RECENT JURISPRUDENCE IN COMMERCIAL LAW

G.R. Nos. 154470-71. September 24, 2012.

BANK OF COMMERCE, vs. PLANTERS DEVELOPMENT BANK and BANGKO SENTRAL
NG PILIPINAS
G.R. Nos. 154589-90. September 24, 2012.
BANGKO SENTRAL NG PILIPINAS vs. PLANTERS DEVELOPMENT BANK
The Rizal Commercial Banking Corporation (RCBC) was the registered owner of seven Central Bank
(CB) bills with a total face value of P70 million, issued on January 2, 1994 and would mature on January
2, 1995. As evidenced by a "Detached Assignment" dated April 8, 1994, the RCBC sold these CB bills to
the BOC. As evidenced by another "Detached Assignment" of even date, the BOC, in turn, sold these CB
bills to the PDB. The BOC delivered the Detached Assignments to the PDB.
On April 15, 1994 (April 15 transaction), the PDB, in turn, sold to the BOC Treasury Bills worth P70
million, with maturity date of June 29, 1994, as evidenced by a Trading Order and a Confirmation of Sale.
However, instead of delivering the Treasury Bills, the PDB delivered the seven CB bills to the BOC, as
evidenced by a PDB Security Delivery Receipt, bearing a "note: ** substitution in lieu of 06-29-94"
referring to the Treasury Bills. Nevertheless, the PDB retained possession of the Detached Assignments. It
is basically the nature of this April 15 transaction that the PDB and the BOC cannot agree on.
On June 30, 1994, upon learning of the transfers involving the CB bills, the PDB informed the Officer-inCharge of the BSP's Government Securities Department, Lagrimas Nuqui, of the PDB's claim over these
CB bills, based on the Detached Assignments in its possession. The PDB requested the BSP to record its
claim in the BSP's books, explaining that its non-possession of the CB bills is "on account of imperfect
negotiations thereof and/or subsequent setoff or transfer."
Nuqui denied the request, invoking Section 8 of CB Circular No. 28 (Regulations Governing Open
Market Operations, Stabilization of the Securities Market, Issue, Servicing and Redemption of the Public
Debt) which requires the presentation of the bond before a registered bond may be transferred on the
books of the BSP.
RULING:
In United Coconut Planters Bank v. E. Ganzon, Inc., the Court considered the BSP as an administrative
agency, exercising quasi-judicial functions through its Monetary Board. It held:
A quasi-judicial agency or body is an organ of government other than a court and other than a legislature,
which affects the rights of private parties through either adjudication or rule-making. The very definition
of an administrative agency includes its being vested with quasi-judicial powers. The ever increasing
variety of powers and functions given to administrative agencies recognizes the need for the active
intervention of administrative agencies in matters calling for technical knowledge and speed in countless
controversies which cannot possibly be handled by regular courts. A "quasi-judicial function" is a term
which applies to the action, discretion, etc., of public administrative officers or bodies, who are required
to investigate facts, or ascertain the existence of facts, hold hearings, and draw conclusions from them, as
a basis for their official action and to exercise discretion of a judicial nature.
Undoubtedly, the BSP Monetary Board is a quasi-judicial agency exercising quasi-judicial powers or
functions. As aptly observed by the Court of Appeals, the BSP Monetary Board is an independent central
monetary authority and a body corporate with fiscal and administrative autonomy, mandated to provide
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

