleging that the board of directors held a teleconference on June 25. Cusi and Amparo Cusi. It was only on January 28. the respondent should have incorporated it in its complaint. the respondent did not explain why the said certificate was signed by Atty. only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written copy. given the additional fact that no such allegation was made in the complaint. It was only on March 6. and yet was notarized one year later (on January 10. and that the resolution allegedly approved by the respondent's Board of Directors during the said teleconference was a mere concoction purposefully foisted on the RTC. Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. The request was denied because Po has not paid fully the amount of his subscription. subscriber or stockholder. for the first time. petitioner-appellant. They are hereby specifically authorized to prosecute. More importantly.

(In the case of nonstock corporations a membership certificate is usually issued. governing the transfer of its shares of stock (Sec. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice-president. 466. Appellant Nava contends that the Fua Cun case was decided under section 36 of the Corporation Law which provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof has been paid by him to the corporation". Section 37 provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof. 19 Phil. Lee E. 21 Phil. The corporation can include in its by-laws rules. and new certificates therefor issued to such person or persons. 589). 705 to justify respondents' refusal in registering the twenty shares in Nava's name in the books of the corporation. March 26. The parties did not bother to submit in evidence the by-laws nor invoke any of its provisions.S. As prescribed in section 35. Bryan. Botica Nolasco Co. It is now section 37.. as contemplated in section 52 of the Corporation Law. That procedure cannot be followed in the instant case because. Bryan. The certificate is then surrendered and a new one issued to the transferee.J. Fleischer vs. shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer.After hearing. except as between the parties. L-23851. Lezama. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends. 138. 13 7. Wack Wack Golf & Country Club. (re voting trust agreement) . Apparently. the shares which may be alienated are those which are covered by certificates of stock. 70 SCRA 165). The subscriber is as much bound to pay his subscription as he would be to pay any other debt. the corporation has a claim on the said shares for the unpaid balance of Po's subscription. the twenty shares in question are not covered by any certificate of stock in Po's name. As a rule. vs. as shown in the following provisions of the Corporation Law and as intimated in Hager vs. Inc. The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does not entitle the subscriber to a certificate of stock for one-half of the number of shares subscribed. or corporation. no provision of the by-laws of the corporation covers that situation. There should be compliance with the mode of transfer prescribed by law (18 C. he fills up the blanks in the form by inserting his own name as transferee. . Wack Wack Golf & Country Club. notes. however. 35. Moreover. 47 Phil 583. A stock subscription is a subsisting liability from the time the subscription is made. Inc. 616. Won vs. The certificate may thereafter be transferred from one person to another. See 19 Phil. "SEC. The usual practice is for the stockholder to sign the form on the back of the stock certificate. xxx xxx xxx (Emphasis supplied). 104 Phil. or transfer of stock" that is supposed to be recorded in the stock and transfer book. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. 36. shall be valid. 19 Phil 138 (overruling the decision in Hager vs. 14 SCRA 1030). 3518.000 as the balance due on Po's subscription and that the twenty shares are not covered by any stock certificate. the trial court dismissed the petition. Won. or the full subscription in case of no par stock. sale. not inconsistent with law. 44 Phil. 928). The issue is whether the officers of Peers Marketing Corporation can be compelled by mandamus to enter in its stock and transfer book the sale made by Po to Nava of the twenty shares forming part of Po's subscription of eighty shares. has been paid by him to the corporation". . "No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation. 523.000 and for which Po had paid only P2. We hold that the transfer made by Po to Nava is not the "alienation. 1459.000. 930). the number of the certificate.. as already noted. the date of the transfer. No transfer. Act No. "xxx xxx xxx "The certificates of stock so transferred shall be surrendered and cancelled." His sole assignment of error is that the trial court erred in applying the ruling in Fua Cun vs. . Section 36 was amended by Act No. it being admitted that the corporation has an unpaid claim of P6.S. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" (18 C. countersigned by the secretary or clerk and sealed with the seal of the corporation. "SEC. and the number of shares transferred.J. (Hager vs. 143-4). until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction. 1976. in which new certificates it shall appear that they are issued pursuant to said agreement. Summers and China Banking Corporation. as such trustee or trustees. Bryan. and Hodges vs. shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. with a total par value of P8. Nava appealed on the ground that the decision "is contrary to law.

petitioner. as a condition precedent for the issuance of the certificate of stock.. which is the evidence of ownership of corporate stock. the pledgee. It is noteworthy that in the Baltazar case the stockholder. In the Baltazar case. there is no clear legal duty on the part of the officers of the corporation to register the twenty shares in Nava's name. No. Buenaventura.. COURT OF APPEALS. 1968. He contends that Peers Marketing Corporation should issue a certificate of stock for the twenty shares. However. 140 So. in this case no stock certificate was issued to Po. notwithstanding that Po had not paid fully his subscription for the eighty shares. Guiok and Lim. Gonzales for private respondent. There is no parallelism between this case and the Baltazar case. Inc. The delivery of the stock certificate.. Inc. Guiok and Sy Lim agreed that in the event of their failure to pay the amount within the period agreed upon. the assignment of corporate shares is effective only between the parties to the transaction (Davis vs. Lim Tay. August 5. Cura. and ESTATE OF ALFONSO LIM. INC. is essential for the protection of both the corporation and its stockholders (Smallwood vs. 23 SCRA 1366) or without the unanimous consent of the stockholders (Lingayen Gulf Electric Power Co. As already stressed. June 30. Moretti. irrespective of the unpaid delinquent shares". Costs against the petitioner-appellant. Nava argues that under section 37 a certificate of stock may be issued for shares the par value of which have already been paid for although the entire subscription has not been fully paid. was authorized to foreclose the pledge upon the said shares of stock. Bitulok Sawmill. 404). 802. however. Inc. an incorporator. 1965. where it was held that section 37 "requires as a condition before a shareholder can vote his shares that his full subscription be paid in the case of no par value stock. Sayoc & De Los Angeles for petitioner. the stockholder can vote the shares fully paid by him only. 93 Phil. 746) A corporation cannot release an original subscriber from paying for his shares without a valuable consideration (Philippine National Bank vs. Hence.] LIM TAY. GO FAY AND CO. Romulo. because section 37 requires full payment for the subscription. although he has not paid the balance of his subscription and a call or demand had been made for the payment of the par value of the delinquent shares. . securing their loans with contracts of pledge covering their respective shares of stock in Go Fay & Company.The right of the corporation to demand payment is no less incontestable. failed to pay their respective loans to Lim Tay. vs. Under said contracts of pledge. The issue was whether the said shares had voting rights although the incorporator had not paid fully the total amount of his subscription. 126891. L-16236-38. 14 SCRA 522. Lumanlan vs. June 29. 2d 628). the trial court's judgment dismissing the petition for mandamus is affirmed. Poizat. [G. 59 Phil. it was held that where a stockholder subscribed to a certain number of shares with par value and he made a partial payment and was issued a certificate for the shares covered by his partial payment.. Nava relies on Baltazar vs. he is entitled to vote the said shares. SYNOPSIS Private respondent Sy Guiok and Alfonso Sy Lim secured a loan from petitioner Lim Tay. 37 Phil. The determination of whether or not a shareholder is entitled to exercise the preceding rights falls within the jurisdiction of the SEC. then jurisdiction lies with the regular courts. and in case of stock corporation with par value. vs. and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The registration of shares in a stockholder's name. Lim Tay filed a petition for mandamus with the Securities and Exchange Commission (SEC) against Go Fay & Company. Inc. respondents. L-24177-85. SY GUIOK. Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to Lim Tay. Wachter. Manuel M. Lingayen Gulf Electric Power Co. SO ORDERED. 361). Baltazar. (Velasco vs. the issuance of stock certificates. 1998. if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed. was the holder of a certificate of stock for the shares the par value of which had been paid by him. Under the facts of this case. praying that an order be issued directing the corporate secretary of the company to register the stock transfers and issue new certificates in his favor.. there is no cause of action for mandamus. In view of the foregoing considerations. 128 So. Mabanta. Without the stock certificate. which represents the shares to be alienated. Lim Tay alleged in his petition that the controversy between him as stockholder and the company was intra-corporate in view of the obstinate refusal of the corporate secretary of the company to record the transfer of the shares of stock of Guiok and Sy Lim in favor of petitioner. only in the case of no par stock. That is not the issue in this case.R.

pursuant to the contracts of pledge. not an owner. petitioner alleged that. ID.. NOVATION. His possession as a pledgee cannot ripen into ownership by prescription. JURISDICTION LIES WITH REGULAR COURTS AND NOT WITH THE SEC. PETITIONER'S POSSESSION OF THE SHARES OF STOCK AS A PLEDGEE CANNOT RIPEN INTO OWNERSHIP BY PRESCRIPTION. petitioner's possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. as provided for in Article 1132 of the Civil Code. CREDIT TRANSACTIONS. is untenable. or by subrogating a third person to the rights of the creditor. however." Novation of a contract must not be presumed. if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed. contain this common proviso: In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof. The determination of whether or not a shareholder is entitled to exercise the abovementioned rights falls within the jurisdiction of the SEC. the debtor continues to be the owner thereof. he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain. shows that petitioner was merely authorized to foreclose the pledge upon maturity of the loans. — There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction. petitioner's claim that he was the owner of the shares of stock in question has no prima facie basis. he became the owner of the shares when the term for the loans expired. it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. Therefore. ownership of the shares could not have passed to him. the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint.Manifestly. CIVIL PROCEDURE. novation takes place only when the old and the new obligations are incompatible on every point. Quite the contrary and as already shown. MERCANTILE LAW. The contractual stipulation which was part of the complaint. does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. the Petition at bench is DENIED DUE COURSE and is hereby DISMISSED. As a general rule. ID. — Petitioner's contention that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription.. the issuance of stock certificates. a pledgor. REMEDIAL LAW. J p: The duty of a corporate secretary to record transfers of stocks is ministerial. In the present case. 40832. Mandamus will not issue to establish a legal right. — Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Nevertheless. SYLLABUS 1. as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. his contention was disputable and uncertain. and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. then jurisdiction lies with the regular courts. Similarly. MANDAMUS. In the present case. What is required by Article 1132 is possession in the concept of an owner. petitioner's complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. Petitioner's contention that he is the owner of the said shares is completely without merit. 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. REASON. NOVATION OF A CONTRACT MUST NOT BE PRESUMED. PRESCRIPTION. At the time petitioner instituted his suit at the SEC. Accordingly. the dispositive portion of which reads: "IN THE LIGHT OF ALL THE FOREGOING. However. prior to foreclosure and sale. — The registration of shares in a stockholder's name. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it.. However. PLEDGE. the contracts of pledge. At best. his ownership claim had no prima facie leg to stand on. . MANDAMUS WILL NOT ISSUE TO ESTABLISH A RIGHT. However. 3. but only to enforce one that is already clearly established. the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from. it demonstrated that he was merely a pledgee. . With costs against the [p]etitioner. which were made integral parts of the Complaint. invalid or inadequate or is otherwise negated by the very allegations of such complaint. not to own them." 4. the SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder is. CORPORATION LAW. OWNERSHIP OF SHARES OF STOCKS. the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock . In his Complaint. PETITIONER DID NOT ACQUIRE OWNERSHIP OF THE SHARES BY VIRTUE OF THE PLEDGE. LibLex Statement of the Case These are the principles used by this Court in resolving this Petition for Review on Certiorari before us. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale." DECISION PANGANIBAN. Quite the contrary. either by changing its object or principal conditions. Mandamus will not issue to establish a right." 3 . he does not have any ownership rights at all. "In the absence of an express agreement. as explicitly provided by Article 2103 of the same Code: "Unless the thing pledged is expropriated. More specifically. on the face of the complaint." 2. — Petitioner has failed to establish a clear legal right. by substituting a new debtor in place of the old one. CIVIL LAW. 5. assailing the October 24. but only to enforce one that is already established. or defend it against a third person.

Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon to the [p]etitioner. the facts of the case are as follows: " . Under said 'Contracts of Pledge. on the basis of the foregoing facts. praying that: 'PRAYER WHEREFORE. under the option hereby granted. 1993 Decision 6 of SEC Hearing Officer Rolando C. the Honorable Commission has no jurisdiction to enter the present controversy since their [sic] is no intracorporate relationship between complainant and respondent. it is respectfully prayed that an order be issued directing the corporate secretary of [R]espondent Go Fay & Co. Inc. on demand of the PLEDGOR. and the expenses. as Affirmative Defense..] be ordered to pay all dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay. inter alia. Complainant is not a stockholder of [r]espondent. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof. Upon payment of the said amount and interest in full. Rollo) The [p]etitioner alleged." 7 However. and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge. 8. It is likewise prayed that [R]espondent Go Fay & Co. Alfonso Sy Lim secured a loan.By the foregoing disposition. which dismissed the action for mandamus filed by petitioner. in the manner hereinabove provided. On the same date. . the Court of Appeals effectively affirmed the March 7. the [p]etitioner filed a 'Petition for Mandamus' against Respondent Corporation. .000 payable in six (6) months. the PLEDGEE will. [t]he determination of which. Inc. On January 8. The Complaint states no cause of action against [r]espondent. In October. 5. SEC Case No. shall be paid by the PLEDGEE to the PLEDGOR. if any. inter alia.000 payable within six (6) months. Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc. shall have caused such shares to be transferred to him upon the books of the issuing company. redeliver to him the said shares of stock by surrendering the certificate delivered to him by the PLEDGOR or by retransferring each share to the PLEDGOR. The Facts As found by the Court of Appeals.' Respondent[s] Guiok and Sy Lim covenanted. 9. 1990. The Respondent Corporation filed its Answer to the Complaint and alleged.. 1980. for brevity's sake. in view of all the foregoing. 4. the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling them same at public or private sale with or without notice to the PLEDGOR. at which sale the PLEDGEE may be the purchaser at his option. in the event that the PLEDGEE. Respondent repleads and incorporates herein by reference the foregoing allegations. Malabonga. that: '3." 5 The SEC en banc upheld the August 16. in his Petition that the controversy between him as stockholder and the Respondent Corporation was intra-corporate in view of the obstinate refusal of the corporate secretary of Respondent Corporation to record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor of and under the name of the [p]etitioner and to issue new certificates of stock to the [p]etitioner. To secure the payment of the aforesaid loan and interest thereon. Respondent-Appellee Sy Guiok secured a loan from the [p]etitioner in the amount of P40. In the event of the foreclosure of this pledge and the sale of the pledged certificate. . that: 'AFFIRMATIVE DEFENSE ' 7. cdphil Plaintiff further prays for such other relief just and equitable in the premises. connected with the foreclosure sale. 03894'. premises considered. to register the stock transfers and issue new certificates in favor of Lim Tay. with the SEC entitled 'Lim Tay versus Go Fay & Company. Under said contract. Hence. supra) Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to the [p]etitioner. Sy Lim executed a 'Contract of Pledge' covering his three hundred (300) shares of stock in Respondent Corporation. is within the jurisdiction of the regular courts and not with the SEC. Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the date of the execution of said contract. from the [p]etitioner in the amount of P40. To secure the payment of his loan.' (page 34. Respondent Corporation. any surplus remaining in the hands of the PLEDGEE after the payment of the said sum and interest. 1996 Decision 4 of the Securities and Exchange Commission (SEC) en banc: "WHEREFORE. judgment is hereby rendered dismissing the appeal on the ground that mandamus will only issue upon a clear showing of ownership over the assailed shares of stock. and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest. Inc[. Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the date of said contract of pledge.' (idem..

10. and therefore. and.00. Rollo) The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in their favor.. This Honorable Commission has no jurisdiction over the person of the respondent and nature of the action. The sum of P50. prLL 6. to sell the same to satisfy the loan. Rollo) After due proceedings. al. the pledgee is authorized to foreclose the pledge and thereafter. costs of suit. Sy Lim died. Other reliefs just and equitable [are] likewise prayed for. Granting for the sake of argument only that there was a valid foreclosure and sale of the subject st[o]cks in favor of the plaintiff — which [i]ntervenors deny — still paragraph 5 of the contract allows redemption. it is clear that upon failure to pay the amount within the stipulated period. as follows: 'IV. on several occasions. 9. 2.000. 3. That respondent is not [a] real party in interest. The appropriation of the subject shares of stocks by plaintiff. to dismiss the case for lack of merit. et al. the [h]earing [o]fficer promulgated a Decision dismissing [p]etitioner's Complaint on the ground that although the SEC had jurisdiction over the action. as attorneys fees. the same did not automatically vest [i]n complainant ownership of the pledged shares. pursuant to the Decision of the Supreme Court in the case of 'Rural Bank of Salinas et. Granting arguendo that a pledge was constituted over the shareholdings of Sy Guiok in favor of the complainant and that the former defaulted in the payment of his obligations to the latter. amounted to '[p]actum commis[s]orium' therefore. [H]owever.' ( pages 39-42. versus Court of Appeals. to transfer the subject shares of stocks from the name of your [i]ntervenors to that of the plaintiff in the absence of clear and legal basis for such. [i]ntervenors had been in the past negotiating possible compromise and at the same time. II. [i]ntervenors had made representations with the plaintiff for the compromise and settlement of all the obligations secured by the subject pledges — even offering to pay compensation over and above the value of the obligations.' (pages 42-43. represented by Conchita Lim.10.000. without compliance with the formality of law. failure to pay the loan within the contract period automatically foreclosed the pledged shares of stocks and that the share of stocks are automatically purchased by the plaintiff. interest[s] and dividends accruing to the share of stocks but. there was no foreclosure of shares executed in accordance with the Chattel Mortgage Law whatsoever. as moral damages. In the second place. that: 'xxx xxx xxx 5.00. 210 SCRA 510'. 3. to this point in time. any demand to transfer the shares of stocks to the name of the plaintiff has no legal basis. 7. the respondent company could not be force[d] to [sic] by way of mandamus. Deny specifically the allegation under paragraph 5 of the Complaint that. DENY specifically the allegations under paragraphs 6. plaintiff unjustly refused to accept the offer of payment.' (page 37. . Respondents Guiok and the Intestate Estate of Alfonso Sy Lim. Rollo) In the interim. SPECIAL AFFIRMATIVE DEFENSES 11. The complaint states no cause of action. ordering plaintiff to accept payment for the loans secured by the subject shares of stocks and to pay plaintiff: 1. As a matter of fact. inter alia. 8. In the first place. plaintiff is not a stockholder of the respondent corporation. [n]either was there any sale of stocks — by way of public or private auction — made after foreclosure in favor of the plaintiff to speak about. plaintiff having no personality at all to compel respondent by way of mandamus to perform certain corporate function[s]. the truth being that pursuant to the [sic] paragraph 3 of the contract of pledges. Even the Chattel Mortgage law allowed redemption of the [c]hattel foreclosed. had tendered payment of the loan secured by the subject pledges but plaintiff refused unjustifiably to oblige and accept payment o[r] even agree on the computation of the principal amount of the loan and interest on top of a substantial amount offered just to settle and compromise the indebtedness of [i]ntervenors. PRAYER It is respectfully prayed to this Honorable Commission after due hearing. plaintiff has not performed any operative act of foreclosing the shares of stocks of [i]ntervenors in accordance with the Chattel Mortgage law. null and void. there were no sales consummated that would transfer to the plaintiff the subject shares of stocks and therefore. 4. 7 and 8 of the complaint as to the existence of the alleged intracorporate dispute between plaintiff and company for being without proper and legal basis. he failed to prove the legal basis for the Intervenors replead by way of reference all the foregoing allegations to form part of the special affirmative defenses. for being false and distorted. the sum of P50. filed their Answer-In-Intervention with the SEC alleging. Annexes 'A' and 'B'. for which intervenors are willing to redeem the share of stocks pledged.