policy directions in the areas of money, banking and credit. It has power to issue subpoena, to sue for
contempt those refusing to obey the subpoena without justifiable reason, to administer oaths and compel
presentation of books, records and others, needed in its examination, to impose fines and other sanctions
and to issue cease and desist order. Section 37 of Republic Act No. 7653, in particular, explicitly provides
that the BSP Monetary Board shall exercise its discretion in determining whether administrative sanctions
should be imposed on banks and quasi-banks, which necessarily implies that the BSP Monetary Board
must conduct some form of investigation or hearing regarding the same. [citations omitted]
While the very nature of an administrative agency and the raison d'tre for its creation and proliferation
dictate a grant of quasi-judicial power to it, the matters over which it may exercise this power must find
sufficient anchorage on its enabling law, either by express provision or by necessary implication. Once
found, the quasi-judicial power partakes of the nature of a limited and special jurisdiction, that is, to hear
and determine a class of cases within its peculiar competence and expertise. In other words, the
provisions of the enabling statute are the yardsticks by which the Court would measure the quantum of
quasi-judicial powers an administrative agency may exercise, as defined in the enabling act of such
agency.
Once the issue and/or sale of a security is made, the BSP would necessarily make a determination, in
accordance with its own rules, of the entity entitled to receive the proceeds of the security upon its
maturity. This determination by the BSP is an exercise of its administrative powers under the law as an
incident to its power to prescribe rules and regulations governing open market operations to achieve the
"primary objective of achieving price stability." As a matter of necessity, too, the same rules and
regulations facilitate transaction with the BSP by providing for an orderly manner of, among others,
issuing, transferring, exchanging and paying securities representing public debt.
Significantly, when competing claims of ownership over the proceeds of the securities it has issued are
brought before it, the law has not given the BSP the quasi-judicial power to resolve these competing
claims as part of its power to engage in open market operations. Nothing in the BSP's charter confers on
the BSP the jurisdiction or authority to determine this kind of claims, arising out of a subsequent transfer
or assignment of evidence of indebtedness a matter that appropriately falls within the competence of
courts of general jurisdiction. That the statute withholds this power from the BSP is only consistent with
the fundamental reasons for the creation of a Philippine central bank, that is, to lay down stable monetary
policy and exercise bank supervisory functions. Thus, the BSP's assumption of jurisdiction over
competing claims cannot find even a stretched-out justification under its corporate powers "to do and
perform any and all things that may be necessary or proper to carry out the purposes" of R.A. No. 7653.
To reiterate, open market operation is a monetary policy instrument that the BSP employs, among others,
to regulate the supply of money in the economy to influence the timing, cost and availability of money
and credit, as well as other financial factors, for the purpose of stabilizing the price level. 116 What the
law grants the BSP is a continuing role to shape and carry out the country's monetary policy not the
authority to adjudicate competing claims of ownership over the securities it has issued since this
authority would not fall under the BSP's purposes under its charter.
In other words, the grant of quasi-judicial authority to the BSP cannot possibly extend to situations which
do not call for the exercise by the BSP of its supervisory or regulatory functions over entities within its
jurisdiction. The fact alone that the parties involved are banking institutions does not necessarily call for
the exercise by the BSP of its quasi-judicial powers under the law.
G.R. No. 181126 . 15 June 2011
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IV

UMALE vs. ABS Realty Corporation

This case involves a parcel of land identified as Lot 7, Block 5, Amethyst Street, Ortigas Center,
Pasig City which was originally owned by Amethyst Pearl Corporation (Amethyst Pearl), a company that
is, in turn, wholly-owned by respondent ASB Realty Corporation (ASB Realty). In 1996, Amethyst Pearl
executed a Deed of Assignment in Liquidation of the subject premises in favor of ASB Realty in
consideration of the full redemption of Amethyst Pearls outstanding capital stock from ASB
Realty. Thus, ASB Realty became the owner of the subject premises and obtained in its name Transfer
Certificate of Title No. PT-105797, which was registered in 1997 with the Registry of Deeds of Pasig
City.
Sometime in 2003, ASB Realty commenced an action in the Metropolitan Trial Court (MTC) of
Pasig City for unlawful detainer of the subject premises against petitioner Leonardo S. Umale
(Umale). ASB Realty alleged that it entered into a lease contract with Umale for the period June 1, 1999May 31, 2000. Their agreement was for Umale to conduct a pay-parking business on the property and
pay a monthly rent of P60,720.00 to ASB Realty.
On June 23, 2003, ASB Realty served on Umale a Notice of Termination of Lease and Demand to
Vacate and Pay. ASB Realty stated that it was terminating the lease effective midnight of June 30, 2003;
that Umale should vacate the premises, and pay to ASB Realty the rental arrears amounting to P1.3
million by July 15, 2003. Umale failed to comply with ASB Realtys demands and continued in
possession of the subject premises, even constructing commercial establishments thereon.
Umale challenged, among others, ASB Realtys personality to recover the subject premises
considering that ASB Realty had been placed under receivership by the Securities and Exchange
Commission (SEC) and a rehabilitation receiver had been duly appointed. Under Section 14(s), Rule 4 of
the Administrative Memorandum No. 00-8-10SC, otherwise known as the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules), it is the rehabilitation receiver that has the power to take
possession, control and custody of the debtors assets. Since ASB Realty claims that it owns the subject
premises, it is its duly-appointed receiver that should sue to recover possession of the same.
RULING:
Corporations, such as ASB Realty, are juridical entities that exist by operation of law. As a creature of
law, the powers and attributes of a corporation are those set out, expressly or impliedly, in the
law. Among the general powers granted by law to a corporation is the power to sue in its own name. This
power is granted to a duly-organized corporation, unless specifically revoked by another law. The
question becomes: Do the laws on corporate rehabilitation particularly PD 902-A, as amended, and its
corresponding rules of procedure forfeit the power to sue from the corporate officers and Board of
Directors?
Corporate rehabilitation is defined as the restoration of the debtor to a position of successful operation
and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan more if the corporation continues
as a going concern than if it is immediately liquidated. It was first introduced in the Philippine legal
system through PD 902-A, as amended. The intention of the law is to effect a feasible and viable
rehabilitation by preserving a floundering business as a going concern, because the assets of a business
are often more valuable when so maintained than they would be when liquidated. This concept of
preserving the corporations business as a going concern while it is undergoing rehabilitation is called
debtor-in-possession or debtor-in-place. This means that the debtor corporation (the corporation
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IV

undergoing rehabilitation), through its Board of Directors and corporate officers, remains in control of its
business and properties, subject only to the monitoring of the appointed rehabilitation receiver. The
concept of debtor-in-possession, is carried out more particularly in the SEC Rules, the rule that is relevant
to the instant case. It states therein that the interim rehabilitation receiver of the debtor corporation
does not take over the control and management of the debtor corporation. Likewise, the rehabilitation
receiver that will replace the interim receiver is tasked only to monitor the successful implementation of
the rehabilitation plan. There is nothing in the concept of corporate rehabilitation that would ipso
facto deprive the Board of Directors and corporate officers of a debtor corporation, such as ASB
Realty, of control such that it can no longer enforce its right to recover its property from an errant
lessee.
To be sure, corporate rehabilitation imposes several restrictions on the debtor corporation. The
rules enumerate the prohibited corporate actions and transactions (most of which involve some kind of
disposition or encumbrance of the corporations assets) during the pendency of the rehabilitation
proceedings but none of which touch on the debtor corporations right to sue. The implication therefore is
that our concept of rehabilitation does not restrict this particular power, save for the caveat that all its
actions are monitored closely by the receiver, who can seek an annulment of any prohibited or anomalous
transaction or agreement entered into by the officers of the debtor corporation.
G.R. No. 176579 . June 28, 2011
GAMBOA v. TEVES
This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the
sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate
of First Pacific Company Limited (First Pacific).
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT.With the sale, First Pacifics common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits
foreign ownership of the capital of a public utility to not more than 40 percent.
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens xxx.
The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11,
Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined
total of common and non-voting preferred shares)?
RULING:

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IV

The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock comprising both common and non-voting preferred shares.
Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right to vote in
the election of directors, then the term "capital" shall include such preferred shares because the right to
participate in the control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers
only to shares of stock that can vote in the election of directors.
In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred
shares have no voting right for any purpose whatsoever.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the
States grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common
shares earn, grossly violates the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.
G.R. No. 176579 . 9 October 2012
GAMBOA v. TEVES MR
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance with
the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should
not diminish that right through the legal fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of foreigners in a corporation
engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporations outstanding capital stock is owned by
"Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing corporation, the same process must be
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IV

observed. One must not stop until the citizenships of the individual or natural stockholders of layer after
layer of investing corporations have been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule.
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to
voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our
28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipino owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether
a corporation is a "Philippine national."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative
that such requirement apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital
stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.
The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows
denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the
election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares, even
if denied the right to vote in the election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of
substantially all corporate assets; (5) investment of funds in another business or corporation or for a
purpose other than the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.
Since a specific class of shares may have rights and privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with voting rights but also to shares without
voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still
entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged
in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares
must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of public utilities shall be reserved exclusively
to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in
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IV

voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.
The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIAs implementing rules explain that "[f]or stocks to
be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.
G.R. NOS. 174457-59/G.R. Nos. 175418-20/G.R. No. 177270
December 5, 2012
IN THE MATTER OF: THE CORPORATE REHABILITATION OF
TELECOMMUNICATIONS, INC.