" 8 [citations omitted] On the issue of whether mandamus can be availed of by the petitioner the Court of Appeals agreed with the SEC. and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. on March 7. dismissing [p]etitioner's appeal on the grounds that: (a) the issue between the [p]etitioner and the [r]espondents being one involving the ownership of the shares of stock pledged by Respondent Guiok and Sy Lim the SEC had no jurisdiction over the action filed by the [p]etitioner. and (b) Whether the petitioner is entitled to the relief of mandamus as against the respondent Go Fay & Co." Ruling of the Court of Appeals On the issue of jurisdiction. the SEC promulgated a Decision. ." pursuant to Article 1132 of the Civil Code. The Court's Ruling The petition has no merit. [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus prayed for by him . and through respondents' subsequent acts." In addition. 5. Section 5 of Presidential Decree No. 1996.secretary of the Respondent Corporation to be compelled to register stock transfers in favor of the [p]etitioner and to issue new certificates of stock under his name (pages 67-77. but. 11 Assignment of Errors Petitioner submits. the issuance of stock certificates. established. The registration of shares in a stockholder's name. preparatory to the institution of said Petition for Mandamus with the SEC. . partnerships and other forms of associations . 10 Hence. However. (b) the status of the relationships of the parties. these issues: 12 "(a) Whether the Securities and Exchange Commission had jurisdiction over the complaint filed by the petitioner. Rollo) The [p]etitioner appealed the Decision of the [h]earing [o]fficer to the SEC. but to enforce one which has already been established. . First Issue: Jurisdiction of the SEC Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction of the SEC." 9 [citations omitted] prLL The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares by virtue of novation. and not to inquire and adjudicate and. the petitioner brought before us this Petition for Review on Certiorari in accordance with Rule 45 of the Rules of Court. therefore it is not the purpose of the writ to establish a legal right. Inc. 14 which ruled that the right of a transferee or an assignee to have stocks transferred to his name was an inherent right flowing from his ownership of the said stocks. . holding that respondents' indorsement and delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that petitioner's receipt of dividends was in compliance with Article 2102 of the same Code. the consideration for which was the extinguishment of the loans and the interests thereon. . then the regular courts have jurisdiction over the action. Where the controversy is purely a civil matter resoluble by civil law principles and there is no need for the application of the expertise and technical know-how of the SEC. Petitioner also claims that there was dacion en pago. . Inc. then jurisdiction lies with the regular courts. viz: ". the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not there is a need to enlist the expertise and technical know-how of the SEC in resolving the issue of the ownership of the shares of stock. the Court of Appeals ruled: "In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioner's action. Court of Appeals. The determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls within the jurisdiction of the SEC. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations.Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt exists . the right of ownership of the [p]etitioner over the 300 shares of stock pledged by Respondent Guiok and Sy Lim not having been as yet. (b) the latter had no cause of action for mandamus against the Respondent Corporation. [and] (c) the nature of the question that is the subject of the controversy. in which the shares of stock were deemed sold to petitioner.The principal function of the writ of mandamus is to command and expedite. 13 which upheld the jurisdiction of the SEC over a suit filed by an unregistered stockholder seeking to enforce his rights. v. which amounted to a novation of the contracts of pledge. He also seeks support from Rural Bank of Salinas. petitioner contends that it has acquired ownership of the shares "through extraordinary prescription. petitioner relies heavily on Abejo v. De La Cruz. for the consideration of this Court. 902-A sets forth the jurisdiction of the SEC as follows: "SEC. if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed. Petitioner's claim that he had acquired ownership of the shares by virtue of prescription was likewise dismissed by Respondent Court in this wise: "The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the shares of stock from the [p]etitioner accrued only from the time they paid their loans and the interests thereon and [made] a demand for their return.. Petitioner likewise claims that laches bars respondents from recovering the subject shares.

a controversy "among stockholders. which was part of the Complaint. partnership or association has no sufficient assets to cover its liabilities. Nowhere did the Complaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after such foreclosure His status as a mere pledgee does not. In fact.18 (emphasis supplied) However. members. it demonstrated that he was merely a pledgee. ." 15 Thus. upon failure of the borrowers to pay the stated amounts within the contract period. the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract. business associates. the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. copy of this Contract of Pledge is attached as Annex "B" and made part hereof . Such foreclosure is not automatic. petitioner alleged that. Inc. partnership or association of which they are stockholders. but is under the Management Committee created pursuant to this decree. On the same date January 8.registered with it as expressly granted under existing laws and decrees. members of associations or organizations registered with the Commission.. entitle him to ownership of the subject shares. from Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand [p]esos (P40. Lim Tay received three hundred (300) shares of stock of Go Fay & Co. officers or managers of such corporations. Manifestly. " This contractual stipulation. partnerships or associations. On [J]anuary 8. and the PLEDGEE is hereby authorized and empowered at his option. it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. the contracts of pledge. between any or all of them and the corporation. (b) Controversies arising out of intra-corporate or partnership relations. In his Complaint. . to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge. shows that plaintiff was merely authorized to foreclose the pledge upon maturity of the loans. 3. partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity. and between such corporation. (d) Petitions of corporations. he became the owner of the shares when the term for the loans expired. its officers or partners. not to own them. subsequent to the filing of the Complaint.. between and among stockholders. Accordingly. the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract. in the manner hereinabove provided. . amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of stockholders. 1980. and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest. under a similar Contract of Pledge. It is also noteworthy that petitioner's Complaint did not aver that said shares were acquired through extraordinary prescription. partners or associates themselves" 16 is intracorporate in nature and falls within the jurisdiction of the SEC. the very allegations of the Complaint and its annexes negated the jurisdiction of the SEC. 5. In fact. under a Contract of Pledge. . Moreover. however. the Complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. security for the payment of a loan of [f]orty [t]housand [p]esos (P40. or associates. petitioner's claim. partnership or association possesses property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation. under civil law. at which sale the PLEDGEE may be the purchaser at his option. 17 in the present case. a copy of this Contract of Pledge is attached as Annex "A" and made part hereof . partners. from Sy Guiok as. petitioner's claim that he was the owner of the shares of stock in question has no prima facie basis. as will be shown. that he acquired ownership of the said shares through these three modes is not indubitable and still has to be resolved. pursuant to the contracts of pledge. Inc. such allegation has no merit. members or associates. the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR. who is expressly authorized and empowered to transfer the duly endorsed shares of stock on the books of the corporation to his own name.00) Philippine currency. partnerships or associations to be declared in the state of suspension of payments in cases where the corporation. Quite the contrary. respectively. for it must be done in a public or private sale. The Complaint contained the following pertinent averments: "xxx xxx xxx 4. By the express terms of the agreements. the pledge is foreclosed and the shares of stock are purchased by [p]laintiff. novation or laches.00) Philippine currency. Lim Tay received three hundred (300) shares of stock of Go Fay & Co. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof. not an owner.. which were made integral parts of the Complaint.000. trustees. 1990. it shall have original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by or any acts of the board of directors. cda As a general rule. (c) Controversies in the election or appointment of directors.000. contain this common proviso: "3.

a second one with the same formalities shall be held. petitioner has failed to establish a clear legal right. a motion for intervention was filed. thereby demonstrating that Telectronic Systems. Second Issue: Mandamus Will Not Issue to Establish a Right Petitioner prays for the issuance of a writ of mandamus. Melenia Guerrero executed deeds of assignment for the shares in favor of the respondents in that case. It neither confers powers nor imposes duties and is never issued in doubtful cases. Inc. in his favor. of the shares pledged to him.Petitioner's reliance on the doctrines set forth in Abejo v. the creditor may appropriate the thing pledged. the corporate secretary. Telectronic Systems. thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature. the contracts of pledge contained a common proviso. Inc. upon Respondents Sy Guiok and Sy Lim's failure to pay their respective loans. title over the shares from the time the sale was perfected until the time such sale was annulled. retroact to the time the sale was made. stating the amount for which the public sale is to be held. an action for mandamus was instituted. Further. Subsequently. It is simply a command to exercise a power already possessed and to perform a duty already imposed. the contract had already been perfected. whether prescription effectively transferred ownership of the shares. was already a prima facie shareholder of the corporation. Hence. Telectronic Systems. petitioner's ownership over the shares in this case was not yet perfected when the Complaint was filed. the Abejo spouses sold to Telectronic Systems. In this case he shall be obliged to give an acquittance for his entire claim. We do not agree. Quite the contrary and as already shown. to issue new certificates of stock and to deliver the corresponding dividends to him. In Abejo. If the said deeds were to be annulled later on. which we quote again for the sake of clarity: . The contract of pledge certainly does not make him the owner of the shares pledged. Petitioner's contention that he is the owner of the said shares is completely without merit. was already the prima facie owner of the shares and. directing the corporate secretary of respondent corporation to have the shares transferred to his name in the corporate books. he does not have any ownership rights at all. but only to enforce one that is already clearly established. Even if the sale were to be annulled later on. But on appeal. petitioner claimed that ownership over the shares had passed to him. De la Cruz and Rural Bank of Salinas. and with notification to the debtor and the owner of the thing pledged in a proper case. not via the contracts of pledge. v. may proceed before a Notary Public to the sale of the thing pledged. cda In Rural Bank of Salinas. refused to record the transfer of the shares in the corporate books and instead asked for the annulment of the sale. Inc." 21 In the present case. had. at the time the Bragas questioned the validity of the transfers made by the Abejos. the respondents in Rural Bank of Salinas were already prima facie shareholders when the deeds of assignment were questioned. the Court held that "the issue is not on ownership of shares but rather the non-performance by the corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary " 19 Unlike Abejo. his ownership claim had no prima facie leg to stand on. his contention was disputable and uncertain. which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer. as a rule." Furthermore. and that they were in fact donations because the considerations therefor were below the book value of the shares. At the time the Bragas questioned the validity of the sale. Mandamus will not issue to establish a legal right. Pledgor Is Not the Owner of Pledged Shares Petitioner initially argued that ownership of the shares pledged had passed to him. it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Inc. At the outset. This sale shall be made at a public auction. At the time petitioner instituted his suit at the SEC. seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated. it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required. Without Foreclosure and Purchase at Auction. Norberto Braga. If at the first auction the thing is not sold. Inc. 20 "In order that a writ of mandamus may issue. and that his wife's shares were sold without consideration or consent. in the meantime. but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. Article 2112 of the Civil Code states: "The creditor to whom the credit has not been satisfied in due time. shares of stock in Pocket Bell Philippines. Inc. Subsequent to such contract of sale. The effects of an annulment operate prospectively and do not. a stockholder of Pocket Bell Philippines. Inc. Therefore. respondents would still be considered shareholders of the corporation from the time of the assignment until the annulment of such contracts. Like the Abejo spouses. When the corporate secretary refused to register the transfer. and whether laches had set in were difficult legal issues. however. consequently. whether there was a novation of the contracts of pledge. At best. and if at the second auction there is no sale either. Court of Appeals is misplaced. claiming that he and his wife had a preemptive right over some of the shares.

and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name. it is petitioner's right to demand payment that may be in danger of prescription. with expenses in a proper case. petitioner has not acquired the certificates of stock through extraordinary prescription. As aptly pointed out by Justice Jose C. . the cause of action does not accrue until the party obligated refuses. as provided for in Article 1132 of the Civil Code which states: "Art. Based on the foregoing. Nevertheless. private respondents would have a right to ask for the redelivery of their certificates of stock upon payment of their debts to petitioner. ownership of the shares could not have passed to him." 25 Petitioner expressly repudiated the pledge. the prescriptive period did not begin to run when the loan became due. . What is required by Article 1132 is possession in the concept of an owner. Thus. and to hold the certificate issued in lieu thereof under the terms of this pledge. This is because the right to ask for the return of the thing pledged will not arise so long as the loan subsists."3. a cause of action on a written contract accrues when a breach or violation thereof occurs. The period of prescription of any cause of action is reckoned only from the date the cause of action accrued. which reads: "The debtor cannot ask for the return of the thing pledged against the will of the creditor. Therefore. unless and until he has paid the debt and its interest. but also an act or omission of the defendant in violation of said legal right. petitioner's possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. without need of any other condition. The ownership of personal property also prescribes through uninterrupted possession for eight years. not being in the concept of an owner." 22 There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction. consonant with Article 2105 of the Civil Code. possession with a juridical title. to comply with its duty. at which sale the PLEDGEE may be the purchaser at his option. a trustee. . In order to ripen into ownership. the debtor continues to be the owner thereof. Prescription should not begin to run on the action to demand the return of the thing pledged while the loan still exists. Under the contracts of pledge. and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest. possession must be in the concept of an owner. peaceful and uninterrupted. Vitug: "Acquisitive prescription is a mode of acquiring ownership by a possessor through the requisite lapse of time. a lessee. such as by a usufructory." 23 Accordingly. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale." 24 Thus. as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. In the present case. In the present case. expressly or impliedly. as explicitly provided by Article 2103 of the same Code: LLphil "Unless the thing pledged is expropriated. No Novation in Favor of Petitioner . agent or a pledgee. the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR." Petitioner's argument is untenable. His possession as a pledgee cannot ripen into ownership by prescription. only when he filed his Complaint and claimed that he was not a mere pledgee. 1132." No Ownership by Prescription Petitioner did not acquire the shares by prescription either. because it is only then that respondents acquire a cause of action for the return of the thing pledged. but that he was already the owner of the shares. the prescriptive period within which to demand the return of the thing pledged should begin to run only after the payment of the loan and a demand for the thing has been made. cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party. public. in the manner hereinabove provided. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof. or defend it against a third person. the right to recover the shares based on the written contract of pledge between petitioner and respondents would arise only upon payment of their respective loans. The ownership of movables prescribes through uninterrupted possession for four years in good faith. Therefore. the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from. "Since a cause of action requires as an essential element not only a legal right of the plaintiff and a correlative obligation of the defendant. On the other hand. Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription.

The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereon accruing." 28 This stipulation did not effect the transfer of ownership to petitioner. Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads: "2. More important. SR. . HONORABLE COURT OF APPEALS. Absent an explicit agreement. petitioner could have foreclosed the pledges as soon as the loans became due.. the creditor shall compensate what he receives with those which are owing him. the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not meant to relinquish ownership thereof." Novation cannot be inferred from the mere fact that petitioner has not.. OCTAVIO KATIGBAK. Ignacio and Jose R. Costs against petitioner.. the same was done pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy Lim. No. [G. as already pointed out. for an unreasonable length of time. LLphil SO ORDERED." 27 In the present case. novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600 shares. in his capacity as Hearing Officer. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it. or insofar as the amount may exceed that which is due. following Article 2102 of the Civil Code which provides: "If the pledge earns or produces fruits. WHEREFORE. REYNALDO VILLANUEVA. ANDRES GONZALES. instituted any action to recover the shares. FLORES. it is negligence or omission to assert a right within a reasonable time. 30 which states that if the thing pledged are shares of stock. and Article 2095. AVELINA M. the petition is hereby DENIED and the assailed Decision is AFFIRMED. 29 which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement. BERNARDO BAUTISTA.. HONORABLE ENRIQUE L. September 28. THE OFFICERS AND DIRECTORS. INC. the pledge shall extend to the interest and the earnings of the right pledged. Amando D." 32 In this case. or by subrogating a third person to the rights of the creditor. SECURITIES AND EXCHANGE COMMISSION. VILLANUEVA. or interests. novation takes place only when the old and the new obligations are incompatible on every point. warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. to do that which by exercising due diligence could or should have been done earlier. cdll Moreover. as the loan is still outstanding. the consideration for which is the extinguishment of the loans and the accrued interests thereon. in which the certificates of stock are deemed sold to petitioner. 124535. JR. dividends. income. Laches Not a Bar to Petitioner Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the shares of stock serves to bar them from asserting rights over said shares on the basis of laches. INC.R." 26 Novation of a contract must not be presumed. by substituting a new debtor in place of the old one. JAIME CUSTODIO. HONORABLE COMMISSION EN BANC. It was merely in compliance with Article 2093 of the Civil Code. he shall apply it to the principal. AURORA LACERNA. As stated by respondent corporation. preferring instead to pursue his baseless claim to ownership. EDGARDO REYES. vs. Dimayuga for private respondents. petitioner cannot simply presume dacion en pago. and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY. CATALINO VILLANUEVA. and (c) the fact that respondents have not instituted any action to recover the shares since 1980. respondents. No Dacion en Pago in Favor of Petitioner Neither can there be dacion en pago. FRANCISCO CUSTODIO. Such action is in fact premature. since 1980. novation is never presumed inferred.Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Besides. under the contracts of pledge. but if none are owing him. either by changing its object or principal conditions. "In the absence of an express agreement. ALEJANDRA TONOGAN and ELENA USI. Unless there is a stipulation to the contrary.] THE RURAL BANK OF LIPA CITY. 2001. (b) petitioner's receipt of dividends from 1980 to 1983. Petitioner had all the time to demand payment of the debt. it is in fact petitioner who may be guilty of laches. Rosales Law Office for petitioners. he failed to do so. CELSO LAYGO. But for still unknown or unexplained reasons. Dacion en pago is a form of novation in which a change takes place in the object involved in the original contract." 31 Laches has been defined as "the failure or neglect. petitioners. then the "instrument proving the right pledged" must be delivered to the creditor.

898.. members or associates. 5 OF PD NO. Avelina. — We have uniformly held that for a valid transfer of stocks. there was no effective transfer of shares since the requirements prescribed by the law for a valid transfer of shares of stock have not been complied with.54. as mere assignees cannot enjoy the status of stockholders. and (c) To be valid against third parties.00). ID. EFFECT OF NON-COMPLIANCE THEREWITH. the absence of which is a fatal defect. and his wife. cannot enjoy the status of a stockholder. as yet. IaDcTC SYLLABUS 1. Consequently. CDISAc 3. SEC JURISDICTION OVER CASES FALLING UNDER SEC. respectively.R. 1996. otherwise. the Board sent them a letter 3 demanding: (1) the surrender of all the stock certificates issued to them.000.467 shares. petitioner. as yet. The instant controversy arose from a dispute between the Rural Bank of Lipa City. between and among stockholders. Sr. SP No.. the petitioners. The Supreme Court found the appeal meritless. and certain stockholders of the said bank. ruling: that while private respondents executed a deed of assignment of their shares in favor of petitioners. Reynaldo Villanueva.346. Incorporated (hereinafter referred to as the Bank). J p: Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated February 27. At a meeting of the Board of Directors of the Bank on November 15. — While this case was pending. ID. ID. 1 wherein he assigned his shares. Parenthetically. Moreover. 1996. Title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer. The Villanuevas ignored the bank's demands. CASE AT BAR. R. should the proceeds of the sale of said shares fail to satisfy in full the obligation. partnership or association of which they are stockholders. and between such corporation. When the Villanueva spouses failed to settle their obligation to the Bank on the due date. there must be strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock certificate.SYNOPSIS This is an appeal from the CA decision which upheld the decision of the SEC which granted the preliminary injunction prayed for by private respondents who claimed that the newly elected officers of petitioner-bank should be enjoined from discharging their duties because private respondents-stockholders of petitioner-bank were not notified of the stockholders' meeting held on January 15. 902A." The instant controversy clearly falls under this category of cases which are now cognizable by the Regional Trial Court. said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners.. until the issue of ownership of the shares in question is finally resolved. 8799. 2. CASE AT BAR. NO. executed an Agreement 2 wherein they acknowledged their indebtedness to the Bank in the amount of Four Million Pesos (P4. TRANSFER OF SHARES OF STOCK. executed a Deed of Assignment. and private respondents cannot. insofar as the assigned shares are concerned. . DECISION YNARES-SANTIAGO. as well as those of eight (8) other shareholders under his control with a total of 10. as well as the Resolution dated March 29. the Villanueva spouses assured the Board that their debt would be paid on or before December 31 of that same year. . transferring to the courts of general jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. SECURITIES AND EXCHANGE COMMISSION. until and unless the issue of ownership and transfer of the shares in question is resolved with finality.. 8799 was enacted. ID. Consequently. in favor of the stockholders of the Bank represented by its directors Bernardo Bautista. the Bank would be entitled to liquidate their shareholdings. represented by its officers and members of its Board of Directors. Sr. and stipulated that said debt will be paid out of the proceeds of the sale of their real property described in the Agreement. or associates. and (2) the delivery of sufficient collateral to secure the balance of their debt amounting to P3. 1993. including those under their control. ID. One of those cases enumerated is any controversy "arising out of intra-corporate or partnership relations. The records reveal the following antecedent facts: DaTICE Private respondent Reynaldo Villanueva. Republic Act No.A. be deprived of their rights as stockholders.000. insofar as the assigned shares are concerned. REQUISITES FOR VALIDITY. In such an event... The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. the transfer must be recorded in the books of the corporation. cannot vote nor be voted for. whereupon their . Jaime Custodio and Octavio Katigbak. partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity. Sometime thereafter. and will not be entitled to dividends.. a stockholder of the Rural Bank of Lipa City. 38861. COMMERCIAL LAW. as mere assignees. petitioners admit that the assignment of shares was not coupled with delivery. ID. — While it may be true that there was an assignment of private respondents' shares to the petitioners. their attorneys-in-fact or any other person legally authorized to make the transfer. the private respondents cannot. . in CA-G. 902-A NOW COGNIZABLE BY THE RTC. be deprived of their rights as stockholders. between any and/or all of them and the corporation. the unpaid balance shall be secured by other collateral sufficient therefor. members. 1994 wherein said new set of officers were elected. CORPORATION CODE.