BAYAN

Petitioners fault the Court of Appeals for ruling that the debt-to-equity conversion rate of 77.7%, as
proposed by The Bank of New York, violates the Filipinization provision of the Constitution. Petitioners
explain that the acquisition of shares by foreign Omnibus and Financial Creditors shall be done, both
directly and indirectly in order to meet the control test principle under RA 7042 or the Foreign
Investments Act of 1991. Under the proposed structure, said creditors shall own 40% of the outstanding
capital stock of the telecommunications company on a direct basis, while the remaining 40% of shares
shall be registered to a holding company that shall retain, on a direct basis, the other 60% equity reserved
for Filipino citizens.
Article XII, Section 11 of the 1987 Constitution explicitly reserves to Filipino citizens control over public
utilities, pursuant to an overriding economic goal of the 1987 Constitution: to "conserve and develop our
patrimony" and ensure "a self-reliant and independent national economy effectively controlled by
Filipinos."
In the recent case of Gamboa v. Teves,95 the Court settled once and for all the meaning of "capital" in the
above-quoted Constitutional provision limiting foreign ownership in public utilities. In said case, we held
that considering that common shares have voting rights which translate to control as opposed to preferred
shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right to vote in
the election of directors, then the term "capital" shall include such preferred shares because the right to
participate in the control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers
only to shares of stock that can vote in the election of directors.
Applying this, two steps must be followed in order to determine whether the conversion of debt to equity
in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign ownership of
a public utility: First,identify into which class of shares the debt shall be converted, whether common
shares, preferred shares that have the right to vote in the election of directors or non-voting preferred
shares; Second, determine the number of shares with voting right held by foreign entities prior to
conversion. If upon conversion, the total number of shares held by foreign entities exceeds 40% of the
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IV

capital stock with voting rights, the constitutional limit on foreign ownership is violated. Otherwise, the
conversion shall be respected.
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantel is that
its shareholders shall "relinquish the agreed-upon amount of common stock[s] as payment to Unsecured
Creditors as per the Term Sheet." 97 Evidently, the parties intend to convert the unsustainable portion of
respondent's debt into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of
Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization
provision of the Constitution. Therefore, the Court of Appeals acted correctly in sustaining the 40% debtto-equity ceiling on conversion.
G.R. No. 171815 . 7 August 2007
CEMCO v. NLIC
Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders UCHC, a
non-listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority
of UCHCs stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand,
owned 9% of UCHC stocks.
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that it and its
subsidiary ACC had passed resolutions to sell to Cemco BCIsstocks in UCHC equivalent to 21.31% and
ACCs stocks in UCHC equivalent to 29.69%.
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of
petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners total beneficial
ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares
of UCC
On 19 August 2004, respondent National Life Insurance Company of the Philippines, Inc. filed a
complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase
agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares.
RULING:
Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to
acquire equity securities of a public company. A public company is defined as a corporation which is
listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100 shares of such company. Stated differently, a
tender offer is an offer by the acquiring person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer. Tender offer is in place to protect minority
shareholders against any scheme that dilutes the share value of their investments. It gives the minority
shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell
their shares at the same price as those of the majority shareholders.
The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer
rule covers not only direct acquisition but also indirect acquisition or any type of acquisition.
The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of
the listed company and for the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a public company is obtained, either
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IV

through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. As
appropriately held by the Court of Appeals:
The petitioner posits that what it acquired were stocks of UCHC and not UCC. By
happenstance, as a result of the transaction, it became an indirect owner of UCC. We are
constrained, however, to construe ownership acquisition to mean both direct and
indirect. What is decisive is the determination of the power of control. The legislative
intent behind the tender offer rule makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed company through the purchase of
shares. Control may [be] effected through a direct and indirect acquisition of stock, and
when this takes place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the listed company the
opportunity to decide whether or not to sell in connection with a transfer of
control. x x x.
G.R. No. 141001 . 141018. 29 May 2009
BANK OF AMERICA v. ASSOCIATED CITIZENS BANK
On 6 October 1978, BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset
Press, Inc. (Miller), through the latters authorized representatives, i.e., Uy Kiat Chung, Ching Uy Seng,
and Uy Chung Guan Seng. BA-Finance granted Miller a credit line facility through which the latter could
assign or discount its trade receivables with the former. On 20 October 1978, Uy Kiat Chung, Ching Uy
Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement with BA-Finance whereby
they jointly and severally guaranteed the full and prompt payment of any and all indebtedness which
Miller may incur with BA-Finance.
Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of
Assignment in favor of the latter. In consideration of the assignment, BA-Finance issued four checks
payable to the Order of Miller Offset Press, Inc. with the notation For Payees Account Only. These
checks were drawn against Bank of America.
The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate secretary of
Miller, in Account No. 989 in Associated Citizens Bank (Associated Bank). Account No. 989 is a joint
bank account under the names of Ching Uy Seng and Uy Chung Guan Seng. Associated Bank stamped
the checks with the notation all prior endorsements and/or lack of endorsements guaranteed, and sent
them through clearing. Later, the drawee bank, Bank of America, honored the checks and paid the
proceeds to Associated Bank as the collecting bank.
Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently, BAFinance filed a Complaint against Miller for collection of the amount of P731,329.63 which BA-Finance
allegedly paid in consideration of the assignment, plus interest at the rate of 16% per annum and penalty
charges. Likewise impleaded as party defendants in the collection case were Uy Kiat Chung, Ching Uy
Seng, and Uy Chung Guan Seng.
RULING:
Liability of Drawee Bank
The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the
contract between the bank and its customer (drawer), to pay the check only to the payee or the payees
order. The drawers instructions are reflected on the face and by the terms of the check. When the drawee
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IV

bank pays a person other than the payee named on the check, it does not comply with the terms of the
check and violates its duty to charge the drawers account only for properly payable items. Thus, we ruled
in Philippine National Bank v. Rodriguez that a drawee should charge to the drawers accounts only the
payables authorized by the latter; otherwise, the drawee will be violating the instructions of the drawer
and shall be liable for the amount charged to the drawers account.
Effects of Crossed Check
This Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and could not be converted into cash. Thus, the
effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check
for deposit only by the rightful person, i.e., the payee named therein. The crossing may be special
wherein between the two parallel lines is written the name of a bank or a business institution, in which
case the drawee should pay only with the intervention of that bank or company, or general wherein
between two parallel diagonal lines are written the words and Co. or none at all, in which case the
drawee should not encash the same but merely accept the same for deposit. In Bataan Cigar v. Court of
Appeals, we enumerated the effects of crossing a check as follows: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a
bank; and (c) the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course.
Liability of Collecting Bank
A collecting bank where a check is deposited, and which endorses the check upon presentment with the
drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants
that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid and
subsisting. This Court has repeatedly held that in check transactions, the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuineness of the endorsements.
When Associated Bank stamped the back of the four checks with the phrase all prior endorsements
and/or lack of endorsement guaranteed, that bank had for all intents and purposes treated the checks as
negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so, Associated Bank
cannot deny liability on the checks. In Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation,[20] we held that:
x x x the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out to the public as the
expert and the law holds it to a high standard of conduct. x x x In presenting the checks
for clearing and for payment, the defendant [collecting bank] made an express guarantee
on the validity of all prior endorsements. Thus, stamped at the back of the checks are
the defendants clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff [drawee] would
not have paid on the checks. No amount of legal jargon can reverse the clear meaning of
defendants warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its representation.
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

As ruled by this Court in Jai-Alai Corporation of the Philippines v. Bank of the Philippine Islands, one
who accepts and encashes a check from an individual knowing that the payee is a corporation does so at
his peril. Accordingly, we hold that Associated Bank is liable for the amount of the four checks and
should reimburse the amount of the checks to Bank of America.
G.R. No. 164197 . 25 January 2012
SEC v. Prosperity.Com, Inc.
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet
service. To make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB)
capacity. At the same time, by referring to PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate in the Philippines and in the United States, and insurance coverage
worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own
down-lines. These second tier of buyers could in turn build up their own down-lines. For each pair of
down-lines, the buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyersponsor should not exceed 16 since the commissions due from excess referrals inure to PCI, not to the
buyer-sponsor.
Whether or not PCIs scheme constitutes an investment contract that requires registration under R.A.
8799.
RULING:
The Securities Regulation Code treats investment contracts as securities that have to be registered with
the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or
scheme where a person invests his money in a common enterprise and is led to expect profits primarily
from the efforts of others.
The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that,
for an investment contract to exist, the following elements, referred to as the Howey test must concur: (1)
a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.
An example that comes to mind would be the long-term commercial papers that large companies, like San
Miguel Corporation (SMC), offer to the public for raising funds that it needs for expansion. When an
investor buys these papers or securities, he invests his money, together with others, in SMC with an
expectation of profits arising from the efforts of those who manage and operate that company. SMC has
to register these commercial papers with the SEC before offering them to investors.
Here, PCIs clients do not make such investments. They buy a product of some value to them: an
Internet website of a 15-MB capacity. The client can use this website to enable people to have internet
access to what he has to offer to them, say, some skin cream. The buyers of the website do not invest
money in PCI that it could use for running some business that would generate profits for the
investors. The price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that
PCI creates, using its computer facilities and technical skills.