Atty. 1995.. Edgardo Reyes. The complaint is insufficient. the Villanuevas. moral and exemplary damages. the Villanuevas filed an Omnibus Motion 11 praying that the said meeting and election of officers scheduled on January 14. However. thus moved for the lifting of the temporary restraining order and the dismissal of the petition for lack of merit. Andres Gonzales. upon finding that since the Villanuevas' have not disposed of their shares. petitioners prayed for actual. petitioners herein. 02-94-4683 were no longer stockholders with voting rights. Jaime Custodio. questioned the legality of the conversion of their shares. and from performing their duties and functions as such. the Villanuevas' application for the issuance of a writ of preliminary injunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof. questioned the legality of the said stockholders' meeting and the validity of all the proceedings therein. 1995 be suspended or held in abeyance. Accordingly. abandoned. and for the upholding of the validity of the stockholders' meeting and election of directors and officers held on January 15. Jr. 5) The petitioners are estopped from challenging the conversion of their shares. the Villanueva spouses filed with the Securities and Exchange Commission (SEC). having already assigned all their shares to the Bank. Flores. or otherwise extinguished. The petition states no cause of action. 4) The petitioners' claims had already been paid. 7 the respondents therein raised the following defenses: 1) 2) 3) The petitioners have no legal capacity to sue. Alejandro Tonogan. 13 naming as respondents therein SEC Hearing Officer Enrique L. erstwhile petitioners in SEC Case No. counsel for the Villanueva spouses. The said petition alleged that the orders dated December 16. a motion for reconsideration 8 was granted on December 16. a writ of preliminary injunction was issued enjoining the petitioners from acting as directors and officers of the bank. its directors and officers before the SEC en banc. respondents therein. the Bank. Corollarily. 02-94-4683. In reply. they were still stockholders entitled to notice of the annual stockholders' meeting was sustained by the SEC. 1994. the stockholders of the Bank met to elect the new directors and set of officers for the year 1994. whether voluntarily or involuntarily. On April 6. By way of counterclaim. the SEC issued a temporary restraining order enjoining the respondents. 6 In their joint Answer. AECcTS In their Comment/Opposition. On February 16. and (5) the candidacy of petitioner Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo Bautista and company during the said meeting. Named respondents were the newly-elected officers and directors of the Rural Bank. . in the meantime. 4 On January 15. Joining them as co-petitioners were Catalino Villanueva. In a letter dated January 19. Aurora Lacerna. The Villanuevas were not notified of said meeting. the Villanuevas and other private respondents argued that the filing of the petition for certiorari was premature and there was no grave abuse of discretion on the part of the SEC Hearing Officer. (3) they were deprived of their right to vote despite their being holders of common stock with corresponding voting rights. 1994. One (1) day before the scheduled stockholders meeting. with damages and prayer for preliminary injunction 5 . 1994. waived. 12 A petition for Certiorari and Annulment with Damages was filed by the Rural Bank. and the Villanuevas. and that the 1993 Board of Directors be allowed. Francisco Custodio and Juanita Bautista. Celso Laygo. (4) their names were irregularly excluded from the list of stockholders. With the impending 1995 annual stockholders' meeting only nine (9) days away. the SEC Hearing Officer granted the Omnibus Motion by issuing a temporary restraining order preventing petitioners from holding the stockholders meeting and electing the board of directors and officers of the Bank. nor did he act without or in excess of his jurisdiction. were issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or excess of jurisdiction. 1994. Octavio Katigbak. 1994. Consequently. Later.shares of stock were converted into Treasury Stocks. docketed as SEC Case No. and Elena Usi. The Villanuevas' main contention was that the stockholders' meeting and election of officers and directors held on January 15. 1994. 10 challenging the propriety of the said writ considering that they had not yet received a copy of the order granting the application for the writ of preliminary injunction. Petitioners. which allowed the issuance of the writ of preliminary injunction and prevented the bank from holding its 1995 annual stockholders' meeting. (2) they were not given due notice of said meeting and election notwithstanding the fact that they had not waived their right to notice. 9 Thereafter. respectively. the new set of officers of the Bank informed Atty. its directors and its officers questioned the SEC Hearing Officer's right to restrain the stockholders' meeting and election of officers and directors considering that the Villanueva spouses and the other petitioners in SEC Case No. 1994 and January 13. namely: Bernardo Bautista. a petition for annulment of the stockholders' meeting and election of directors and officers on January 15. 1994. Amado Ignacio. 1994 were invalid because: (1) they were conducted in violation of the by-laws of the Rural Bank. to act as such. from acting as directors and officers of the Bank. 02-944683. Ignacio that the Villanuevas were no longer entitled to notice of the said meeting since they had relinquished their rights as stockholders in favor of the Bank. petitioners filed an urgent motion to quash the writ of preliminary injunction. through their counsel.

arbitrary or despotic manner. For an effective transfer of shares of stock.R. That the private respondents are presumably stockholders of the bank in view of the fact that they have in their possession the stock certificates evidencing their stockholdings. The hearing officer. The private respondents are presumably stockholders of the Bank in view of the fact that they have in their possession the stock certificates evidencing their stockholdings. In particular. . in the exercise of his right to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in favor of another person where the provisions of Sec. except as between the parties. Jaime Custodio and Octavio Katigbak. to our mind. however. had a basis in issuing the questioned orders since the private respondents' rights as stockholders may be prejudiced should the writ of injunction not be issued. title to such shares will not be effective unless the duly indorsed certificate of stock is delivered to them. We find no reversible error in the questioned orders. did not exercise his judgment in a capricious. shall be valid. assailing the Order dated June 7. Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order 18 dated March 29. Moreover. That the Hon. 1996. The ultimate issue raised before the Court of Appeals was whether or not the SEC en banc erred in finding: 1. Private respondents are still presumed to be the owners of the shares and to be stockholders of the Rural Bank. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner . 1995. petitioners faulted the Court of . The questioned Orders issued by the Hearing Officer were based on pertinent law and the facts of the case. may issue such orders and resolutions which may be necessary or reasonable relative thereto to protect their rights and interest in the meantime that the said case is still pending trial on the merits. when private respondents executed a deed of assignment of their shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City. the instant petition for review seeking to annul the Court of Appeals' decision dated February 27. 1996. A petition for review was thus filed before the Court of Appeals. should rightfully be litigated and proven before the hearing officer. 1996 and the resolution dated March 29. . 1995. being the one directly confronted with the facts and pieces of evidence in the case. petitioners could not show any proof of despotic or arbitrary exercise of discretion committed by the hearing officer in issuing the assailed orders save and except the allegation that the private respondents have already transferred their stockholdings in favor of the stockholders of the Bank.On June 7. Hearing Officer in SEC Case No. the date of the transfer. to support the claim that the private respondents are no longer stockholders of the Bank is misplaced. No transfer. SP No. The appellate court found that: The public respondent is correct in holding that the Hearing Officer did not commit grave abuse of discretion. . et al. 1995 and the Resolution dated September 29. It does not contemplate a "transfer" whereby the stockholder. the Court of Appeals rendered the assailed Decision 17 dismissing the petition for review for lack of merit. v. . the mode and manner of transfer as prescribed by law should be followed. is the very issue of the controversy in the case a quo and which. That the private respondents are still stockholders of the subject bank and further stated that "it does not contemplate a transfer" whereby the stockholders. particularly Section 83 thereof. 02-94-4683 did not commit any grave abuse of discretion that would warrant the filing of a petition for certiorari. 1995 of the SEC en banc in SEC EB No. For an effective transfer of stock.. transfer of title to such shares is ineffective until and unless the duly indorsed certificate of stock is delivered to them. A subsequent motion for reconsideration 15 was likewise denied by the SEC en banc in a Resolution 16 dated September 29. 14 which stated: In the case now before us. On February 27." In the case at bench. The said law applies to acquisition of shares of stock by the corporation in the exercise of a stockholder's right of appraisal or when the said stockholder opts to dissent on a specific corporate act in those instances provided by law and demands the payment of the fair value of his shares. the number of the certificate or certificates and the number of shares transferred. whimsical. citing Nava v. Inc. therefore. 1996. the non-delivery of the stock certificate does not make the transfer of the shares of stock effective. the decision is challenged for its ruling that notwithstanding the execution of the deed of assignment in favor of the petitioners. Peers Marketing Corp. The officer. This is so because of the undisputed fact the (sic) private respondents are still in possession of the stock certificates evidencing their stockholdings and as held by the Supreme Court in Embassy Farms. 188 SCRA 492. and 3. . which was docketed as CAG. Until proven otherwise.. Court of Appeals. 63 of the same Code should be complied with. the SEC en banc denied the petition for certiorari in an Order. in exercising his judicial functions. This. 440. We likewise find that the provision of the Corporation Code cited by the herein petitioner. until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction. 2. represented by Bernardo Bautista. Section 63 of the Corporation Code states: ". they remain to be such and the hearing officer. the mode of transfer as prescribed by law must be followed. 38861. however. Hence. in the exercise of his right to dispose of his shares (jus disponendi) sells or assigns his stockholdings in favor of another person where the provisions of Section 63 of the same Code should be complied with.

There being no showing that any of the requisites mandated by law 23 was complied with. to meet and elect their directors. partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Consequently. and the Court of Appeals decision upholding the SEC en banc order. Moreover. private respondents shall be notified of the meeting and be allowed to exercise their rights as stockholders thereat. No transfer. it does not necessarily make the transfer effective. between any and/or all of them and the corporation. in view of all the foregoing. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. 8799 24 was enacted. shall be valid. 902-A. The Decision and Resolution of the Court of Appeals in CA-G. partnership or association of which they are stockholders. the date of the transfer. 22 The requirements are: (a) There must be delivery of the stock certificate. which in turn upheld the order of the SEC Hearing Officer. 19 private respondents had relinquished to them any and all rights they may have had as stockholders of the Bank. as mere assignees. however.R. (Emphasis ours) Petitioners argue that by virtue of the Deed of Assignment. compliance with any of these requisites has not been clearly and sufficiently shown. Certificate of stock and transfer of shares. For the Fourth Judicial Region.2 of R. 26 WHEREFORE. SP No. Inc. However. countersigned by the secretary or assistant secretary. are valid and in accordance with law and jurisprudence. the petitioners. transferring to the courts of general jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. cannot enjoy the status of a stockholder. said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners. the private respondents cannot. the assignment was valid between the parties. 02-94-4683 (herein private respondents). (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer." The instant controversy clearly falls under this category of cases which are now cognizable by the Regional Trial Court. or associates. and will not be entitled to dividends. and (c) To be valid against third parties. Accordingly. The case is ordered REMANDED to the Regional Trial Court of Batangas . 21 We have uniformly held that for a valid transfer of stocks. While this case was pending. until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction. there must be strict compliance with the mode of transfer prescribed by law. To enable the shareholders of the Rural Bank of Lipa City. the order of the SEC en banc affirming the ruling of the SEC Hearing Officer. except as between the parties. members. Shares of stocks so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. It may be argued that despite non-compliance with the requisite endorsement and delivery.Appeals for not taking into consideration the acts of disloyalty committed by the Villanueva spouses against the Bank. the absence of which is a fatal defect. the number of the certificate or certificates and the number of shares transferred. 20 Thus. — The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president. 8799. Republic Act No. as yet. As it is. cannot vote nor be voted for. While it may be true that there was an assignment of private respondents' shares to the petitioners. 25 One of those cases enumerated is any controversy "arising out of intra-corporate or partnership relations. We find no merit in the instant petition. petitioners admit that the assignment of shares was not coupled with delivery. thus warranting the denial of the instant petition for review. 1995 must be lifted. members or associates. Parenthetically. for the said rulings were in accordance with law and jurisprudence. the instant petition for review on certiorari is DENIED. The Corporation Code specifically provides: SECTION 63. While the assignment may be valid and binding on the petitioners and private respondents. until and unless the issue of ownership and transfer of the shares in question is resolved with finality. insofar as the assigned shares are concerned. meaning the private respondents as assignors and the petitioners as assignees. Branch 32 is the designated court. No. their attorneys-in-fact or any other person legally authorized to make the transfer. and sealed with the seal of the corporation shall be issued in accordance with the by-laws. between and among stockholders. be deprived of their rights as stockholders. the transfer must be recorded in the books of the corporation. respectively. the temporary restraining order issued by the SEC Hearing Officer on January 13. The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc. specifically in the Province of Batangas. the RTC of Batangas City.A. and between such corporation. Pursuant to Section 5. title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. the SEC Hearing Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by petitioners in SEC Case No. 38861 are hereby AFFIRMED. this Court designated specific branches of the Regional Trial Courts to try and decide cases formerly cognizable by the SEC.

and a stockholder may opt not to be issued a certificate. the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. As between the corporation on the one hand. 1995 is ordered LIFTED. As between the corporation. the date of the transfer. Estelito P. CERTIFICATE OF STOCK. so to speak. CORPORATION CODE. the CA dismissed the complaint for mandamus for failure to state a cause of action. — Pursuant to Sec. it rests on the will of the stockholder whether he wants to be issued stock certificates. The petitioner tried to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding the issuance of the stock certificate in his name. vs. CONSTRUED. The certificate is in law. GIRON..] VICENTE C. After respondents filed their reply. petitioner prayed for the SEC to issue in his name certificates of stocks covering the 239. respondents. A TANGIBLE EVIDENCE OF THE STOCK ITSELF AND OF THE VARIOUS INTERESTS THEREIN. petitioner. Hence." Unless and until such recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal basis. shall be valid. 2. From this time. an equivalent of such ownership. REMEDIAL LAW. SHOULD BE RECORDED IN THE STOCK AND TRANSFER BOOK OF A CORPORATION. From the corporation's point of view. a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned.R. 206 SCRA 740 (1992). the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. PETITION FOR MANDAMUS. the SEC hearing officer granted the motion to dismiss. the respondents appealed to the Court of Appeals. that it states no cause of action. 2002. CTDHSE 3. MERCANTILE LAW. the number of the certificate or certificates and the number of shares transferred. TRANSFER OF SHARES OF STOCKS. The motion for reconsideration having been denied. This is the import of Section 63 which states that "No transfer. ID. — The deed of undertaking with indorsement presented by petitioner does not establish. except between the parties. The SEC hearing officer decided that the petitioner could not do as he prayed because there was no record of any assignment or transfer in the books of the respondent corporation and there was neither instruction nor authority from the transferor for such assignment or transfer. on its face. 138 (1911). According to the hearing officer. [G. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein.500 shares of stocks and its legal increments and for the corporation to pay him damages. and its stockholders and third persons on the other. however. No. The temporary restraining order issued by the SEC Hearing Officer dated January 13. The certificate is the evidence of the holder's interest and status in the corporation. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders.City. Petitioner appealed the order of dismissal. PONCE. Gaid was an incorporator and an original stockholder of the respondent corporation who subscribed and fully paid for 239. without such recording. but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. ID. 139802. and FRANCISCO M. Gaid. Quiason Makalintal Barot Torres and Ibarra for petitioner. — In Tan vs. ALSONS CEMENT CORPORATION. SYNOPSIS Petitioner herein filed a complaint with the SEC for mandamus and damages against respondents. the transfer is not effective until it is recorded. IMPORTANCE OF CERTIFICATE OF STOCK. the instant petition for review on certiorari. Bryan. APPLICATION IN CASE AT BAR. petitioner failed to state a cause of action. The Supreme Court ruled that petitioner had no cause of action and that his petition for mandamus was properly dismissed. In fact. Respondent moved to dismiss the complaint on the ground. the corporation looks only to its books for the purpose of determining who its stockholders are. the real party-in-interest was Fausto G. Branch 32. SEC. Mendoza for respondents. SPECIAL CIVIL ACTIONS. 63 of the Corporation Code. his right to demand for the registration of the transfer and the issuance of certificates of stocks. With his allegations. December 10. insofar as the issuance of stock certificates is concerned.. this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the . At issue herein was whether the Court of Appeals erred in holding that herein petitioner had no cause of action for a writ of mandamus. WHEN NOT PROPER TO COMPEL THE REGISTRATION OF STOCK TRANSFER. APPLICATION IN CASE AT BAR. Thus.500 shares of stock. or his estate. In Hager vs. 19 Phil. the corporation looks only to its books for the purpose of determining who its shareholders are. EFFECT OF FAILURE. SO ORDERED. and its shareholders and third persons on the other. Hence. JR. The Court of Appeals held that in the absence of any allegations that the transfer of shares between Fausto Gaid and the petitioner was registered in the stock and transfer book of respondent corporation. It expresses the contract between the corporation and the stockholder. we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. his ownership of the share represented thereby. or his heirs.. for proper disposition. The Commission en banc reversed the decision of the hearing officer. cSCADE SYLLABUS 1. until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction. among others. on one hand.

plaintiff (now petitioner) Vicente C. among others. 1968. The test of sufficiency of the facts alleged in a petition is whether or not. 545 and reinstated the order 3 of the Hearing Officer dismissing herein petitioner's complaint. in our view. 9. is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (P239. in violation of plaintiff's right to secure the corresponding certificate of stock in his name. 10. J p: This petition for review seeks to annul the decision 1 of the Court of Appeals.500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. in CA-G. not all the elements of a cause of action are alleged in the complaint. Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS. while this case is one for issuance of stock. from whom he obtained the stocks. 1996. .500 shares of Gaid. admitting the facts alleged. 1999. . Said deed and indorsement read as follows: DEED OF UNDERTAKING KNOW ALL MEN BY THESE PRESENTS: I. Jr. VICENTE C.) VICENTE C. . PONCE February 8. Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner's failure to record earlier the transfer of shares. having subscribed to and fully paid 239. PONCE. From the time of incorporation of VCC up to the present. denying petitioner's motion for reconsideration. there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary. DTAaCE On January 25. so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. 1968 CONFORME: (SGD. 1990. IaHDcT DECISION QUISUMBING. in the absence of express instructions from them.registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. is of no moment. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer.500. . Gaid was an incorporator of Victory Cement Corporation (VCC). filed a complaint 5 with the SEC for mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its corporate secretary Francisco M. VCC was renamed Floro Cement Corporation (FCC for brevity). Ponce. .R. 8. the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239. SP No. 6 Attached to the complaint was the Deed of Undertaking and Indorsement 7 upon which petitioner based his petition for mandamus. 657 (1986).500 shares of said corporation. Also assailed is the CA's resolution 4 of August 10. which set aside the decision 2 of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No. thus far. we reiterated that a mere indorsement by the supposed owners of the stock. that: xxx xxx xxx 6.) FAUSTO GAID INDORSEMENT I. With more reason. In Rivera vs. one of the elements of the cause of action for mandamus is clearly missing. . FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (239. plaintiff and Fausto Gaid executed a "Deed of Undertaking" and "Indorsement" whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. On February 8. 144 SCRA 643. no certificates of stock corresponding to the 239. Giron. The late Fausto G. that before a transferee may ask for the issuance of stock certificates. On April 10. Gaid and/or the plaintiff. 46692. 7. 5. a copy of which is attached as Annex "B".00) stocks of Victory Cement Corporation to VICENTE C. In his complaint.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation. It has been made clear. FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC. the court could render a valid judgment thereon in accordance with the prayer of the petition. he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned.500. (SGD. to make the transfer. . PONCE. On October 22. petitioner alleged. Despite repeated demands. 1968. Florendo. A copy of the said deed/indorsement is attached as Annex "A". cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. a corporate secretary may not be compelled to issue stock certificates without such registration. as in this case. This test would not be satisfied if.

defendant-appellees failed to show that the transferor nor his heirs have refuted the ownership of the transferee. the petitioner's cause of action is barred by laches. rather than through the usual tedious regular court procedure. . 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks. Gaid. According to paragraph 9 of the Complaint. . Jr.500 shares of stocks and its legal increments and (b) to pay him damages. the . "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder". the real party in interest is Fausto G. as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 1992. Assuming these allegations to be true. 1996. therefore. Indeed. a stockholder who has fully paid for his subscription together with interest and expenses in case of delinquent shares. xxx xxx xxx In the present case.) FAUSTO GAID With these allegations. 8 Instead of filing an answer. respondents moved to dismiss the complaint on the grounds that: (a) the complaint states no cause of action. said indorsement by Gaid to the plaintiff of the shares of stock in question — assuming that the indorsement was in fact a transfer of stocks — was not valid against third persons such as ALSONS under Section 63 of the Corporation Code. supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code. any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC. which held that: xxx xxx xxx from the transferor (Gaid) for such assignment or transfer. no stock certificate was issued to Gaid. such recording being a prerequisite to the issuance of a stock certificate in favor of the transferee. (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13. 68). As the SEC maintains. (2) he is the proper party-in-interest since he stands to be benefited or injured by a judgment in the case. nothing is alleged in the complaint on these two points. the Commission En Banc cited our ruling in Abejo vs. Flores. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. and mandamus will not lie. xxx xxx xxx Insofar as the issuance of certificates of stock is concerned. Assuming the document has this effect. no specific legal duty on the part of the respondents to issue the corresponding certificates of stock. In accordance with Section 37 of the old Corporation Law (Act No. and (d) in any case. 11 Petitioner filed his opposition to the motion to dismiss on February 19. 1459) obtaining in 1968 when the defendant corporation was incorporated. and there is no instruction or authority As appearing in the allegations of the complaint. there is not even any indorsement of any stock certificate to speak of. mandamus is improper and not available to petitioner. 149 SCRA 654 (1987) to the effect that: . nevertheless there is neither any allegation nor any showing that it is recorded in the books of the defendant corporation. granted the motion to dismiss in an Order dated February 29. a transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. SEC Hearing Officer Enrique L. On January 6. Applying this principle in the case on hand. 1997. 10 There was. for two reasons: there is no record of any assignment or transfer in the books of the defendant corporation. petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239. . .500 shares of stock (Annex "B"). 12 Petitioner appealed the Order of dismissal.(SGD. plaintiff-appellant is the transferee of the shares of stock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful owner and holder of a stock certificate to be issued in his name. CAcDTI Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding issuance of the certificates of stock in his name. Moreover. or his estate or his heirs. De la Cruz. (c) the cause of action is barred by the statute of limitations. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioner's rights as a stockholder. . the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. 9 They argued. 13 The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the real party in interest. is entitled to the issuance of a certificate of stock for his shares. Also. This is because the SEC by express mandate has "absolute jurisdiction. (b) the petitioner is not the real party in interest. the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. inter alia. This he cannot do. After respondents filed their reply. Gaid was an incorporator and an original stockholder of the defendant corporation who subscribed and fully paid for 239. that there being no allegation that the alleged "INDORSEMENT" was recorded in the books of the corporation. Needless to say.