WARRIOR NOTES by: ATTY. BERNZ AMAGO

IV

Actually, PCI appears to be engaged in network marketing, a scheme adopted by companies for getting
people to buy their products outside the usual retail system where products are bought from the stores
shelf. Under this scheme, adopted by most health product distributors, the buyer can become a down-line
seller. The latter earns commissions from purchases made by new buyers whom he refers to the person
who sold the product to him. The network goes down the line where the orders to buy come.
The commissions, interest in real estate, and insurance coverage worth P50,000.00 are incentives to
down-line sellers to bring in other customers. These can hardly be regarded as profits from investment of
money under the Howey test.
The CA is right in ruling that the last requisite in the Howey test is lacking in the marketing scheme that
PCI has adopted. Evidently, it is PCI that expects profit from the network marketing of its products. PCI
is correct in saying that the US$234 it gets from its clients is merely a consideration for the sale of the
websites that it provides.

G.R. No. 135808 . 6 October 2008

SEC vs. INTERPORT RESOURCES CORP, et al.
The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed information
is the gravamen of illegal conduct. The intent of the law is the protection of investors against fraud,
committed when an insider, using secret information, takes advantage of an uninformed investor. Insiders
are obligated to disclose material information to the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based on two factors: first, the existence of a relationship
giving access, directly or indirectly, to information intended to be available only for a corporate purpose
and not for the personal benefit of anyone; and second, the inherent unfairness involved when a party
takes advantage of such information knowing it is unavailable to those with whom he is dealing.
In the United States (U.S.), the obligation to disclose or abstain has been traditionally imposed on
corporate insiders, particularly officers, directors, or controlling stockholders, but that definition has
since been expanded. The term insiders now includes persons whose relationship or former
relationship to the issuer gives or gave them access to a fact of special significance about the issuer or the
security that is not generally available, and one who learns such a fact from an insider knowing that the
person from whom he learns the fact is such an insider. Insiders have the duty to disclose material facts
which are known to them by virtue of their position but which are not known to persons with whom they
deal and which, if known, would affect their investment judgment. In some cases, however, there may be
valid corporate reasons for the nondisclosure of material information. Where such reasons exist, an
issuers decision not to make any public disclosures is not ordinarily considered as a violation of insider
trading. At the same time, the undisclosed information should not be improperly used for non-corporate
purposes, particularly to disadvantage other persons with whom an insider might transact, and therefore
the insider must abstain from entering into transactions involving such securities. [36]
Respondents further aver that under Section 30 of the Revised Securities Act, the SEC still needed to
define
the
following
terms: material
fact,
reasonable
person,
nature
and
reliability and generally available. [37] In determining whether or not these terms are vague, these
terms must be evaluated in the context of Section 30 of the Revised Securties Act. To fully understand
how the terms were used in the aforementioned provision, a discussion of what the law recognizes as
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