1992.corporation has a mere ministerial duty to register in its stock and transfer book the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity of the deed of assignment in the proper tribunal. They conclude that petitioner's cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS. The Corporation Code states that: SEC. when a corporate secretary is presented with a document of transfer of fully paid shares. Thus. III. the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. "HAGER VS. . Giron Jr. "the complaint for mandamus should be dismissed for failure to state a cause of action. according to petitioner. DE LA CRUZ". . to record the alleged transfer of stocks. cited by respondents. Fausto Gaid. Finally. his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Certificate of stock and transfer of shares. . 14 Their motion for reconsideration having been denied. 144 SCRA 643 (1986). INC. and Rivera vs. It is also clear from the Amended Articles of Incorporation 20 approved on April 9. 96674. his name. the transfer cannot be the basis of issuance of a certificate of stock. Bryan. 19 At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for a writ of mandamus. . 19 PHIL. . do not apply to this case. Thus.500 shares. JUNE 26.00 per share.". THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION. There is no question that Fausto Gaid was an original subscriber of respondent corporation's 239. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. . These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar. 63. This is clear from the numerous pleadings filed by either party. 138 (1911).R. petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in. They add that petitioner is not the real party-in-interest. Florendo. it is undisputed that petitioners had not made a previous request upon the corporate secretary of ALSONS. . in their comment. A transferee who requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary. however. the Court of Appeals held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. VS. issue a new stock certificate in the name of the transferee. Secondly. CITING SECTION 63 OF THE CORPORATION CODE.. 149 SCRA 654 AND "RURAL BANK OF SALINAS. 19 Phil. until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction. BRYAN". THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE. there is no law. 138. COURT OF APPEALS. shall be valid. and cancel the old one. it is his duty to record the transfer in the stock and transfer book of the corporation. G. HECaTD Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. In its decision. no stock certificates have been issued even in the name of the original stockholder. respondent Francisco M. We find the instant petition without merit. — The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president. ET AL. Ponce was registered in the stock and transfer book of ALSONS. maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent in so far as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. . TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK. . Respondents. II. Until the recording is made. and that his petition for mandamus was properly dismissed. He contends that Hager vs. NO. herein respondents appealed the decision 15 of the SEC En Banc and the resolution 16 denying their motion for reconsideration to the Court of Appeals. said the CA. ET AL. No transfer. countersigned by the secretary or assistant secretary. rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. And. The Court of Appeals did not err in ruling that petitioner had no cause of action. the . 1995 21 that each share had a par value of P1. the instant petition for review on certiorari alleging that: I. Ergo. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS. 1999. except as between the parties. as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. sealed with the seal of the corporation shall be issued in accordance with the by-laws." 17 Petitioner's motion for reconsideration was likewise denied in a resolution 18 dated August 10. the real party-in-interest being Fausto Gaid since it is his name that appears in the records of the corporation. Ponce failed to state a cause of action.. Hence.

however. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente's name and to execute the proper documents therefor. Court of Appeals. thus: It appears. except between the parties. there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners. the number of the certificate or certificates and the number of shares transferred. Thus. is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. 26 In other words. which duty is ministerial on its part. respondent Court of Appeals did not err in upholding the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. on its face. cannot be effective as against the corporation. the corporation looks only to its books for the purpose of determining who its shareholders are. Inc. The deed of undertaking with indorsement presented by petitioner does not establish. that this petitioner is not the registered owner of the stock which he seeks to have transferred. Bryan. until registration is accomplished. however. 27 Petitioner insists that it is precisely the duty of the corporate secretary. the SEC En Banc cited Rural Bank of Salinas. 28 where we held that: For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book. the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question. however. Pursuant to the foregoing provision. At all events. 25 From the corporation's point of view. Based on those circumstances.date of the transfer. Unless and until such recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal basis. AcHEaS In Rural Bank of Salinas. the number of the certificate or certificates and the number of shares transferred. Pursuant to the authority so given. the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 24 of the Corporation Code. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. the corporation is under no specific legal duty to issue stock certificates in the transferee's name. when presented with the document of fully paid shares.. a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder. Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment covering the assigned shares. vs. to make the transfer. From this time. private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero. the stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. . from whom he obtained the stocks. It follows that. the transfer. Where a transferee is not yet recognized as a stockholder. as held by the Court of Appeals: . in whose name it is registered on the books of the Visayan Electric Company. shall be valid. to effect the transfer by recording the transfer in the stock and transfer book of the corporation and to issue stock certificates in the name of the transferee. and its shareholders and third persons on the other. In Hager vs. and its shareholders and third persons on the other. though valid between the parties. there is no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary . the corporation looks only to its books for the purpose of determining who its shareholders are. and except in so far as he alleges that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company. On this point. in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation. This is the import of Section 63 which states that "No transfer. until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction. the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Inc. That cannot be said of this case. 138 (1911). without such recording. since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. for then he would be entitled to the remedy of mandamus. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. HcISTE Hence. the date of the transfer. from the original as well as the amended petition. As between the corporation on the one hand. the transfer is not effective until it is recorded. . 19 Phil." The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party. 23 It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. the private respondent has failed to state a cause of action. Thus. the registered stockholder. 22 As between the corporation on the one hand. his right to demand for the registration of the transfer and the issuance of certificates of stocks.

657 (1986). Finally. one of the elements of the cause of action for mandamus is clearly missing. The Court's statement. the corporation looks only to its books for the purpose of determining who its shareholders are. that before a transferee may ask for the issuance of stock certificates. the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferee's name. as in this case. in the absence of express instructions of the registered owner to make such transfer to the indorsee. upon the demand either of the person in whose name the stock is registered. SEC. is of no moment. 104 Phil. or that the BryanLandon Company has ever itself made such demand upon the Visayan Electric Company. as between the corporation on the one hand. It has no pertinence in this controversy. an equivalent of such ownership. In this case there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer. we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. it rests on the will of the stockholder whether he wants to be issued stock certificates. as to justify the issuance of the writ to compel him to perform it. 34 Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner's failure to record earlier the transfer of shares. which is not pertinent to the issue at hand. in our view. SAHEIc Under the provisions of our statute touching the transfer of stock (Secs. or a power of attorney authorizing such transfer. because. such a clear legal obligation upon the respondent. due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation's controlling 56% shares of stock which were covered by duly endorsed stock certificates. Florendo. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the BryanLandon Company authorizing a demand for the transfer of the stock. we held that considering that the law does not prescribe a period within which the registration should be effected. he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. 144 SCRA 643. 31 Petitioner's reliance on our ruling in Abejo vs. With more reason. In Tan vs. there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary. cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. the action to enforce the right does not accrue until there . and a stockholder may opt not to be issued a certificate. that case arose between and among the principal stockholders of the corporation. but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation." 32 was addressed to the issue of jurisdiction. It expresses the contract between the corporation and the stockholder. or of some person holding a power of attorney for that purpose from the registered owner of the stock. AaSCTD That petitioner was under no obligation to request for the registration of the transfer is not in issue. unless it affirmatively appears that he has failed or refused so to do. 149 SCRA 654 (1987). In Won vs. It has been made clear. will not necessarily be recognized as such by the corporation and its officers. a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company. admitting the facts alleged.. Inc. that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. we reiterated that a mere indorsement by the supposed owners of the stock. a corporate secretary may not be compelled to issue stock certificates without such registration. Wack Wack Golf and Country Club. which petitioner seeks to have made through the medium of the mandamus of this court. 33 This test would not be satisfied if. claiming to be the owner. 35 and 36 of Act No.of the Visayan Electric Company to make the transfer. Pocket Bell. the legal obligation. so to speak. 206 SCRA 740 (1992). 466 (1958). Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit. and in the absence of such allegation we are not able to say that there was such a clear indisputable duty. 1459). 35 In fact. One may own shares of corporate stock without possessing a stock certificate. The test of sufficiency of the facts alleged in a petition is whether or not. that "there is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchaser's right to secure the corresponding certificate in his name. under such circumstances the duty. The certificate is in law. in the absence of express instructions from them. so that a mere indorsee of a stock certificate. The certificate is the evidence of the holder's interest and status in the corporation. and its shareholders and third persons on the other. we are all agreed that in a case such as that at bar. in Abejo we did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. 29 the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand. As aforesaid. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. Moreover. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. while this case is one for issuance of stock. 30 In Rivera vs. not all the elements of a cause of action are alleged in the complaint. is not so clear and indisputable as to justify the issuance of the writ. As a general rule and especially under the above-cited statute. his ownership of the share represented thereby. the court could render a valid judgment thereon in accordance with the prayer of the petition. thus far. Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS. De la Cruz. so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner.

TERENCE Y. MOTION FOR RECONSIDERATION. JUANITA TAN ONG. the petition is DENIED for lack of merit. in their personal capacities. 1998. INC. LOURDES C. it would be totally against all rules of justice. They alleged that in view of the findings that both parties were guilty of violating their Agreement. TERENCE Y. TIU. The decision of the Court of Appeals. SYNOPSIS In these consolidated petitions. TIU. for W. WILLIE T. According to them. WILSON T. ANNA L.] ONG YONG. MOLY YU GAW. ANNA L. JUANITA TAN ONG. petitioner's complaint for mandamus must fail. on the other hand. the decision or final order is contrary to law). moved for the issuance of a writ of execution of the February 1. No. April 8. April 8. ONG. petitioners. Pimentel III for Landlink. ONG. the Court ruled that the Tius could not legally rescind the Pre-Subscription Agreement. BELEN SEE YU. REGISTER OF DEEDS OF PASAY CITY.has been a demand and a refusal concerning the transfer. 144476. TIU. D. ONG YONG. No.R. LOURDES C. MASAGANA TELAMART. neither of them could resort to rescission under the principle of pari delicto. vs. but because he had alleged no cause of action sufficient for the issuance of the writ. WILLIAM T. ITSCED [G. WILSON T. is hereby AFFIRMED. It denied Tius' motion for issuance of a writ of execution for being moot. They claimed that it was the Tius who were guilty of fundamental violation in failing to remit funds to FLADC and diverting the same to their MATTERCO account. SaDICE Movants Ong argued that specific performance and not rescission was the proper remedy under the premises. Thus. the Ongs moved for reconsideration of the February 1. Rescission is certainly not one of them.R. 2002 decision of the Court. TIU. the Court held that the Tius. Gonzales Batiller Bilog & Asso. the Court declared null and void the unilateral rescission by the Tius of the subject Pre-Subscription Agreement. WHEREFORE. for just about any real or imagined offense. vs. respondents. which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. Moreover. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder. WILLIE T. other than rescission. MOLY YU GAW. the Court found that Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. Hence. INTRALAND RESOURCES DEVELOPMENT CORP.. Ong. Estelito P.. ONG. SEC rules and even the Rules of Court provide for appropriate adequate intra-corporate remedies. Aquilino L. REMEDIAL LAW. in CA-G. especially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met.e. The Corporation Code. Feria Feria Lugtu La O'Noche for petitioners.. ONG. although the Tius were adversely affected by the Ong's unwillingness to let them assume the positions of Vice-President and Treasurer of the Corporation. ONG. NOT PRO-FORMA FOR THE REASON ALONE THAT IT REITERATES THE ARGUMENTS EARLIER PASSED UPON AND REJECTED BY THE APPELLATE COURT. In the present case. ONG. and JULIA ONG ALONZO. which in turn upheld. 2002 Decision of the Supreme Court affirming with modification the October 5. not because of laches or estoppel. No pronouncement as to costs. they should be given the proportionate share of the mall. TIU. The Tius. CELY Y. Arturo Santos for Masagana. TIU. Mendoza for petitioners. [G. which confirmed the unilateral rescission by the Tius of the Pre-Subscription Agreement between them and the Ongs. 545 and reinstated the order of the Hearing Officer. MOTIONS. BELEN SEE YU. cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of the subscription contract. which did not justify the rescission of the contract.] DAVID S. DAVID S. respondents. etc. and INTRALAND RESOURCES DEVELOPMENT CORP.R. WILLIAM T. at most casual. According to the Court. ONG. the decision of the SEC en banc dated September 11. 1999 Decision of the Court of Appeals. 2003. their alleged breach of the Pre-Subscription Agreement was. ONG. JOHN YU. and the SECURITIES AND EXCHANGE COMMISSION. CELY Y. petitioners. 46692. SO ORDERED. JOHN YU. TIU. D. this Court has to evaluate the merits of the arguments to prevent an unjust decision . TIU. — The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. rescission due to breach of contract was definitely a wrong remedy for their personal grievances. to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. In reversing itself. fairness and equity to deprive the Ongs of their interest on petty and tenuous grounds. Accordingly. SP No. likewise with modification. As long as the same adequately raises a valid ground (i. and JULIE ONG ALONZO. EHTIcD SYLLABUS 1. Without the Ongs. Tan Acut & Lopez for respondents. in situations like this. the Tius would have lost everything they originally invested in said mall.. The Ongs further argued that assuming rescission to be proper. 2003. 144629.

000 shares of stock was. ID. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder. ID. RESCISSION BASED ON BREACH OF CONTRACT NOT PROPER REMEDY WHERE PARTY ASKING FOR IT HAS NO LEGAL PERSONALITY TO DO SO AND THE REQUIREMENTS OF THE LAW THEREFOR HAVE NOT BEEN MET.. fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds. from the viewpoint of the law. The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions.. they also have other available and effective remedies under the law. result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117. no clear ruling was made on why an order distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. There are no ifs or buts about it. 118. they were in fact remediable and correctable under the law. AaEDcS 3. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related .from attaining finality. in the final analysis. ID. inequitable and disastrous effect on the corporation. RESCISSION THEREOF UNWARRANTED IN CASE AT BAR. unless he shows that he has a real interest affected thereby. 119 and 120 of the Corporation Code. 4. Thus. Assuming it had valid reasons to do so. we ruled that a motion for reconsideration is not pro forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. ID. The Ongs' shortcomings were far from serious and certainly less than substantial. their assigns and heirs. Thus. Rescission is certainly not one of them. In Security Bank and Trust Company vs. — A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation — its shares of stock. For instance. 2003 Memorandum. no ruling was made on some of the petitioner Ongs' arguments. Hence. SUBSCRIPTION CONTRACT. It would be totally against all rules of justice. ID. were not considered or clearly resolved by this Court. In the case at bar." Therefore.. rescission due to breach of contract is definitely the wrong remedy for their personal grievances. the Tius.. the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. A PARTY WHO HAS NOT TAKEN PART IN THE TRANSACTION CANNOT SUE OR BE SUED FOR PERFORMANCE OR FOR CANCELLATION THEREOF. although mere repetitions. rescission will. the Tius would have lost everything they originally invested in said mall. not between the Ongs and the Tius.. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation.. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone. It was FLADC that did. ID. the subscription contract (denominated by the parties as Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1. ID.000.. in situations like this.. — After all is said and done... UNLESS HE SHOWS THAT HE HAS A REAL INTEREST AFFECTED THEREBY. We wish it were that simple. specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of subscription contract. ID. CORPORATIONS. the Ongs and FLADC regarding the subscription of the parties to the corporation. ID. a civil case for rescission on the ground of breach of contract filed by the Tius m their personal capacities will not prosper. Article 1311 of the Civil Code provides that "contracts take effect only between the parties. We explained there that a movant may raise the same arguments. — In their February 28. only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Otherwise stated. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair. to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. . if only to convince this Court that its ruling was erroneous. 6. Without the Ongs. the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius. it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein.. Moreover. the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them. — Contrary to the Tius' allegation.. NOT WARRANTED ABSENT PROOF THAT THE CORPORATION IS BEING USED AS A CLOAK OR COVER FOR FRAUD OR ILLEGALITY. . although the Tius were adversely affected by the Ongs' unwillingness to let them assume their positions. CORPORATION LAW. its creditors and the Ongs. — However. The Corporation Code. PIERCING THE VEIL OF CORPORATE FICTION. for just about any real or imagined offense. no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. RESCISSION THEREOF WILL RESULT IN THE PREMATURE LIQUIDATION OF THE CORPORATION IN CASE AT BAR. DAcaIE 5. Not only are they not parties to the subscription contract between the Ongs and FLADC. ID. ID. OR TO WORK INJUSTICE. 2. SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies.. other than rescission.. ID. COMMERCIAL LAW.. If only for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments — assuming good faith and honest intentions — we cannot allow the rescission of the subject subscription agreement. one between the Ongs and FLADC. a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof. ID. Cuenca. ID. ID. in their personal capacities.

There was no revised treasurer's affidavit and no proof that said decrease will not prejudice the creditors' rights. supervised the collection and receipt of rentals in the Masagana Citimall. ID. NOT COMPLIED WITH IN CASE AT BAR. The records show that the President. It is a decision that only the stockholders and the directors can make.. ID. they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. This doctrine is the underlying principle in the procedure for the distribution of capital assets. we find this argument too strained for comfort. the "corporate peace" laudably hoped for by the court will remain nothing but a dream because this time. since the Ongs represent FLADC as its management. Though FLADC was represented by the Tius in the subscription contract.. first enunciated by this Court in the 1923 case of Philippine Trust Co. — The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders. It is the Ongs alone who can say that. the breach of the shareholders' agreement. ID... ID. considering that they are the contracting parties thereto. Decreasing a corporation's authorized capital stock is an amendment of the Articles of Incorporation. the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. ID.. — The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. There was nothing in the Pre-Subscription Agreement even remotely suggesting such alleged interdependence. said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. and that he held on to the cash and properties of the corporation. Thus. ID." 7. — All this notwithstanding. within the bounds of reason. the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs. There is evidence that the Ongs did prevent the rightfully elected Treasurer. No majority vote of the board of directors was ever taken. thereby violating the Trust Fund Doctrine and the Corporation Code.. In this case. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used "as a cloak or cover for fraud or illegality. ELABORATED. since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. They want this .. ID. ID. Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation. 11. for that matter. it will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. granting but not conceding that the Tius possess the legal standing to sue for to rescission based on breach of contract. or to work injustice. Furthermore. 2003.and dependent on each other. It is obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in which they were personally not parties-in-interest. PRESIDENT OF THE CORPORATION IS PROHIBITED FROM ACTING CONCURRENTLY AS TREASURER THEREOF. OFFICERS OR DIRECTORS OR EARNEST DESIRE OF THE COURT A QUO TO PREVENT FURTHER SQUABBLES AND FUTURE LITIGATIONS. ID. FLADC had a separate juridical personality from the Tius. ID. ID. be interpreted as the consideration of the subscription contract between FLADC and the Ongs. provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. TRUST FUND DOCTRINE... ID. On the contrary. Otherwise. DISTRIBUTION OF CORPORATE ASSETS AND PROPERTY CANNOT BE MADE TO DEPEND ON THE WHIMS AND CAPRICES OF THE STOCKHOLDERS. The rationale behind the provision is to ensure the effective monitoring of each officer's separate functions. which was allegedly the consideration for the subscription contract. the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with. HAS A SEPARATE JURIDICAL PERSONALITY FROM ITS STOCKHOLDERS. which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock. or even. this Court fails to see how the shareholders agreement between the Ongs and Tius can.. all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. however. Rivera. Furthermore. ID. (2) purchase of redeemable shares by the corporation. vs. Assuming arguendo that there were two "sub-agreements" embodied in the Pre-Subscription Agreement. Cely Tiu. aDECHI 8. Be that as it may. it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. ID. ID.. was also a breach of the latter.. embodied in the Corporation Code. breach by the Ongs is breach by FLADC. on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. In the instant case. — The Tius allege that they were prevented from participating in the management of the corporation.. that he ordered the same to be deposited in the bank. 9. from exercising her function as such. DECREASE OF CAPITAL STOCK. and (3) dissolution and eventual liquidation of the corporation. This must also fail because such an argument disregards the separate juridical personality of FLADC.. FORMAL REQUIREMENTS. Neither was there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. regardless of the existence of unrestricted retained earnings. Wilson Ong. The Trust Fund Doctrine. Thus. — The Tius also argue that. officers or directors of the corporation.. Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29. DEHaAS 10.

dated March 15. but the Ongs prevented them from doing so. Moly Yu Gow. dated March 15. the Ongs refused to provide them the space for their executive offices as Vice-President and Treasurer.000 shares). ID. 2002. Tiu had in fact assumed the positions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them.000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200. (2) motion for partial reconsideration. Tiu (the Tius) of our February 1. J p: Before us are the (1) motion for reconsideration. Anna L. Under the Pre-Subscription Agreement they entered into. 2002. courts are not in the business of business. dated September 11. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer. Tiu. Belen See Yu. the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. Furthermore. and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen. the Secretary and six directors (including the chairman) to the board of directors of FLADC. a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders is a violation of the "business judgment rule" which states that: . (2) preventing David S. Tiu and Cely Y. 2002. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions. an esteemed author in corporate law. 1998. — Truth to tell. Tiu and Cely S.200 shares. Tiu to assume the positions and perform the duties of Vice-President and Treasurer. Finally. they felt they were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings. Apparently. dated October 5. likewise with modification.8 million (for 49. the First Landlink Asia Development Corporation (FLADC).00 each in addition to their already existing subscription of 450. especially so. Moreover. DCSTAH 12. ID. Hence. CASE AT BAR.. John Yu and Lourdes C. RESOLUTION CORONA. rescinded the Pre-Subscription Agreement. ID. to invest in FLADC. The Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and above their P100 million investment.. encountered dire financial difficulties. the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner. the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. 2002 Decision. Ong. of petitioner movant Willie Ong seeking a reversal of this Court's Decision. 1 dated February 1. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. Tiu. and (3) refusing to give them the office spaces agreed upon. however.000 shares) and P49. William Ong. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. Furthermore. BUSINESS JUDGMENT RULE. as when plaintiffs aver that the defendants (members of the board). the Ongs paid P100 million in cash for their subscription to 1. DaAETS A brief recapitulation of the facts shows that: In 1994. 1999. was shortlived because the Tius. Cely Y. the Ongs pointed out that the Tius did in fact already have existing executive .800 shares at P100. and (3) motion for issuance of writ of execution of petitioners David S. RATIONALE BEHIND THE RULE. Wilson Ong. Terence Y. the Ongs were given the right to manage and operate the mall. respectively.800 stock subscription therein. the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1. William T. the decision of the SEC en banc. Ong. In their defense. they agreed that the Tius were entitled to nominate the VicePresident and the Treasurer plus five directors while the Ongs were entitled to nominate the President. respectively.00 each while the Tius were to subscribe to an additional 549. The reason behind the rule is aptly explained by Dean Cesar L.. (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority. P30 million (for 300. According to the Tius. Tiu. More importantly. On the issue of office space. the agreement was for David S. Such an act infringes on the law on reduction of capital stock. To stave off foreclosure of the mortgage on the two lots where the mall was being built. . on February 23.R.000. Willie Ong and Julia Ong Alonzo (the Ongs). It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management duties but that the Tius shied away from helping them manage the corporation.800 shares) to cover their additional 549. Villanueva. the Ongs said that David S. in G. have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders. Wilson T. Anna Ong. The business harmony between the Ongs and the Tius in FLADC. Nos. . D. EXPLAINED. which in turn upheld. Juanita Tan Ong. thus: Courts and other tribunals are wont to override the business judgment of the board mainly because. 1996. Accordingly. the Tius invited Ong Yong. Juanita Tan Ong. the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs.Court to make a corporate decision for FLADC. and most serious of all.000 shares at a par value of P100. a 1. Ordering the return and distribution of the Ongs' capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. of petitioner movants Ong Yong. 144476 and 144629 affirming with modification the decision 2 of the Court of Appeals. Tiu and Cely Y. Ong and Julia Ong Alonzo (the Ongs).902. which was owned by the Tius. when courts are ill-equipped to make business decisions.30 square-meter lot and a 151 square-meter lot. the Ongs refused to give them the shares corresponding to their property contributions of a fourstory building.000.

although the Tius executed a deed of assignment for the 1. they could then be given the corresponding shares of stocks.000. it was easy for the Tius to simply pay the said transfer taxes and. (a) Ong Group — P100. 1996 at the Securities and Exchange Commission (SEC). jointly and severally. (h) The plaintiff David Tiu to pay individual defendants the sum of P20. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in accordance with the following cash and property contributions of the parties therein. (c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of incorporation of FLADC to conform with this decision. (f) The individual defendants.000 shares subscription of the individual defendants in FLADC. This meant that the 151 square-meter property was at that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of new shares of stock. What the Tius really wanted were new offices which were anyway subsequently provided to them. 1997 decision of the Hearing Officer. 1997 confirming the rescission sought by the Tius.000.offices in the mall since they owned it 100% before the Ongs came in. the Court of Appeals (CA) rendered a decision on October 5. the above decision was partially reconsidered but only insofar as the Ongs' P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of interest on it was correct.000. (d) The defendants to surrender to the plaintiffs TCT Nos.00 cash contribution for one (1) million shares in First Landlink Asia Development Corporation at a par value of P100.866.000. 8 On appeal. after the new TCT was issued in FLADC's name. 134066 (formerly 15587). to desist from exercising or performing any and all acts pertaining to stockholder. plus the legal rate of interest thereon from the date of their receipt of such payment until fully paid.000 shares of FLADC. The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan or advance to FLADC. seeking confirmation of their rescission of the Pre-Subscription Agreement. (e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. subject to the following MODIFICATIONS: 1. 132494. Andaya.. 6 Both parties appealed 7 to the SEC en banc which rendered a decision on September 11. thus: WHEREFORE. the SEC would not approve the valuation of the Tius' property contribution (as opposed to cash contribution). issued a decision on May 19. and consequently ordering: (a) The cancellation of the 1.690 for capital gains tax and documentary stamp tax. the Ongs asserted that. SO ORDERED.00 to the individual defendants representing the return of their contribution for 1. 1999. Jr.00 per share.902. they (the Tius) refused to pay P570.000. individually and collectively.00 representing his loan from said defendants plus legal interest from the date of receipt of such amount.000. not entitled to earn interest. even before their Pre-Subscription Agreement was executed in 1994. 132493.30 square-meter lot in favor of FLADC.200 shares in First Landlink Asia Development Corporation at a par value of P100. On the 151 square-meter property. TEAICc The controversy finally came to a head when this case was commenced 4 by the Tius on February 27.000. affirming the May 19. The Tius initially claimed that they could not as yet surrender the TCT because it was "still being reconstituted" by the Lichaucos from whom the Tius bought it. . After hearing. 5 On motion of both parties. the Tius never executed a deed of assignment in favor of FLADC. 134066 (formerly 15587).000. through then Hearing Officer Rolando G. the Order dated September 11.000. hence. their agents and representatives. would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADC's name. 598 and 601 confirming the rescission of the PreSubscription Agreement dated August 15.669. to return to FLADC interest payment in the amount of P8. 1998.00 per share.00 original cash contribution for 450. (g) The individual defendants. This.00 and all interest payments as well as any payments on principal received from the P70. (b) Tiu Group: 1) P45. On the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius' property contributions. as follows: WHEREFORE.000. failing in which said titles are declared void. The Ongs later on discovered that FLADC had in reality owned the property all along. judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement. (b) FLADC to pay the amount of P170. 1998 issued by the Securities and Exchange Commission En Banc in SEC AC CASE NOS. Without the payment thereof.00 inexistent loan. 135325 and 134204 and any other title or deed in the name of FLADC.020. the SEC. in turn.000. 1994 is hereby AFFIRMED. director or officer of FLADC or in any manner intervene in the management and affairs of FLADC. In any event.

returning the original investment of the Ongs and awarding practically everything else to the Tius. and that. by rescinding the Pre-Subscription Agreement.2) A four-storey building described in Transfer Certificate of Title No. contended that the rescission should have been limited to the restitution of the parties' respective investments and not the liquidation of FLADC based on the erroneous perception by the court that: the Masagana Citimall was threatened with incompletion since FLADC was in financial distress. 10 These were findings later on affirmed in our own February 1. "for practical considerations. Moreover. 2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the management thereof is (sic) hereby ordered transferred to the Tiu Group. they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million investment in FLADC. 144629. that the P70 million paid by the Ongs was an advance and not a premium on capital. The CA concluded that both the Ongs and the Tius were in pari delicto (which would not have legally entitled them to rescission) but.R. the Ongs argued that the Tius may not properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-Subscription Agreement did not provide for reciprocity of obligations." since the same are not valid grounds under the Corporation Code. it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. both parties filed separate petitions for review before this Court.. 11 But there was also a strange aspect of the CA decision. Tiu. the 151 sq. that they were diverting rentals from lease contracts due to FLADC to their own MATTERCO account. and to award costs and damages. 15587 in the name of Masagana Telamart. Should the former incur in delay in the payment thereof. specifically. the Tius. 3) A 1. respectively. 3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70.00 loaned them by the Ongs upon the finality of this decision. m.000. SO ORDERED. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the approval of the SEC for the property contribution and. 9 An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the "height of ingratitude" and as "pulling a fast one" on the Ongs.000. that they violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of assignment over the 151 squaremeter property commensurate to 49. The Ongs prevented the Tius from assuming the positions of Vice-President and Treasurer of the corporation. Ong et al. on the other hand.902. They also argued that the liquidation of FLADC may not legally be ordered by the appellate court even for so called "practical considerations" or even to prevent "further squabbles and numerous litigations. that they did not commit a substantial and fundamental breach of their agreement since they did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC." that is. the Tius shall be credited with 49. Should the former incur in delay in the payment thereof. this Court promulgated its Decision (the subject of the instant motions). On February 1. valued at P30. In their petition docketed as G. 1996.R.000. parcel of land. Ong et al. 2002.00 per share. thereafter.000. 1996. that they did not turn over to the Ongs the entire amount of FLADC funds. 15587 in the name of Intraland Resources and Development Corporation valued at P20. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be computed from the date of the FLADC Board Resolution which is June 19. 144476.00 per share. No.000 shares in First Landlink Asia Development Corporation at a par value of P100.00 for 300. the issuance of title in FLADC's name. it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. and that the failure to credit the 300.800 shares in FLADC for their property contribution. On the other .00 that was advanced to it by the Ong Group upon the finality of this decision.00 for 200. vs.800 shares in FLADC thereby failing to pay the price for the said shares. This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-Subscription Agreement.. HICcSA In their petition docketed as G. 2. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum to be computed from the time of judicial demand which is from April 23. affirming the assailed decision of the Court of Appeals but with the following modifications: 1.000. 2002 Decision which is the subject of the instant motion for reconsideration. 4) The Tius are hereby ordered to pay the amount of P20. that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB. The CA moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO account.902.30 square-meter property covered by TCT No.30 square-meter parcel of land covered by Transfer Certificate of Title No.000 shares in First Landlink Asia Development Corporation at a par value of P100.000 shares corresponding to the 1. the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million advances to FLADC and David S.000. and 3. that the rights over the subject matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC). Tiu et al.000. it was best to separate the two groups by rescinding the Pre-Subscription Agreement. their inability to work together. Tiu et al. vs. No. Their motions for reconsideration having been denied. Inc.000.

the SEC retained jurisdiction over pending cases involving intra-corporate disputes already submitted for final resolution upon the effectivity of the said law. and (c) the SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). 2002. The Ongs filed their opposition. that. the Ongs filed their own "Motion for Reconsideration. Besides. based on well-settled jurisprudence. On March 15. They (the Ongs) should not merely be given interest on their capital investments. They stress that providing appropriate offices for David S. pursuant to Section 5. pointing out that there was no violation of the Pre-Subscription Agreement on the part of the Ongs. this Court agreed with the Court of Appeals that the remedy of specific performance. (b) any further delay would be injurious to the rights of the Tius since the case had been pending for more than six years. 2002. assuming rescission to be proper. which would have been foreclosed by PNB if not for their timely investment of P190 million in 1994 and which is now worth about P1 billion mainly because of their efforts. had no bearing on their obligations under the Pre-Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC itself. as espoused by the Ongs. neither of them could resort to rescission under the principle of pari delicto. 1998 pursuant to Sections 1 and 12. the Ongs claim that it was the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO account. it held that rescission was not possible since both parties were in pari delicto. Rule 43 of the Rules of Court. The Ongs also allege that. On their second point (assuming rescission to be proper.2 of RA 8799. Hence. The Tius compare the arguments in said pleadings to prove that the Ongs do not raise new issues. an innocent third party. rescission had become not only impractical but would also adversely affect the rights of innocent parties. Alternatively. For rescission to be justified. Tiu as Vice-President and Treasurer. said remedy may no longer be availed of under the law. 12 the Ongs' present motion is therefore pro forma and did not prevent the Decision of this Court from attaining finality. the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the grounds that: (a) the SEC order had become executory as early as September 11. the Ongs should be given their proportionate share of the mall). Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution. in view of the findings of the Court that both parties were guilty of violating the Pre-Subscription Agreement. since the cash and other contributions now sought to be returned already belong to FLADC. At any rate. and. Consequently. casual which did not justify the rescission of the contract. respectively. 2002. 2002 Decision)" on March 15. counter that the arguments therein are a mere re-hash of the contentions in the Ongs' petition for review and previous motion for reconsideration of the Court of Appeals' decision. after more than seven years since the mall began its operations." Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8. in their opposition to the Ongs' motion for reconsideration. the subject decision of this Court should be modified to entitle movants to their proportionate share in the mall. and that. contending that the Decision dated February 1. Such obligation arose from the relations between the said officers and the corporation and not any of the individual parties such as the Ongs. AISHcD The Tius. Likewise. The said portion of our Decision. Tiu and Cely Y. It also contravenes this Court's assurance in the questioned Decision that the Ongs and Tius "will have a bountiful return of their respective investments derived from the profits of the corporation. movants Ong argue that their alleged breach of the Pre-Subscription Agreement was. the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADC's loan to PNB. the alleged failure to provide office space for the two corporate officers was no more than an inconsequential infringement. the Decision established that the Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO account. should be included in any partition and distribution. They point out that the mall itself. Motion for Modification (of the February 1. and (b) that. according to the Ongs. the law requires that the breach of contract should be so "substantial or fundamental" as to defeat the primary objective of the parties in making the agreement. On their first point (specific performance and not rescission was the proper remedy). at most. .hand. Just the same. in this light. In addition. and that it would be highly inequitable and unfair to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius. that no good reason existed to issue a warrant of execution. according to them. However. raising two main points: (a) that specific performance and not rescission was the proper remedy under the premises. the alleged failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs. 2002 was not yet final and executory. amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the agreement was "the height of ingratitude" and an attempt "to pull a fast one" as it would prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. it could not be done in view of the Tius' refusal to pay the necessary transfer taxes which in turn resulted in the inability to secure SEC approval for the property contributions and the issuance of a new TCT in the name of FLADC. was not practical and sound either and would only lead to further "squabbles and numerous litigations" between the parties. movants Ong vehemently take exception to the second item in the dispositive portion of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the management thereof (after liquidation) shall be transferred to the Tius.

we find that our Decision of February 1. one between the Ongs and FLADC. The procedural rule on pro forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. the Special Second Division of this Court held oral arguments on the respective positions of the parties.200 shares representing the paid-up capital. This is not the first time that this Court has reversed itself on a motion for reconsideration. it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein. We grant the Ongs' motions for reconsideration. 14 After a thorough re-examination of the case. after a re-study of the facts and the law. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related and dependent on each other. this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality. 2003. from the viewpoint of the law. we resolve whether the Tius could legally rescind the PreSubscription Agreement.000. an increase of the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the PreSubscription Agreement. their assigns and heirs. the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius.000. The authorized capital stock was thus increased from 500. within the bounds of reason. vs. National Telecommunications Commission.000. FLADC and its creditors.On January 29. On February 27. 16 we ruled that a motion for reconsideration is not pro forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court.000 shares with the Tius owning 450. In Philippine Consumers Foundation.000. It was FLADC that did. Thus. A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation — its shares of stock. In Security Bank and Trust Company vs. although mere repetitions. a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper. Willie Ong and the rest of the movants Ong filed their respective memoranda.000 shares and the Tius to 549. were not considered or clearly resolved by this Court. On February 28. FLADC was originally incorporated with an authorized capital stock of 500. 13 this Court. In the case at bar. Moreover. Since these were unissued shares. It is obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in which they were personally not parties-in-interest. the breach of the shareholders' agreement. which was allegedly the consideration for the subscription contract. through then Chief Justice Felix V. Cuenca. Thus. not between the Ongs and the Tius. unless he shows that he has a real interest affected thereby.e. if not corrected. When the Tius invited the Ongs to invest in FLADC as stockholders. with the Ongs subscribing to 1. be interpreted as the consideration of the subscription . the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them.000 shares with a par value of P100 each.. a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof.000 shares. no clear ruling was made on why an order distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. the Tius submitted their memorandum. Article 1311 of the Civil Code provides that "contracts take effect only between the parties. Inc. Thus.000 shares of stock was. Going now to the merits. For instance. . Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29. the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1. the rule (that a motion is pro forma if it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. . Assuming arguendo that there were two "sub-agreements" embodied in the Pre-Subscription Agreement. 2002 overlooked certain aspects which. Dr. said that its members may and do change their minds. will cause extreme and irreparable damage and prejudice to the Ongs. We explained there that a movant may raise the same arguments. We rule that they could not. if only to convince this Court that its ruling was erroneous. Makasiar. we find this argument too strained for comfort.200 shares to complete 1. illuminated by a mutual exchange of views. Title VII of the Corporation Code: Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title." Therefore.800 more shares in addition to their 450. the subject matter of the contract was the 1. 2003.000 shares to 2. 17 In their February 28. Otherwise stated. notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics supplied). the decision or final order is contrary to law).000. 2003 Memorandum. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone. Assuming it had valid reasons to do so. the Ongs and FLADC regarding the subscription of the parties to the corporation.000 unissued shares of FLADC stock allocated to the Ongs. 2003. 2003. was also a breach of the latter. no ruling was made on some of the petitioner Ongs' arguments. this Court fails to see how the shareholders agreement between the Ongs and Tius can. the parties' Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60. Thus. As long as the same adequately raises a valid ground 15 (i.

25 and (3) dissolution and eventual liquidation of the corporation. Wilson Ong. first enunciated by this Court in the 1923 case of Philippine Trust Co. its creditors and the Ongs. officers or directors of the corporation. aCSEcA The Tius allege that they were prevented from participating in the management of the corporation. it will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. regardless of the existence of unrestricted retained earnings. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used "as a cloak or cover for fraud or illegality. 119 and 120 of the Corporation Code. 28 The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. vs. We wish it were that simple. rescission will.contract between FLADC and the Ongs. The rationale behind the provision is to ensure the effective monitoring of each officer's separate functions. Though FLADC was represented by the Tius in the subscription contract. the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares 26 and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with. Hence. The Corporation Code. Rescission is certainly not one of them. 20 and that he held on to the cash and properties of the corporation. There was nothing in the Pre-Subscription Agreement even remotely suggesting such alleged interdependence. for just about any real or imagined offense. ETDHaC Contrary to the Tius' allegation. The Trust Fund Doctrine. since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. There is evidence that the Ongs did prevent the rightfully elected Treasurer. in situations like this. Furthermore. in the final analysis. It is the Ongs alone who can say that. 21 Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. since the Ongs represent FLADC as its management. the Tius. the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation. In the instant case. specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. for that matter. granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract. 19 that he ordered the same to be deposited in the bank. or even. or to work injustice. to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. Be that as it may. Not only are they not parties to the subscription contract between the Ongs and FLADC. 24 (2) purchase of redeemable shares by the corporation. inequitable and disastrous effect on the corporation. . result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117. 23 This doctrine is the underlying principle in the procedure for the distribution of capital assets. they also have other available and effective remedies under the law. the "corporate peace" laudably hoped for by the court will remain nothing but a dream because this time. All this notwithstanding. Otherwise. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation. Rivera. embodied in the Corporation Code. rescission due to breach of contract is definitely the wrong remedy for their personal grievances. thereby violating the Trust Fund Doctrine and the Corporation Code. said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair. however. SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies. in their personal capacities. other than rescission. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder. on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. 27 The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders. Thus. 22 provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. from exercising her function as such. which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock. cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of subscription contract. Cely Tiu. However. supervised the collection and receipt of rentals in the Masagana Citimall. This must also fail because such an argument disregards the separate juridical personality of FLADC. The records show that the President. FLADC had a separate juridical personality from the Tius. the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs." 18 The Tius also argue that. breach by the Ongs is breach by FLADC. they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. although the Tius were adversely affected by the Ongs' unwillingness to let them assume their positions. 118.

why should FLADC issue additional shares to the Tius for property already owned by the corporation and which. later on. the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. according to them. to "pull a fast one" on the Ongs because that was where the problem precisely started. a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders is a violation of the "business judgment rule" which states that: ." The Tius claim that their case for rescission. in the words of the Court of Appeals. . judging from the comparative gravity of the acts separately committed by each group. the perfect excuse for blackballing the Ongs. we find that the Ongs' acts were relatively tame vis-à-vis those committed by the Tius in not surrendering FLADC funds to the corporation and diverting corporate income to their own MATTERCO account. stated that both groups were in pari delicto. 30 Apparently. the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. In other words. In this case. The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. Section 122 of the law provides that "(e)xcept by decrease of capital stock . On the other hand. . the Tius started planning to take over the corporation again and exclude the Ongs from it. This new argument has no merit. will any of the parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere from P450 million to P900 million 31 but will also take over an extremely profitable business without much effort at all. our Decision dated February 1. the issue of rescission in this case is not difficult to understand. Another very important point follows. by failing to pay that relatively small amount which they could easily afford. considering that they are the contracting parties thereto. It appears that the Tius' refusal to pay transfer taxes might not have really been at all unintentional because. . and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen. courts are not in the business of business. Truth to tell. It is a decision that only the stockholders and the directors can make. On the contrary. the Tius should have expected that they were not going to be given the corresponding shares. It is clear that. that both the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. More importantly. There was no revised treasurer's affidavit and no proof that said decrease will not prejudice the creditors' rights. And as far as the 151 square-meter lot was concerned. The Court of Appeals and. an esteemed author in corporate law. in the final analysis. Furthermore. from every angle. was already factored into the shareholdings of the Tius before the Ongs came in? We are appalled by the attempt by the Tius. Villanueva. the Tius created a problem then used that same problem as their pretext for showing their . being a petition to decrease capital stock. when the finances of FLADC improved considerably after the equity infusion of the Ongs. all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. This may be true to a certain extent but. 2003. Decreasing a corporation's authorized capital stock is an amendment of the Articles of Incorporation. Stripped to its barest essentials. No majority vote of the board of directors was ever taken. will injustice be inflicted on any of the parties? The answer is no because the financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. The Ongs were right in not issuing to the Tius the shares corresponding to the four-story building and the 1.In their Memorandum dated February 28. thus: Courts and other tribunals are wont to override the business judgment of the board mainly because. the Tius claim that rescission of the agreement will not result in an unauthorized liquidation of the corporation because their case is actually a petition to decrease capital stock pursuant to Section 38 of the Corporation Code. All that needs to be done. 29 The reason behind the rule is aptly explained by Dean Cesar L. It was.902. Such an act infringes on the law on reduction of capital stock. Neither was there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. as when plaintiffs aver that the defendants (members of the board).. (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority. Ordering the return and distribution of the Ongs' capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. If rescission is denied. meaning. it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. does not violate the liquidation procedures under our laws. owing to the Tius' refusal to pay the transfer taxes. the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs.30 square-meter lot because no title for it could be issued in FLADC's name. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. 2002. if rescission is granted. . have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders. They want this Court to make a corporate decision for FLADC. when courts are ill-equipped to make business decisions. especially so. is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said decrease.

D. the motion for reconsideration. they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB). the Decision of this Court. Tiu. ID. ID. RESPONDENT BANK WITH A CHARTER OF ITS . 3. Ramon A. the stockholder may demand a copy of the excerpts of the records or minutes..P. It would be totally against all rules of justice. and that the person asking for such examinations must be "acting in good faith and for a legitimate purpose in making his demand. 4. LIMITATIONS OF RIGHT OF INSPECTION UNDER THE NEW CODE (B. NOW DISSIPATED BY THE CLEAR PROVISION OF SECTION 74 OF B. John Yu and Lourdes C. dated March 15. ID.] RAMON A. After all is said and done. ID. affirming with modification the decision of the Court of Appeals.. Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration. among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following: the records must be kept at the principal office of the corporation. Cely Y. is hereby REVERSED. William Ong. — As may be noted. 1459. If only for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments — assuming good faith and honest intentions — we cannot allow the rescission of the subject subscription agreement. ID. GONZALES. 2002. Wilson Ong. No. the Tius would have lost everything they originally invested in said mall. Juan Diaz for respondent. dated March 15. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement. the inspection must be made on business days. he has not set forth the reasons and the purposes for which be desires such inspection.partners the door. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. 2002. dated October 5. May 30.. is hereby declared as null and void.. MODE OF ACQUISITION OF ONE SHARE OF STOCK. Anna Ong. Without the Ongs. Tiu. AS EVIDENCE OF BAD FAITH AND ULTERIOR MOTIVE.. PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BE GOVERNED PRIMARILY BY SAID CHARTERS. THE PHILIPPINE NATIONAL BANK. as amended. CORPORATION CODE. 68). Moly Yu Gow. However. but it could not be said that his purpose is germane to his interest as a stockholder. the new Code has prescribed limitations to the same. no longer holds true under the provisions of the present law. they were in fact remediable and correctable under the law. There are no ifs or buts about it. Gonzales in his own behalf. WHEREFORE. ID. L-33320. Tiu is hereby DENIED for being moot. — The unqualified provision on the right of inspection previously contained in Section 51. ID. of petitioner Willie Ong are hereby GRANTED. 2002.R. to the extreme and irreparable damage of the Ongs. FLADC and its creditors. of petitioners David S. and the SEC en banc. SO ORDERED. and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. Tiu.. In the process. 1994.. BLG.P. dated March 15. 1999. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same. He could have been impelled by a laudable sense of civil consciousness. Accordingly. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. aDHCAE Costs against the petitioner Tius. it now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. petitioner. except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. Terence Y. of petitioners Ong Yong. 02-96-5269 is hereby DISMISSED for lack of merit. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. Juanita Tan Ong. BLG. The motion for the issuance of a writ of execution. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. The Ongs' shortcomings were far from serious and certainly less than substantial. while seemingly enlarging the right of inspection. — Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank. [G. no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. dated September 11. vs. 68. 2002. Act No. UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW. Belen See Yu. fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. ID. 1998." 2. dated February 1. respondent.. SYLLABUS 1. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination. dated August 15. COMMERCIAL LAW. 68. 1983.

the petitioner instituted this action.. (Annex B. DECISION VASQUEZ. in his dual capacity as a taxpayer and stockholder. Talog Sugar Milling Co. 71044 versus the Board of Directors of the Bank. 1967. Co." The provision of Section 74 of Batas Pambansa Blg. Dev. supplemented by the provisions of this Code. First among them is Civil Case No. LLjur The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to be reviewed. On October 18. 1969. its financing of the Cebu-Mactan Bridge to be constructed by V. petitioner addressed a letter to the President of the Bank (Annex A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$23 million sugar-mill to be financed by Japanese suppliers and financiers. Having a charter of its own. Pet. 4. Huber Corporation. 'On January 11. Section 4 of the said Code provides: "SEC. filed the following cases involving the bank or the members of its Board of Directors to wit: '1. 69345 filed on April 27. to be financed by Japanese suppliers and financiers. Inc. insofar as they are applicable. 1967. '2. Inc.) The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as having been "correctly stated. 57. Vice President and Legal Counsel of the Bank answered petitioner's letter denying his request for being not germane to his interest as a one share stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said share.C. Inc. requesting submission to look into the records of its transactions covering the purchase of a sugar central by the Southern Negros Development Corp. Calinog-Lambunao Sugar Mill Integrated Farming. Antonio Raquiza of Public Works and Communications. and the construction of the Passi Sugar Mills in Iloilo. August 30. J p: Petitioner Ramon A. 1969. Civil Case No. the Asst. On May 11. 72936 versus Roberto Benedicto and other Directors of the Bank. Ltd. Safary Central.. the Commissioner of Public Highways. therefore. Ponce. 1967. On January 23. Inc. In the course of the hearing of said case on August 3.. Passi (Iloilo) Sugar Central. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the above-quoted provisions of the charter of the bank. 1968. the National Investment and Development Corp. Civil Case No. 1969.. Pet. and Agro-Inc.. The petitioner has alleged had his written request for such examination was denied by the respondent. it is not governed... In view thereof. 'Subsequent to his aforementioned acquisition of one share of stock of the Bank.." (Petitioner-Appellant's Brief. 1459. pp. the petitioner instituted several cases in this Court questioning different transactions entered into by the Bank with other parties. — Corporations created by special laws or charters. '3. or Saravia.. Allis Chalmers and General Motors Corporation. as follows: "'Briefly stated. the Bank. he expressed and made known his intention to acquire one share of stock from Congressman Justiniano Montano which. It is not correct to claim. The trial court having dismissed the petition for mandamus. Inc. pp. that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. the instant appeal to review the said dismissal was filed. Continental Ore Phil. 16-18. by petitioner as a taxpayer versus Sec.. Ponce. the personality of herein petitioner to sue the bank and question the letters of credit it has extended for the importation by the Republic of the Philippines of public works equipment intended for the massive development program of the President was raised. the following facts gathered from the stipulation of the parties served as the backdrop of this proceeding. Continental Ore. 1967. as a rule. was transferred in his name in the books of the Bank. 'Previous to the present action. that such examination would violate the confidentiality of the records of the respondent bank as provided in Section 16 of .'" (Rollo. 76427 versus Alfredo Montelibano and the Directors of both the PNB and DBP. Marubeni Iida Co. as well as to inquire into the validity of said transactions. must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes.) In view of the Bank's refusal. Inc. Inc.C. On May 8. — Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. on the following day. Civil Case No..).. as amended) is not absolute. and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines.) LLjur The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No. petitioner.. however. by the Corporation Code of the Philippines. but is limited to purposes reasonably related to the interest of the stockholder. — The Philippine National Bank is not an ordinary corporation. and Batangas Sugar Central Inc. that the respondent is financing the construction of the P21 million Cebu-Mactan Bridge to be constructed by V.OWN IS NOT GOVERNED BY THE CORPORATION CODE. Inc.

. or was not acting in good faith or for a legitimate purpose in making his demand. assuming that a proper motive or purpose for the desired examination is necessary for its exercise. the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination.) Sections 15. 1459. Assailing the conclusions of the lower court. except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. as amended. otherwise known as the "Corporation Code of the Philippines. further. 51. 68 provide the following: "The records of all business transactions of the corporation and the minutes of any meeting shall be open to inspection by any director. trustee. (Republic Act No. shall be liable to such director. Said provision reads in part as follows: "Sec. and that the petitioner has not exhausted his administrative remedies. and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand. but it could not be said that his purpose is germane to his interest as a stockholder. the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided." As may be noted from the above-quoted provisions.its charter. as amended. We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. stockholder or member for damages. . no longer holds true under the provisions of the present law. Any officer or agent of the corporation who shall refuse to allow any director. as amended) has been replaced by Batas Pambansa Blg. 1459. it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg 68. regarding the right of a stockholder to inspect and examine the books and records of a corporation. Republic Act No. That if such refusal is made pursuant to a resolution or order of the board of directors or trustees. 1459 has been retained. 16 and 30 of the said charter provide respectively as follows: . at his expense. . while seemingly enlarging the right of inspection. there is nothing improper in his purpose for asking for the examination and inspection herein involved." Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose. but with some modifications. among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation. 68. stockholder or member of the corporation at reasonable hours on business days and he may demand. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. 1459. He further argues that. the stockholder may demand a copy of the excerpts of the records or minutes." The unqualified provision on the right of inspection previously contained in Section 51. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. as amended. However. The former Corporation Law (Act No. as amended. 1300. shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank. the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. 1300." The right of inspection granted to a stockholder under Section 51 of Act No. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same. in accordance with the provisions of this Code. in writing. The second and third paragraphs of Section 74 of Batas Pambansa Blg. member or stockholder of the corporation at reasonable hours. he has not set forth the reasons and the purposes for which he desires such inspection. Act No. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. the law having granted such right to a stockholder in clear and unconditional terms. and in addition. as amended. trustee. 1459. He could have been impelled by a laudable sense of civic consciousness. the inspection must be made on business days. stockholder or member of the corporation to examine and copy excerpts from its records or minutes. That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation. Petitioner may no longer insist on his interpretation of Section 51 of Act No. The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director. for a copy of excerpts from said records or minutes. trustee.

— Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. 2001.] ELIZALDE STEEL CONSOLIDATED. or agent of the Bank. COURT OF APPEALS. — Any director. 1982. he did so in behalf of and for the bank. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for Eliscon as debtor. that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. 16. Section 4 of the said Code provides: "SEC. After the defendants filed their respective answers. Its failure to do so can only mean an acquiescence in the assumption by DBP of Eliscon's obligation. EcHTCD The Court found the petitions meritorious. JJ.08 due on three domestic letters of credit as of October 31. On February 20. Hence. as successor-in-interest of Commercial Bank and Trust Company (CBTC). On April 29.240. concur. Penalties for violation of the provisions of this Act.232. or other officers designated by law to inspect or investigate the condition of the National Bank.67 due on the promissory note dated October 31. Confidential information. Inspection by Department of Supervision and Examination of the Central Bank. Likewise.. employee. 15.102. petitioner. executed and opened with the CBTC. BANK OF THE PHILIPPINE ISLANDS. as a rule. vs. 2001. Florentino & Assoc.] CHESTER BABST. the Secretary of Finance. trial on the merits ensued. respondents. January 26.. Having a charter of its own." The provision of Section 74 of Batas Pambansa Blg. the trial court rendered its decision in favor of the plaintiff and ordered herein defendant Eliscon to pay the amount of P2. Multi and Babst filed their respective notices of appeal. shall not reveal to any person other than the President of the Philippines. or any person aiding or abetting the violations of any of the provisions of this Act. INC. Antonio Barredo & Associates for respondent in 104625 Padilla Law Office for respondent BPI SYNOPSIS On January 17. The authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank. 1982. No. When the court officer failed to object to the substitution of debtors. which resulted . 49226 against Eliscon. by the Corporation Code of the Philippines. especially after it had already learned that DBP had taken over the assets and assumed the liabilities of Eliscon. Eliscon. corporations. the Court of Appeals rendered a decision modifying the appealed decision by ordering appellant Eliscon to pay the amount awarded to the BPI. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the above quoted provisions of the charter of the respondent bank. the petition is hereby DISMISSED. and the Board of Directors the details of the inspection or investigation.. [G. P3. 1983. No.02."'Sec. Inc. 104625. Babst.' 'Sec. these consolidated petitions seeking the review of the decision of the Court of Appeals.963. 4. Multi and Babst to enforce payment of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated.322.' 'Sec. without costs. it is not governed. its current accounts or deposits belonging to private individuals. petitioner. there was a valid novation. 99398. — The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank. BPI could have subsequently registered its objection to the substitution. Jr. officer. vs. who violates or permits the violation of any of the provisions of this Act. attorney's fees. the trial court ordered the defendants Pacific Multi-Commercial Corporation and Babst to pay jointly and severally with defendant Eliscon all the charges awarded against Eliscon. Melencio-Herrera. It is not correct to claim. [G. INC. 1991. cdrep WHEREFORE. In due time. instituted with the Regional Trial Court of Makati City a complaint for sum of money docketed as Civil Case No. for C.795. PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER BABST. Corporations created by special laws or charters.'" The Philippine National Bank is not an ordinary corporation. interest and related charges on the principal amounting to P2. ELIZALDE STEEL CONSOLIDATED. COURT OF APPEALS. except by order of a Court of competent jurisdiction. 1987. Plana and Gutierrez. insofar as they are applicable. The Court ruled that there exists a clear indication that BPI was aware of the assumption by DBP of the obligations of Eliscon. or both such fine and imprisonment. shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years. 30. nor shall they give any information relative to the funds in its custody. and PACIFIC MULTI-COMMERCIAL CORPORATION. Even granting arguendo that the account officer was not so empowered. BANK OF THE PHILIPPINE ISLANDS. De Guzman.R.R. the appellate court ordered Eliscon to reimburse appellants Multi and Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring to the 3 letters of credit and other related charges. Bank of the Philippine Islands. Hence. therefore.. Additionally. — The Superintendent of Banks and the Auditor General. January 26. or any other entity. supplemented by the provisions of this Code. respondents.

A contract of surety is an accessory promise by which a person binds himself for another already bound. Hence. leaving an outstanding indebtedness in the amount of P2. and Chester G. the contract of suretyship executed separately by Babst and Multi. Inc. KINDS.. be.900. CONTRACTS. THE CONTRACT OF SURETYSHIP IS LIKEWISE EXTINGUISHED. CV No." AaCcST The complaint was commenced principally to enforce payment of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated. THEREFORE. TCSEcI 2. however. Inc. SURETYSHIP. at least 90% of the Company's gross sales is generated by the sale of tin-plates manufactured by Elizalde Steel Consolidated.in the release of Eliscon from its obligation to BPI. one of the corporations survives and continues the business. Inc. being accessory obligations.R. ELISCON obtained from CBTC a loan in the amount of P8. the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors. INC.534. the contracts of suretyship executed separately by Babst and MULTI. IF THE ORIGINAL OBLIGATION IS EXTINGUISHED.. are likewise extinguished. ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC. 1977 which reads: WHEREAS. which had stepped into the shoes of ELISCON. (1) a previous valid obligation.795. However. other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. Defendants-Appellants. Pacific Multi-Commercial Corporation. has requested the assistance of the Company in obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the Company is willing to extend said requested assistance. and agrees with the creditor to satisfy the obligation if the debtor does not. novation would have dual functions — one to extinguish an existing obligation. HIS OBLIGATION TO PAY ARISES ONLY UPON THE PRINCIPAL DEBTOR'S FAILURE OR REFUSAL TO PAY. (3) the extinguishment of the old obligation. 1982. It is settled that in the merger of two existing corporations. to avail and make use of the Credit Line of PACIFIC MULTI- . — BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. In fact. being accessory obligations. may either be extinctive or modificatory. or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). it is to the best interests of the Company to continue handling said tin-plate line. The original obligation having been extinguished. An extinctive novation results either by changing the object or principal conditions (objective or real).84. ONE OF THE CORPORATIONS SURVIVES AND CONTINUES THE BUSINESS WHILE THE OTHER IS DISSOLVED AND ALL ITS RIGHTS. he promises to pay the principal's debt if the principal will not pay. evidenced by a promissory note. the other to substitute a new one in its place — requiring a conflux of four essential requisites. That the PRESIDENT & GENERAL MANAGER. CIVIL LAW. are likewise extinguished. 3 The letters of credit.015. were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank. 1991 of the Court of Appeals in CA-G. 2 ELISCON defaulted in its payments. COMMERCIAL LAW.015. (ELISCON) executed and opened with the Commercial Bank and Trust Company (CBTC). WHEREAS. in its broad concept. BPI has a right to institute the case a quo. NOW. with interest at the rate of 14% per annum. IN THE MERGER OF TWO EXISTING CORPORATIONS. ID. properties and liabilities are acquired by the surviving corporation. Under this mode. In the case at bar. CORPORATION LAW. the preliminary issue of BPI's right of action must first be addressed. whose cause of action should be directed against DBP as the new debtor. and earmarked for that purpose the amount of P4. 1973..54 for payment to BPI. — At the outset. NOVATION. Babst. ACaTIc DECISION YNARES-SANTIAGO. "Bank of the Philippine Islands. It must be remembered. TSHEIc SYLLABUS 1. CASE AT BAR. — BPI gives no cogent reason in withholding its consent to the substitution. pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31. his obligation to pay only arises upon the principal debtor's failure or refusal to pay. (2) an agreement of all parties concerned to a new contract. More importantly. Its authorized capital stock was increased by the government. Inc. J p: These consolidated petitions seek the review of the Decision dated April 29. Hence.67 as of October 31. WHILE THE SURETY IS SOLIDARILY LIABLE WITH THE PRINCIPAL DEBTOR. 17282 1 entitled. Novation. there was no indication that the principal debtor will default in payment. MERGER. DBP.240. ANTONIO ROXAS CHUA. ID. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former. was capable of payment. whose cause of action should be directed against DBP as the new debtor. that while a surety is solidarily liable with the principal debtor. there was a valid novation which resulted in the release of ELISCON from its obligation to BPI. The original obligation having been extinguished.. on the other hand. Elizalde Steel Consolidated. for and in consideration of the foregoing premises — BE IT RESOLVED AS IT IS HEREBY RESOLVED. there is no question that there was a valid merger between BPI and CBTC. On June 8. while the other is dissolved and all its rights. WHEREAS. PlaintiffAppellee versus Elizalde Steel Consolidated. it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. and (4) the birth of a valid new obligation. PROPERTIES AND LIABILITIES ARE ACQUIRED BY THE SURVIVING CORPORATION. A surety is an insurer of the debt. as he is hereby empowered to allow and authorize ELIZALDE STEEL CONSOLIDATED. 3.

102.COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES. It set up a cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the court may render against it in favor of BPI. 1978. including its indebtedness to BPI. ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. MULTI and Babst.73. 9 On December 22. as it does hereby guarantee. TDEASC Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it covers only obligations which MULTI incurred solely for its benefit and not for any third party liability. DBP formally took over the assets of ELISCON. solidarily. 6 P1. 10 Meanwhile. for its part. jointly and severally plaintiff interests at the legal rate on all interests and . 16 On February 20. FINALLY. in its Answer.372. in view of all the foregoing. Annex "A" of the Complaint as of 31 October 1982 and the amount of P3. 2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said promissory note of P2. until full payment thereof.372. 49226. 14 argued that the complaint was premature since DBP had made serious efforts to settle its obligations with BPI.08 due on the three (3) domestic letters of credit. 17 the dispositive portion of which reads: WHEREFORE. and he had no knowledge or information of any transaction between MULTI and ELISCON. as payment for its total indebtedness in the amount of P201.805. as successor-in-interest of CBTC. Sometime in October 1978. as the surviving corporation. BPI.000. On December 28.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid. and averred that the guaranty under its board resolution did not cover purchases made by ELISCON in the form of trust receipts.67 due on the promissory note. which ELISCON used to purchase tin black plates from National Steel Corporation.833. from and after 31 October 1982 until full payment.000.000. denied knowledge of the merger between BPI and CBTC. 4 Subsequently. ELISCON.702. ELISCON defaulted in its obligation to pay the amounts of the letters of credit. ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP).000.72. instituted with the Regional Trial Court of Makati.32 7 and P200. 3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but unpaid as of the filing of this complaint. 8 respectively.963. RESOLVED. CBTC opened for ELISCON in favor of National Steel Corporation three (3) domestic letters of credit in the amounts of P1. jointly and severally with defendant ELISCON. Metro Manila. ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP.963.240.372. on September 26.349. on January 17. for their information. a complaint 13 for sum of money against ELISCON. in the total amount of P3. Makati.25 interests and related charges at the rates provided in said letters of credit. RESOLVED. Antonio Roxas Chua and Chester G.869. also as of 31 October 1982.795. 1982. 5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay. wherein BPI. as of October 31. Metro Manila. In October 1981. That the Pacific Multi-Commercial Corporation guarantee. the payment of the corresponding Letters of Credit upon maturity of the same. Makati. the Court hereby renders judgment in favor of the plaintiff and against all the defendants: 1) Ordering defendant ELISCON to pay the plaintiff the amount of P2. FURTHER. leaving an outstanding account. 11 In June 1981. 1983.00 in the case of defendant Chester Babst. ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets. 5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8. In order to settle its obligations. the trial court rendered its Decision.963. the total sum of P3. 6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay.963.16. 15 MULTI. 1987.232. but BPI expressly rejected the formula submitted to it for not being acceptable. which was docketed as Civil Case No. and on the principal of the three (3) domestic letters of credit of P3.181.564.08. That copies of this resolution be furnished the Commercial Bank & Trust Company of the Philippines.372. Thereafter. the Bank of the Philippine Islands (BPI) and CBTC entered into a merger. 1980.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on the principal amount of P3. 1978. 12 Consequently.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof. acquired all the assets and assumed all the liabilities of CBTC.307. Babst executed a Continuing Suretyship. but to the extent of not more than P8.00 each. Branch 147.946. 4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount due under the preceding paragraphs. DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors.

MULTI and Babst filed their respective notices of appeal.00.232. With costs.related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof. E. 1991. 104625.349. to wit: 1.102.372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid. No. 5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay. Annex "A" of the Complaint as of 31 October 1982 and the amount of P3.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof. ELISCON.963.564.963. no valid novation has been effected.08 due on the three (3) domestic letters of credit. also as of 31 October 1982. Hence. DHCSTa 7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay. D.25 interests and related charges at the rates provided in said letters of credit. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC) B. jointly and severally with appellant ELISCON. 3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related charges but unpaid as of the filing of this complaint. attorney's fees of not less than 10% of the total amount due under paragraphs 5 and 6 hereof. . on the following grounds: A. Respondent BPI is legally entitled to recover from ELISCON. from and after 31 October 1982 until full payment. MULTI and Babst the past due obligations with CBTC prior to the merger of BPI with CBTC.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interest and related charges on the principal amount of P3. 2. THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO BPI. the total sum of P3.372. SO ORDERED. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO RESPONDENT BPI. but to the extent of not more than P8. In due time. Express consent of creditor to substitution should be recorded in the books. 21 BPI filed its Comment 22 raising the following arguments. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS SURETIES OF ELISCON'S OBLIGATION TO BPI.005. docketed as G. BPI did not give its consent to the DBP take-over of ELISCON. 18 On April 29. ELISCON filed a petition for review on certiorari. 3. THEIR CAUSE OF ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON. ICESTA No costs. 4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G.000. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS' DECISION. to now read (with the underlining to show the principal changes from the decision of the lower court) thus: 1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2.000. however.60 due on the promissory note.000. jointly and severally.00 in the case of defendant Chester Babst.731. appellee BPI interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof and the plaintiff's lawyer's fees in the nominal amount of P200. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR. Babst to pay appellee BPI. 6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring to three (3) letters of credit as of 31 October 1982 and other related charges. C. ELISCON. and on the principal of the three (3) domestic letters of credit of P3.963. the judgment appealed from is MODIFIED. 2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of said promissory note of P2. 1992.372.R. denied in a Resolution dated March 9. SO ORDERED. 20 Subsequently. jointly and severally. until full payment thereof. the Court of Appeals rendered the appealed Decision as follows: WHEREFORE. 19 ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was.

No.R. and later transferred to the NDC. ITS LIABILITIES.54. 5. (OR ELISCON) IN THE LATTER'S OBLIGATION TO BPI. the amount of P299. 2817 which states that DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCON's creditors. On September 11. it was incumbent upon the said bank to formally communicate its objection to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting. 26 Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company. it acquired all the latter's rights and interest including all receivables. the Board of Governors of the DBP adopted Resolution No. 1986. 24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June 1981. 27 BPI countered that by virtue of its merger with CBTC. Petitioner Chester G. petitioner Babst averred that the assets of ELISCON which were acquired by the DBP. inter alia. including BPI in the amount of P4. such as ELISCON. the consent of the creditor must be express. 50.4. it being a private corporation. issued by then President Corazon C. Moreover. Since MULTI and Chester G.534.524. 1983 by and between DBP and NDC. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION. that NDC shall pay to ELISCON's creditors. INC. were placed under the Asset Privatization Trust pursuant to Proclamation No. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED. In its Comment.534. with a listed credit of P4.54. 6. that in order to effect a valid novation by substitution of debtors. was indeed authorized by the latter pursuant to the resolution of the Board of Directors of MULTI. 6. This was followed by a Memorandum of Agreement executed on May 4. INC. CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI. there was no showing that the availment by ELISCON of MULTI's credit facilities with CBTC. they may recover from the latter what they may have paid for on account of that guaranty. that in addition. for the latter to take over and continue the operation of its business. 1981. In its Comment. that MULTI expressly bound itself solidarily for ELISCON's obligations to CBTC in its Resolution wherein it allowed the latter to use its credit facilities. 23 wherein he contends that the suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI. Among the creditors mentioned in the agreement was BPI. In compliance with this Court's Resolution dated March 17. that BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP. to guarantee the obligations of ELISCON. and that there is nothing therein which authorizes MULTI. 1993. Furthermore. in turn. 2. 25 the parties submitted their respective memoranda. which was docketed as G. 5. CASaEc 7. through DBP. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO BPI. 3. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI.700. 99398. MULTI AND BABST OF ANY LIABILITY TO BPI. the consent of BPI must appear in its books.015. Aquino on December 8. aATEDS Chester Babst filed a Comment with Manifestation.015. The question of the liability of ELISCON to BPI has been clearly established. WHO WAS PRESENT DURING THE MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF .00. which was supposedly guaranteed by Antonio Roxas Chua. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid letters of credit of ELISCON. Meanwhile. 4. wherein the takeover by DBP of ELISCON was announced. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON. wherein they stipulated. in a petition for review filed with this Court. AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON. and that the suretyship agreement executed by Babst does not exclude liabilities incurred by MULTI on behalf of third parties. Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when: 1. Babst are guarantors of the debts incurred by ELISCON.

In its petition. cited in said decision.. like all others. 34 Subsequently. Serra (47 Phil. ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC. it is sufficient that the latter's consent be given at any time and in any form whatever. 30 Hence. at the creditors' meeting held in June 1981 and thereafter. It stressed that should MULTI or Babst be finally adjudged liable under the suretyship agreement. ELISCON counters that the mere presence of the account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting. Indeed. since novation extinguishes the personality of the first debtor who is to be substituted by a new one. v. Rosenstock & Co. it is deemed to have consented to the substitution of DBP for ELISCON as debtor. BPI contends that in order to have a valid novation. In fact. is not absolute.ELISCON likewise filed a Comment." 36 The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting had expressed consent to the assumption by DBP of ELISCON's debts. MULTI filed its Comment. We now come to the primordial issue in this case — whether or not BPI consented to the assumption by DBP of the obligations of ELISCON. however. 32 The import of the foregoing ruling. 29 admitting the correctness of the petition and adopting the Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI. Elser and the principal director of Yangco.. BPI admits that — "the Development Bank of the Philippines (DBP). one of the corporations survives and continues the business. while the other is dissolved and all its rights. for a time. and the acts of the board of directors after Henry W.. was explained and clarified by this Court in the later case of Asia Banking Corporation v. e Hijos de Pio Barretto y Cia. 1908. in its judgment of June 16. both Spanish and American. since volition may as well be expressed by deeds as by words. Babst. ELISCON pointed out the contradictory positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI. six are arguments which ELISCON itself raised in its previous pleadings." The understanding between Henry W. Inc. Yangco's stock in said corporation. At the outset. It is only the sixth assigned error — that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with ELISCON — that ELISCON takes exception to. Inc. may be made even without the knowledge or against the will of the latter. 28 wherein it manifested that of the seven errors raised by Babst in his petition. et al. the law requires that the creditor should consent to the substitution of a new debtor. volume 23. aEDCSI Article 1293 of the Civil Code provides: Novation which consists in substituting a new debtor in the place of the original one. in substituting the latter for Luis R. MULTI and ELISCON all maintain that due to the failure of BPI to register its objection to the take-over by DBP of ELISCON's assets. the preliminary issue of BPI's right of action must first be addressed. while the agreement of the debtors subsists. including the plaintiff [BPI]. page 503. are a clear and unmistakable expression of its consent. BPI has a right to institute the case a quo. but not without the consent of the creditor. Yangco. In the case at bar. When this court said in the case of Estate of Mota vs. Elser 33 in this wise: The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to the substitution of the new debtor for the old be express. had proposed a formula for the settlement of Eliscon's past obligations to its creditors. which waiver must be express under the principle of renuntiatio non præsumitur. they cannot lawfully recover from ELISCON. there is no question that there was a valid merger between BPI and CBTC. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. which reads: "The rule that this kind of novation. as indicated in the authorities or cases. laid down the doctrine that "article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of debtors must be given simultaneously with the debtor's consent to the substitution. construing said article. for the existence of the consent may well be inferred from the acts of the creditor. v. SDTaHc We find merit in the argument. More particularly. such consent would not bind BPI for lack of a specific authority therefor. 35 this Court reiterated the rule that there can be implied consent of the creditor to the substitution of debtors. 464). However. This consent must be given expressly for the reason that. it implies on the part of the creditor a waiver of the right that he had before the novation.. Inc. it did not wish to convey the impression that the word "express" was to be given an unqualified meaning. with respect to Luis R. Elser had acquired said shares. but from the DBP which had been substituted as the new debtor. Serra. there exist clear indications that BPI was aware of the assumption by DBP of the obligations of ELISCON. Moreover. or given at the time of the substitution.. and the Supreme Court of Spain. there must be an express consent of the creditor. must be express. its evident purpose being to preserve the creditor's full right. recognized by the law in declaring that a waiver of right may not be performed [should read: presumed] unless the will to waive is indisputably shown by him who holds the right. but the formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar). 31 this Court held: It should be noted that in order to give novation its legal effect. while at the same time completely disavowing and denying any such obligation. It is settled that in the merger of two existing corporations. et al. BPI did not object . properties and liabilities are acquired by the surviving corporation.." The same rule is stated in the Enciclopedia Juridica Española. in the case of Vda. In the case of Testate Estate of Mota. Albo & Sevilla. that the creditor's express consent is necessary in order that there may be a novation of a contract by the substitution of debtors.

Mondragon & Cana Law Offices for petitioner. Under this mode. June 29. The course of action chosen taxes the credulity of this Court. there was a valid novation which resulted in the release of ELISCON from its obligation to BPI. it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement.534. give everyone his due. Novation. BPI's complaint against ELISCON. insisted in going after the sureties. was capable of payment. It should be stressed that notwithstanding the lapse of time within which these cases have remained pending. Its authorized capital stock was increased by the government. and observe honesty and good faith. the consolidated petitions are GRANTED. 37 A surety is an insurer of the debt.015. No. which held ELISCON. the prescriptive period for BPI to file its action was interrupted when it filed Civil Case No.000. A contract of surety is an accessory promise by which a person binds himself for another already bound. SYNOPSIS After the merger of Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC). he did so on behalf of and for the bank. novation would have dual functions — one to extinguish an existing obligation. 42 Hence. An extinctive novation results either by changing the object or principal conditions (objective or real). in the exercise of his rights and in the performance of his duties. is REVERSED and SET ASIDE. At the very least. COURT OF APPEALS and LORENZO SARMIENTO JR. he promises to pay the principal's debt if the principal will not pay. BPI could have subsequently registered its objection to the substitution. and earmarked for that purpose the amount of P4. The merger agreement provided that all references to CBTC shall be deemed for all intents and purposes . there was no indication that the principal debtor will default in payment. not as mere surety but as substitute principal debtor. 43 WHEREFORE. MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters of credit. Obligations arising from contract have the force of law between the contracting parties and should be complied with in good faith. that while a surety is solidarily liable with the principal debtor. DBP. MULTI and Babst is DISMISSED. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former. such that when he failed to object to the substitution of debtors. are likewise extinguished. being accessory obligations. provided for by the Civil Code. the other to substitute a new one in its place — requiring a conflux of four essential requisites. BPI. the private respondent executed in favor of Associated Bank a promissory note whereby respondent undertook to pay the bank the sum of P2. the contracts of suretyship executed separately by Babst and MULTI. which had stepped into the shoes of ELISCON. As repeatedly pointed out by ELISCON and MULTI. The appealed Decision of the Court of Appeals.500.00. BPI gives no cogent reason in withholding its consent to the substitution. his obligation to pay only arises upon the principal debtor's failure or refusal to pay. not to the substitution itself. Indeed. Every person must. 41 The original obligation having been extinguished.. Pacis.R. and agrees with the creditor to satisfy the obligation if the debtor does not. petitioner.to the substitution of debtors. suffice it to state that BPI's actuation in this regard runs counter to the good faith covenant in contractual relations. SO ORDERED. other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. for reasons known only to itself. (3) the extinguishment of the old obligation. Castro for private respondent. In fact. Even granting arguendo that the said account officer was not so empowered. and (4) the birth of a valid new obligation. BPI's objection was to the proposed payment formula. vs. 49226.] ASSOCIATED BANK. although it objected to the payment formula submitted by DBP. It must be remembered. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. however. especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. [G. act with justice. 40 Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts. whose cause of action should be directed against DBP as the new debtor. or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). BPI should enforce its cause of action against DBP. (2) an agreement of all parties concerned to a new contract. 39 More importantly. the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors. 38 In the case at bar. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Enrico Eric R. may either be extinctive or modificatory. Villanueva. respondents. 123793. (1) a previous valid obligation. the authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank. HcTEaA ARTICLE 1159. Hence. in its broad concept.54 for payment to BPI. to wit: ARTICLE 19. 1998.

4. amounting to unjust enrichment. that the merger provision being clear. — Ordinarily. — Petitioner's suit for collection of a sum of money was based on a written contract and prescribes after ten years from the time its right of action arose. ID. HCaIDS . cIEHAC The Supreme Court held that the fact that the promissory note was executed after the effectivity of the merger does not militate against the petitioner where the agreement clearly provides that all contracts entered into in the name of CBTC shall be understood as pertaining to the surviving bank. EFFECTIVITY THEREOF DETERMINED BY DATE OF SEC'S ISSUANCE OF CERTIFICATE OF MERGER. the private respondent herein.references to the surviving bank.. although the subject promissory note names CBTC as the payee. one of the combining corporations survives and continues the combined business. had no cause of action against private respondent and that the earlier merger between the two banks could not have vested petitioner with any interest arising from the promissory note executed in favor of CBTC after such merger. EFFECT. Clearly. but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation or in an injustice. The principle of laches is a creation of equity. 3. while the rest are dissolved and all their rights. which was not privy to the transaction. CIVIL LAW. LACHES. because the surviving corporation automatically acquires all their rights.. To hold that no payee/obligee exists and to let private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable. 1978. Hence. plain and free of ambiguity. privileges and powers. the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioners right to collect the proceeds of the loan it extended to the former. INAPPLICABLE WHERE CLAIM WAS FILED WITHIN PRESCRIPTIVE PERIOD. and that to let the private respondent enjoy the fruits of his loan without liability is unfair and unsconscionable. ID. SHALL PERTAIN TO SURVIVING BANK EMPOWERS SERVING BANK TO COLLECT OBLIGATIONS DUE TO ABSORBED BANK. the provision must be given its literal meaning and applied without a convoluted interpretation. APPLIED TO AVOID INEQUITABLE SITUATION OR INJUSTICE. which he himself asserts. Although there is a dissolution of the absorbed corporations. Private respondent was declared as in default for failure to appear at the pre-trial conference and petitioner presented its evidence ex-parte. amounting to unjust enrichment at the expense of petitioner. as if such reference [was a] direct reference to the latter for all intents and purposes. Since. 5. that CBTC's corporate personality has been dissolved by virtue of its merger with petitioner. to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. PRESCRIPTION OF ACTIONS. which is applied not to penalize neglect or failure to assert a right within a reasonable time.. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. ACSaHc 2. Sarmiento's obligation under the promissory note became due and demandable on March 6. in contrast to the earlier aforequoted provision. In light of the foregoing. ID. does not become effective upon the mere agreement of the constituent corporations. before the lapse of the ten-year prescriptive period. REMEDIAL LAW. CORPORATIONS. Being clear. Definitely. the reference to CBTC in the note shall be construed. under the very provisions of the merger agreement.. — The fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. — Neither is petitioner's action barred by laches. IRRESPECTIVE OF DATE OF EXECUTION. ENTERED INTO BY ABSORBED BANK. this recourse. COLLECTION OF SUM OF MONEY BASED ON WRITTEN CONTRACT PRESCRIBES IN TEN (10) YEARS. the latter clause no longer specifically refers only to contracts existing at the time of the merger. herein petitioner. the surviving corporation. ID. must have been duly approved by a majority of the respective stockholders of the constituent corporations. Thereafter. ID. as a reference to petitioner bank. specifically. CASE AT BAR. CASE AT BAR. in turn. Thus. no distinction clause must have been deliberately included in the agreement in order to protect the interests of the combining banks. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank. AGREEMENT PROVIDING THAT ALL CONTRACTS. ABC. properties and liabilities are acquired by the surviving corporation. there is no winding up of their affairs or liquidation of their assets. the same must be given its literal meaning. not the Associated Bank.. Besides. this Court has held that the doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed against him despite the fact. the trial court rendered judgment ordering private respondent to pay the bank his remaining balance plus interests and attorney's fees. When private respondent failed to pay the remaining balance. the Court of Appeals held that petitioner. 1985. To require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which. however. as well as their liabilities. Private respondent denied the pertinent allegations in the complaint and alleged that the complaint states no cause of action because the promissory note was executed in favor of CBTC. petitioner still had every right to commence suit against the payor/obligor. Petitioner's complaint was instituted on August 22. the Court holds that petitioner has a valid cause of action against private respondent. No other construction can be given to the unequivocal stipulation. SYLLABUS 1. On appeal. — The merger.. Associated Bank. MERCANTILE LAW. Verba legis non est recedendum. ID. plain and free of ambiguity. ACTIONS. The procedure to be followed is prescribed under the Corporation Code. sued for collection. MERGER. in the merger of two or more existing corporations. as if such references were direct references to ABC.

paid. that the plaintiff is not the proper party in interest because the promissory note was executed in favor of Citizens Bank and Trust Company. enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract. PARTIAL PAYMENT. J p: In a merger. (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation.689. Private respondent can no longer backtrack and deny his liability to petitioner bank. 7. bearing the signature of private respondent. seeking to set aside the Decision 1 of the Court of Appeals 2 in CA-GR CV No. The contracting parties must have clearly and deliberately conferred a favor upon a third person. An incidental benefit or interest. ID.689. 9. the Associated Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. OBLIGATIONS AND CONTRACTS. CONSTRUED. in case of litigation equivalent to 10% of the amount due.000.000.6.500. still owes plaintiff bank the amount of P2. As per said promissory note. The challenged Decision reversed and set aside the October 17.000. Despite repeated demands the defendant failed to pay the amount due. A person cannot accept and reject the same instrument.000. 1977. ID. ID. These arguments deserve no merit. but prior to the issuance of a certificate of merger by the Securities and Exchange Commission? dctai The Case This is a petition for review under Rule 45 of the Rules of Court. 1986 Decision 3 in Civil Case No. The instrument.00 paid seven months earlier. that the promissory note does not accurately reflect the true intention and agreement of the parties. 1986. . — Furthermore such partial payment is equivalent to an express acknowledgment of his obligation. judgment is hereby rendered in favor of the plaintiff Associated Bank.63 after deducting P1. On or about March 10. EVIDENCE.413. provided he communicated his acceptance to the obligor before its revocation. Branch 48. .. . ID.000. the defendant agreed to pay interest at 14% per annum. to petitioner bank on or before March 6. the Court of Appeals resolved the case in this wise: 5 "WHEREFORE. and attorney's fees. The latter presented before the trial court private respondent's statement of account as of September 30. the decision appealed from. ID. Respondent Sarmiento has not questioned the genuineness and due execution thereof. [T]he defendant denied all the pertinent allegations in the complaint and alleged as affirmative and[/]or special defenses that the complaint states no valid cause of action.. promulgated by the Regional Trial Court of Manila. to date. REQUISITES. Sr.00 exclusive of interest and other charges.413.63 with interest thereon at 14% per annum until fully The amount of P200. is ordered to pay plaintiff: 1.. 1996. 26465 promulgated on January 30. Jr. 1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING plaintiff-appellee's complaint. the surviving bank. Res ipsa loquitur. AN EXPRESS ACKNOWLEDGMENT OF OBLIGATION. — Private respondent also claims that he received no consideration for the promissory note and. 85-32243. as narrated by the trial court and adopted by public respondent. The defendant. STIPULATION POUR AUTRUI. that terms and conditions of the . REMEDIAL LAW.00 as and for attorney's fees.000. On September 7. compounded interests. and not the contract itself. — Florentino vs. 1981. the defendant executed in favor of Associated Bank a promissory note whereby the former undertook to pay the latter the sum of P2. 8. 3. in support thereof. This he failed to do. Encarnacion. 3% per annum in the form of liquidated damages. as testified to by petitioner's accountant. There is no pronouncement as to costs. premises considered. The defendant Lorenzo Sarmiento." On the other hand. is not sufficient. cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned. which another person gains. docketed as Civil Case No. dated October 17. does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger agreement.00 payable on or before March 6.500. TCaAHI DECISION PANGANIBAN. which answered the above question in the negative. speaks for itself. [O]n or about September 16.250. CIVIL LAW. and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The amount of P4. . 1978. 1978. — A stipulation pour autrui is one in favor of a third person who may demand its fulfillment. plus interest. which disposed of the controversy in favor of herein petitioner as follows: 4 "WHEREFORE. RES IPSA LOQUITUR BAR." The Facts The undisputed factual antecedents. and The costs of suit. 85-32243. The "fairest test" in determining whether the third person's interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. xxx xxx xxx . No further proof is necessary to show that he undertook to pay P2.. showing an outstanding balance of P4. are as follows: 6 ". 1975 Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one banking corporation known as Associated Citizens Bank.. 2.

TL-2649-77 dated September 7. [it] needs [to] be strictly construed against appellee bank — assuming for granted that it has the right to enforce and seek collection thereof." The appellate court. Ocampo testified that . C. Corporation Code of the Philippines. he is an accountant of the Loans and Discount Department of the plaintiff bank. 1985 was sent by the bank thru its counsel (Exh. In his appeal. Jr. that a demand letter dated June 6.63 (Exh. At the hearing before the Court ex-parte. On May 22. TL-2649-77 dated September 7. that as per statement of account the outstanding obligation of the defendant is P5. Sarmiento assigned to the trial court several errors.00 (Exhibit A). that the defendant paid only P1. that he knows the [D]efendant Lorenzo Sarmiento.00 or P4. Jr. C) which was received by the defendant on November 12." Accordingly. however. is merely an accommodation pour autrui bereft of any actual consideration to appellant himself and (2) the subject PN is a contract of adhesion. . the defendant was declared as if in default for failure to appear at the PreTrial Conference despite due notice.413. that there were partial payments made but not full. 1986 in its decision given in open court on October 17. 1986 and in not reconsidering the same upon technical grounds which in effect subvert the best primordial interest of substantial justice and equity. 1986. 1986. II The same lower court erred in admitting plaintiff-appellee bank's amended complaint while defendant-appellant's motion to dismiss appellee bank's original complaint and using/availing [itself of] the new additional allegations as bases in denial of said appellant's motion and in the interpretation and application of the agreement of merger and Section 80 of BP Blg. C-2.00 which is reflected in the Exhibit C. namely: 7 "I The [trial court] erred in denying appellant's motion to dismiss appellee bank's complaint on the ground of lack of cause of action and for being barred by prescription and laches.5 million when the subject PN. 1977 in the amount of P2.689. Exhibit A of appellee bank. 1986 was filed by defendant's counsel which was denied by the Court in [an] order dated September 16. Ocampo as of the date he testified on October 16.000. B). Respondent Court held that the . that the defendant has not paid his obligation as evidenced by the latest statement of account (Exh. 1977. that the present action is premature. that as compulsory counterclaim the defendant prays for attorney's fees. 1986 as act of earnest desire to settle the obligation in good faith by the interested parties.500. B-1). C-1. IV The court a quo erred in issuing the orders dated May 22.promissory note are onerous and must be construed against the creditor-payee bank.689.413.63) and appellant's affirmative defenses — pursuant to substantial justice and equity. stipulated only fourteen percent (14%) per annum and which was actually prayed for in appellee bank's original and amended complaints. he counterchecks all the transactions that transpired during the day and is responsible for all the accounts and records and other things that may[ ]be assigned to the Loans and Discount Department. and therefore. he supervises the accounting section of the bank. found no need to tackle all the assigned errors and limited itself to the question of "whether [herein petitioner had] established or proven a cause of action against [herein private respondent]. 1986. . VIII The appealed decision of the lower court erred in not considering at all appellant's affirmative defenses that (1) the subject PN No. 1977. C-3). that Associated Banking Corporation and the Citizens Bank and Trust Company merged to form one banking corporation known as the Associated Citizens Bank and is now known as Associated Bank by virtue of its Amended Articles of Incorporation. moral damages and expenses of litigation. 1986. hence.689. that as such. that several partial payments made in the promissory note are not properly applied. Esteban C. penalties and cost of litigation totaled P4. VI The lower court erred in accepting and giving credence to appellee bank's 27-yearold witness Esteban C. that Lorenzo Sarmiento. 1986 which exacted eighteen percent (18%) per annum on the foisted principal amount of P2.5 million dated September 7. B. 1985 (Exh. 1986 and September 16.000. executed a promissory note No. because he has an outstanding loan with them as per their records. the trial court ordered Respondent Sarmiento to pay the bank his remaining balance plus interests and attorney's fees.5 million which including accrued interests.000.000. A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22." Based on the evidence presented by petitioner. 1986 and the plaintiff was allowed to present its evidence before the Court ex-parte on October 16.000. TL-2649-77 for P2. he was merely an eighteen-year-old minor when appellant supposedly incurred the foisted obligation under the subject PN No.63 less P1.413. 1986 and September 16. III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default orders dated May 22. Exhibit A. V The lower court erred in according credence to appellee bank's Exhibit B statement of account which had been merely requested by its counsel during the trial and bearing date of September 30. VII The [trial court] erred in adopting appellee bank's Exhibit B dated September 30. 68. IX The lower court should have at least allowed appellant the opportunity to present countervailing evidence considering the huge amounts claimed by appellee bank (principal sum of P2. 1986 declaring appellant as if in default due to non-appearance of appellant's attending counsel who had resigned from the law firm and while the parties [were] negotiating for settlement of the case and after a one million peso payment had in fact been paid to appellee bank for appellant's account at the start of such negotiation on February 18.

expressed or implied. respondent is not liable to petitioner because there is no privity of contract between respondent and Associated Bank. 12 12a 12b Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which. franchises. powers. and including [CBTC's] goodwill and tradename. franchises and all appointments. duties and undertakings have been originally incurred or contracted by [ABC]. does not become effective upon the mere agreement of the constituent corporations. since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). privileges. Petitioner now comes to us for a reversal of this ruling. The court ruled that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such merger. 1975 Agreement of Merger. and all and every other interest of [CBTC] shall thereafter be effectually the property of [ABC] as they were of [CBTC]. because the surviving corporation automatically acquires all their rights. executor. privileges. obligations. there is no winding up of their affairs or liquidation of their assets. Upon effective date of the Merger. the September 16. 11 The merger. The procedure to be followed is prescribed under the Corporation Code. 10 Although there is a dissolution of the absorbed corporations. whether by deed or otherwise. actual or contingent.Associated Bank had no cause of action against Lorenzo Sarmiento Jr. set-offs and counterclaims which [CBTC] has or might have and which shall pertain to [ABC].. in turn. assignee. receiver." In a nutshell. Consistent with the aforementioned Section 79. and all other things in action belonging to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC]. rights. any separate or specific deed of conveyance to legally effect the transfer or assignment of any kind of property [or] asset is required. 8 Issues In its petition. one of the combining corporations survives and continues the combined business. guardian of estates. duties and undertakings of [CBTC]. to all rights. unless by express requirements of law or of a government agency. The Main Issue: Associated Bank Assumed All Rights of CBTC Ordinarily." 15 . Respondent Court set aside the decision of the trial court and dismissed the complaint. the absorbed company. 13 which Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into. and all property. despite the merger between petitioner and Citizens Bank and Trust Company. the agreement provides: "10. be the date when the necessary papers to carry out this [m]erger shall have been approved by the Securities and Exchange Commission. privileges. liabilities. the surviving corporation. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The Court's Ruling The petition is impressed with merit. Thus. II The Court of Appeals also erred in declaring that. and when its rights. vested in [CBTC] shall not revert or be in any way impaired by reason thereof." 14 As to the transfer of the properties of CBTC to ABC. subject. whether contractual or otherwise. privileges. registrar of stocks and bonds. provided that its effectivity "shall. however. and all debts due to [CBTC] on whatever act. in the merger of two or more existing corporations. administrator. however. as earlier stated. may enforce the promissory note made by private respondent in favor of CBTC. without need of further act or deed. as well as their liabilities. all rights. is not a real party in interest insofar as the promissory note executed in favor of the merger. defenses. the main issue is whether Associated Bank. the SURVIVING BANK. that all rights of creditors and all liens upon any property of [CBTC] shall be preserved and unimpaired and all debts. immunities. in which case such document or deed shall be executed accordingly. powers. obligations. after the merger agreement had been signed. and all other rights and interests of [CBTC] as trustee. whether real. LLjur III The Court of Appeals erred when it ruled that petitioner. trustee of estates of persons mentally ill and in every other fiduciary capacity. while the rest are dissolved and all their rights. personal or mixed. assets and property of [CBTC]. shall henceforth attach to [ABC] which shall be responsible therefor and may be enforced against [ABC] to the same extent as if the same debts liabilities. must have been duly approved by a majority of the respective stockholders of the constituent corporations. provided. immunities. for all intents and purposes. properties as well as liabilities pass on to the surviving corporation. petitioner cites the following "reasons": 9 "I The Court of Appeals erred in reversing the decision of the trial court and in declaring that petitioner has no cause of action against respondent over the promissory note. and title to any real estate. since the promissory note was executed in favor of Citizens Bank and Trust Company two years after the merger between Associated Banking Corporation and Citizens Bank and Trust Company. privileges and powers. designations and nominations. however. properties and liabilities are acquired by the surviving corporation.

Definitely. Contract Pour Autrui. the SURVIVING BANK. and not the contract . Petitioner's complaint was instituted on August 22. The principle of laches is a creation of equity. Being clear. "as if such reference [was a] direct reference to" the latter "for all intents and purposes. Private respondent contends that." 16 (Emphasis supplied) Thus. Besides.The records do not show when the SEC approved the merger. To hold that no payee/obligee exists and to let private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable. 18 In light of the foregoing. the provision must be given its literal meaning 17 and applied without a convoluted interpretation. 23 Florentino vs. under the very provisions of the merger agreement. the private respondent herein. A stipulation pour autrui is one in favor of a third person who may demand its fulfillment. the surviving bank. provided he communicated his acceptance to the obligor before its revocation. although the subject promissory note names CBTC as the payee. references to [ABC]. herein petitioner. Since. all references to [CBTC] in any deed. The contracting parties must have clearly and deliberately conferred a favor upon a third person. Thus. Verba legis non est recedendum. as a reference to petitioner bank. in contrast to the earlier aforequoted provision. which was September 16. documents. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed against him despite the fact. or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes. as if such references were direct references to [ABC]. 1977 — two years after the merger agreement had been executed — CBTC could not have conveyed or transferred to petitioner its interest in the said note. . 22 No Contract Pour Autrui Private respondent. the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former. Private respondent's theory is that it took effect on the date of the execution of the agreement itself. we still cannot agree that petitioner no longer has any interest in the promissory note. before the lapse of the tenyear prescriptive period. the Court holds that petitioner has a valid cause of action against private respondent. Clearly. that CBTC's corporate personality has been dissolved by virtue of its merger with petitioner. Lack of Consideration No Prescription or Laches Private respondent's claim that the action has prescribed. the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks. petitioner still had every right to commence suit against the payor/obligor. is legally untenable. no distinction should be made. while not denying that he executed the promissory note in the amount of P2. the latter clause no longer specifically refers only to contracts existing at the time of the merger." No other construction can be given to the unequivocal stipulation. 1975. Neither is petitioner's action barred by laches. 24 enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract. which he himself asserts. which is applied not to penalize neglect or failure to assert a right within a reasonable time. amounting to unjust enrichment at the expense of petitioner. .000 in favor of CBTC. 1985. 1978. is not sufficient. 21 To require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust. such right properly pertains only to CBTC. offers the alternative defense that said note was a contract Pour autrui. Encarnacion Sr. Secondary Issues: Prescription Laches.500. . Therefore. A closer perusal of the merger agreement leads to a different conclusion. this Court has held that the doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law. but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation 20 or in an injustice. to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Petitioner's suit for collection of a sum of money was based on a written contract and prescribes after ten years from the time its right of action arose. The provision quoted earlier has this other clause: "Upon the effective date of the [m]erger. which was not yet in existence at the time of the merger. An incidental benefit or interest. petitioner. pursuant to Article 1149 of the Civil Code. 19 Sarmiento's obligation under the promissory note became due and demandable on March 6. since he issued the promissory note to CBTC on September 7. which another person gains. has no right to enforce the promissory note on private respondent. specifically. Assuming that the effectivity date of the merger was the date of its execution. plain and free of ambiguity. the reference to CBTC in the note shall be construed.

his contention cannot be sustained. Hence. Accordingly. but the amendment was approved by the SEC only on April 3. Branch 3 of Iligan City. Iligan City. the Board of Directors of FISLAI passed and approved Board Resolution No. 58337. 2007 and Resolution 3 dated June 1. No.itself. 1991. 7 Meanwhile. if indeed the loan actually benefited a third person who undertook to repay the bank. FISLAI and DSLAI entered into a merger. primarily engaged in the business of granting loans and receiving deposits from the general public. Inc. to petitioner bank on or before March 6. and the Register of Deeds of Cagayan de Oro City. Malayo Bantuas (sheriff Bantuas). The Monetary Board found that MSLAI's financial condition was one of insolvency. assigning its assets in favor of DSLAI which in turn assumed the former's liabilities. At any rate.000. Private respondent can no longer backtrack and deny his liability to petitioner bank. 26 That he made no effort to implead such third person proves the hollowness of his arguments. Philippine Deposit Insurance Corporation (PDIC). showing an outstanding balance of P4. the petition is GRANTED. 111-697. MALAYO BANTUAS. in his capacity as sheriff of the Regional Trial Court (RTC). No further proof is necessary to show that he undertook to pay P2. 86-002. Gilda Go (Go). such partial payment is equivalent to an express acknowledgment of his obligation.. and (3) neither of the contracting parties bears the legal representation or authorization of the third party. Branch 48. 2010. represented by its liquidator. the Monetary Board of the Central Bank of the Philippines ordered its closure and placed it under receivership per Monetary Board Resolution No. Inc. the Monetary Board ordered the liquidation of MSLAI. in Civil Case No. with PDIC as its liquidator. plus interest. 4 Sometime in 1985. 1990. speaks for itself. however. 26465 is hereby REINSTATED. MSLAI seeks the reversal and setting aside of the Court of Appeals 1 (CA) Decision 2 dated March 21. 922 dated August 31. Remedios Uy (Uy). GILDA GO. It merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. The "fairest test" in determining whether the third person's interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. SEIcAD The controversy stemmed from the following facts: The First Iligan Savings and Loan Association. 25 We carefully and thoroughly perused the promissory note. 8 The business of MSLAI. Branch 3 of Iligan City.00 paid seven months earlier. (MSLAI). private respondent could have availed himself of the legal remedy of a third-party complaint. DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of Incorporation. The latter presented before the trial court private respondent's statement of account 27 as of September 30. in his capacity as the Deputy Sheriff of Regional Trial Court.] MINDANAO SAVINGS AND LOAN ASSOCIATION. Uy filed with the RTC. in no part of the instrument is there any mention of a third party at all. on May 26. 1987. 1986. The instrument. Inc. docketed as Civil Case No. These arguments deserve no merit. 178618. CV No. an action for collection of sum of money against FISLAI.500. 1978.63 after deducting P1. INC. no evidence was proffered by private respondent to support his argument. "A person cannot accept and reject the same instrument. Furthermore. represented by its Liquidator.413. Branch 3. REMEDIOS UY. In fact. 6 On August 12. respondents. cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned. October 20. On May 24. as testified to by petitioner's accountant. Respondent Sarmiento has not questioned the genuineness and due execution thereof. (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation. vs. bearing the signature of private respondent. against respondents Edward R.R. DECISION NACHURA.R. It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. failed. respectively.689. 34869 and 32388. J p: This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings and Loan Association. SO ORDERED. 1986. This he failed to do. and treated as banks. 2007 in CA-G." 28 WHEREFORE. 1985. The assailed Decision is SET ASIDE and the Decision of RTC-Manila. Willkom (Willkom). EDWARD WILLKOM. Cdll [G. On .000.000. with DSLAI as the surviving corporation. petitioner. 9 DcaECT It appears that prior to the closure of MSLAI. cdrep Consideration Private respondent also claims that he received no consideration for the promissory note and. Res ipsa loquitur. (FISLAI) and the Davao Savings and Loan Association. Except for his barefaced statement. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under Registry Nos. The instrument itself does not disclose the purpose of the loan contract. THE PHILIPPINE DEPOSIT INSURANCE CORPORATION. 5 The articles of merger were not registered with the SEC due to incomplete documentation. but found no stipulation at all that would even resemble a provision in consideration of a third person. and for it to continue in business would involve probable loss to its depositors and creditors. in support thereof. and the REGISTER OF DEEDS of Cagayan de Oro City.

10 On April 28. A certificate of sale was issued and eventually registered with the Register of Deeds of Cagayan de Oro City. 13 SEIDAC In answer. 17 the CA ruled that there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid down by the Corporation Code for a valid merger or consolidation.801. respondents averred that MSLAI had no cause of action against them or the right to recover the subject properties because MSLAI is a separate and distinct entity from FISLAI. as held by the RTC. Cancellation of Title and Reconveyance of Properties against respondents. A writ of execution was thereafter issued. 19 . sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de Oro City. 1989. 111-697.70. and the costs of suit. 15 On appeal. The decision became final and executory on February 21. ATTACHMENT OR EXECUTION. the claim against FISLAI is warranted. 1992. On September 20. The decision assailed is AFFIRMED. 1997. 11 On June 14. a complaint for Annulment of Sheriff's Sale. 18 Petitioner's motion for reconsideration was denied in a Resolution dated June 1. CDEaAI SO ORDERED. the instant appeal is DENIED. Branch 41 of Cagayan de Oro City. 12 MSLAI alleged that the sale on execution of the subject properties was conducted without notice to it and PDIC. The Division Clerk of Court is hereby DIRECTED to furnish the Office of the Court Administrator a copy of this decision. The RTC declared that it could not annul the decision in Civil Case No. The CA then concluded that the two corporations retained their separate personalities. consequently. Willkom. The decision was modified by the CA by further ordering the third-party defendant therein to reimburse the payments that would be made by the defendants. 1994. the CA said that the validity of the auction sale could not be invalidated by the fact that the sheriff had no authority to conduct the execution sale. We REFER Sheriff Malayo B. 12 to the Office of the Court Administrator for appropriate action. represented by PDIC. but also because the assets of an institution placed under receivership or liquidation such as MSLAI should be deemed in custodia legis and should be exempt from any order of garnishment. 25% as attorney's fees. The dispositive portion of the assailed CA Decision reads: WHEREFORE. that the execution of the RTC decision in Civil Case No. and the subsequent sale of the levied properties at public auction is valid. LEVY. they claimed that FISLAI is still a SEC registered corporation and could not have been absorbed by petitioner. EXEMPT FROM GARNISHMENT. plus interest until full payment. the RTC issued a summary decision in favor of Uy. They further contended that the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging companies did not comply with the formalities and procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines. During the public auction on May 17. 111-697 was illegal and contrary to law and jurisprudence. (3) IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND THEREFORE. attachment. 68. Furthermore. 1993. 2007. CAGAYAN DE ORO COMMITTED GRAVE AND REVERSIBLE ERROR WHEN: (1) IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER SECTION 20 OF BATAS PAMBANSA BLG. Finally. CA. levy. having relied on the clean certificates of title. New certificates of title covering the subject properties were issued in favor of Willkom. Finally. not only because PDIC was not notified of the execution sale. Willkom sold one of the subject parcels of land to Go. premises considered. having been rendered by a court of coordinate jurisdiction. Hence. or execution. Citing Associated Bank v. the instant petition anchored on the following grounds: THE HONORABLE COURT OF APPEALS. 14 On March 13. 16 The appellate court sustained the dismissal of petitioner's complaint not because it had no jurisdiction over the case. the RTC issued a resolution dismissing the case for lack of jurisdiction. MSLAI. was an innocent purchaser for value. MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution.October 19. sheriff Bantuas issued the sheriff's definite deed of sale. DHEaTS (2) IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE SURVIVING CORPORATION. Bantuas' violation of the Supreme Court Administrative Circular No. filed before the RTC. the alleged assignment of assets and liabilities executed by FISLAI in favor of MSLAI was not binding on third parties because it was not registered. Upon the expiration of the redemption period. that PDIC only came to know about the sale for the first time in February 1995 while discharging its mandate of liquidating MSLAI's assets. and the notice of sale was subsequently published. whose right is superior to that of MSLAI. but on a different ground. 1995. Willkom was the highest bidder. 1993. The CA went on to say that even if there had been a de facto merger between FISLAI and MSLAI (formerly DSLAI). directing defendants therein (which included FISLAI) to pay the former the sum of P136.

the assets of FISLAI remain as its assets and cannot be considered as belonging to DSLAI and MSLAI. notifying all corporations concerned at least two weeks before. 21 The merger.To resolve this petition. 23 DTaSIc The steps necessary to accomplish a merger or consolidation. properties. or amend the articles of incorporation of the surviving corporation. and the latter assumed all the liabilities of the former. therefore. if necessary. one of the corporations survives and continues the combined business. the two corporations shall not be considered as one but two separate corporations. notwithstanding the Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI. it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with the SEC due to incomplete documentation. 36 Being separate entities. By operation of law. as well as their liabilities. does not become effective upon the mere agreement of the constituent corporations. as provided for in Sections 76. the property of one cannot be considered the property of the other. are: (1) The board of each corporation draws up a plan of merger or consolidation. by the corporate officers of each constituent corporation. Thus. the SEC shall set a hearing. to the articles of incorporation of the surviving corporation. Consequently. (2) Submission of plan to stockholders or members of each corporation for approval. as well as in the rights of stockholders and creditors. These take the place of the articles of incorporation of the consolidated corporation. there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights. "an assignment of credit. and (2) Was there novation of the obligation by substituting the person of the debtor? We answer both questions in the negative. 20 Although there is a dissolution of the absorbed or merged corporations. or in case of consolidation. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such merger. when proper. as far as third parties are concerned. referred to as the articles of merger o[r] consolidation. we must address two basic questions: (1) Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective. EACTSH (6) Issuance of certificate of merger or consolidation. upon the effectivity of the merger. Such plan must include any amendment. privileges. 34 There being no merger between FISLAI and DSLAI (now MSLAI). Respondents cannot. 31 aSIDCT The same rule applies to consolidation which becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws. for third parties such as respondents. (3) Execution of the formal agreement. (4) Submission of said articles of merger or consolidation to the SEC for approval. 28 . 22 Since a merger or consolidation involves fundamental changes in the corporation. A meeting must be called and at least two (2) weeks' notice must be sent to all stockholders or members. 25 78. 30 In this case. attributes. Clearly. 35 It has a personality separate and distinct from the persons composing it. the absorbed corporation ceases to exist but its rights and properties. the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained. Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding capital stock will be needed. 32 When the SEC. while the rest are dissolved and all their rights. and liabilities are acquired by the surviving corporation. or the instrument is recorded in the Registry of Property in case the assignment involves real property. The issuance of the certificate of merger is crucial because not only does it bear out SEC's approval but it also marks the moment when the consequences of a merger take place. 26 and 79 27 of the Corporation Code. Appraisal rights. 24 77. unless it appears in a public instrument. there must be an express provision of law authorizing them. in the instant case. the fact remains that no certificate was issued by the SEC. is satisfied that the consolidation of the corporations is not inconsistent with the provisions of the Corporation Code and existing laws. A summary of the plan must be attached to the notice. right or action shall produce no effect as against third persons. A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers. Such merger is still incomplete without the certification. all the statements required in the articles of incorporation of a corporation. Ordinarily. and powers. personally or by registered mail. and properties expressly authorized by law or incident to its existence. as well as liabilities. must be respected. in the merger of two or more existing corporations. shall be taken and deemed transferred to and vested in the surviving corporation. it issues a certificate of consolidation which makes the reorganization official. the SEC did not issue the required certificate of merger. however. be faulted for enforcing their claim against FISLAI on the properties registered (5) If necessary. as well as from any other legal entity to which it may be related. the merger shall only be effective upon the issuance of a certificate of merger by the SEC. As provided in Article 1625 of the Civil Code. 29 Where a party to the merger is a special corporation governed by its own charter. upon processing and examining the articles of consolidation." The certificates of title of the subject properties were clean and contained no annotation of the fact of assignment. 33 The new consolidated corporation comes into existence and the constituent corporations are dissolved and cease to exist.

gave her consent to the agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. may be made even without the knowledge or against the will of the latter. Such agreement cannot prejudice Uy. 40 WHEREFORE. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first. Novation which consists in substituting a new debtor in the place of the original one. 2007 in CA-G. 1293. Accordingly. MSLAI. The Court of Appeals Decision dated March 21. Thus. thus: Art. While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI. 38 Article 1293 of the Civil Code is explicit. the petition is DENIED. cannot. such assumption did not result in novation as would release the latter from liability. With more reason can it not cause the cancellation of the title to the subject properties of Willkom and Go. has no legal standing to annul the execution sale over the properties of FISLAI. 2007 and Resolution dated June 1. CcAIDa The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in conventional subrogation in order that a novation shall legally take place. or by subrogating a third person in the rights of the creditor. SO ORDERED. such waiver must be express. 39 Since novation implies a waiver of the right which the creditor had before the novation. premises considered. thereby exempting its properties from execution. therefore.R. the creditor. there was no showing that Uy. as the successor-in-interest of DSLAI. The subsequent sale of the properties by Uy to Willkom. be questioned by MSLAI. and of one of the properties by Willkom to Go. by substituting another in place of the debtor. TDcCIS . 58337 are AFFIRMED. In this case.under its name. either by changing the object or principal conditions. but not without the consent of the creditor. CV No. 37 It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. the assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy against FISLAI. CScTDE Petitioner cannot also anchor its right to annul the execution sale on the principle of novation.