a fact of special significance is required, since the duty to disclose such fact or to abstain from any
transaction is imposed on the insider only in connection with a fact of special significance.
Under the law, what is required to be disclosed is a fact of special significance which may be (a) a
material fact which would be likely, on being made generally available, to affect the market price of a
security to a significant extent, or (b) one which a reasonable person would consider especially important
in determining his course of action with regard to the shares of stock.
G.R. No. 170770
January 9, 2013
VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE, vs. FQB+7, INC., NATHANIEL D.
BOCOBO, PRISCILA BOCOBO and ANTONIO DE VILLA
Pursuant to Section 145 of the Corporation Code, an existing intra-corporate dispute, which does not
constitute a continuation of corporate business, is not affected by the subsequent dissolution of the
corporation.
Facts: A stockholder questions the current composition of the BOD as well as a return of her
stockholdings. However, the corporation has already been dissolved.
RULING:
Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its business, but
allows it to continue with a limited personality in order to settle and close its affairs, including its
complete liquidation.
Complaint not a continuation of business:
The Court fails to find any intention to continue the corporate business of FQB+7. The Complaint does
not seek to enter into contracts, issue new stocks, acquire properties, execute business transactions, etc. Its
aim is not to continue the corporate business, but to determine and vindicate an alleged stockholders
right to the return of his stockholdings and to participate in the election of directors, and a corporations
right to remove usurpers and strangers from its affairs. The Court fails to see how the resolution of these
issues can be said to continue the business of FQB+7.Neither are these issues mooted by the dissolution
of the corporation. A corporations board of directors is not rendered functus officio by its dissolution.
Since Section 122 allows a corporation to continue its existence for a limited purpose, necessarily there
must be a board that will continue acting for and on behalf of the dissolved corporation for that purpose.
In fact, Section 122 authorizes the dissolved corporations board of directors to conduct its liquidation
within three years from its dissolution. Jurisprudence has even recognized the boards authority to act as
trustee for persons in interest beyond the said three-year period.
Intracorporate Dispute
'To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by
the branches of the RTC specifically designated by the Court to try and decide such cases, two elements
must concur: (a) the status or relationship of the parties, and [b] the nature of the question that is the
subject of their controversy.
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or
partnership relations, and (b) the nature of the question subject of the controversy must be such that it is
intrinsically connected with the regulation of the corporation or the enforcement of the parties rights and
obligations under the Corporation Code and the internal regulatory rules of the corporation. So long as
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

these two criteria are satisfied, the dispute is intra-corporate and the RTC, acting as a special commercial
court, has jurisdiction over it.
The dissolution of the corporation simply prohibits it from continuing its business. However, despite such
dissolution, the parties involved in the litigation are still corporate actors. The dissolution does not
automatically convert the parties into total strangers or change their intra-corporate relationships. Neither
does it change or terminate existing causes of action, which arose because of the corporate ties between
the parties. Thus, a cause of action involving an intra-corporate controversy remains and must be filed as
an intra-corporate dispute despite the subsequent dissolution of the corporation.
G.R. No. 157549
May 30, 2011
DONNINA C. HALLEY vs. PRINTWELL, INC.
Stockholders of a corporation are liable for the debts of the corporation up to the extent of their unpaid
subscriptions. They cannot invoke the veil of corporate identity as a shield from liability, because the veil
may be lifted to avoid defrauding corporate creditors.
BMPI commissioned Printwell for the printing of the magazine Philippines, Inc. (together with wrappers
and subscription cards) that BMPI published and sold. For that purpose, Printwell extended 30-day credit
accommodations to BMPI. In the period from October 11, 1988 until July 12, 1989, BMPI placed with
Printwell several orders on credit, evidenced by invoices and delivery receipts totaling P316,342.76.
Considering that BMPI paid only P25,000.00,Printwell sued BMPI on January 26, 1990 for the collection
of the unpaid balance of P291,342.76 in the RTC. On February 8, 1990, Printwell amended the complaint
in order to implead as defendants all the original stockholders and incorporators to recover on their
unpaid subscriptions.
The defendants filed a consolidated answer,6averring that they all had paid their subscriptions in full; that
BMPI had a separate personality from those of its stockholders; that Rizalino C. Vieza had assigned his
fully-paid up sharest o a certain Gerardo R. Jacinto in 1989; and that the directors and stockholders of
BMPI had resolved to dissolve BMPI during the annual meeting held on February 5, 1990.
Printwell impleaded the petitioner and the other stockholders of BMPI for two reasons, namely: (a) to
reach the unpaid subscriptions because it appeared that such subscriptions were the remaining visible
assets of BMPI; and (b) to avoid multiplicity of suits.
The petitioner submits that she had no participation in the transaction between BMPI and Printwell; that
BMPI acted on its own; and that she had no hand in persuading BMPI to renege on its obligation to pay.
Hence, she should not be personally liable.
RULING:
We rule against the petitioners submission.
Although a corporation has a personality separate and distinct from those of its stockholders, directors, or
officers, such separate and distinct personality is merely a fiction created by law for the sake of
convenience and to promote the ends of justice. The corporate personality may be disregarded, and the
individuals composing the corporation will be treated as individuals, if the corporate entity is being used
as a cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a
business conduit for the sole benefit of the stockholders. As a general rule, a corporation is looked upon
as a legal entity, unless and until sufficient reason to the contrary appears. Thus, the courts always
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

presume good faith, and for that reason accord prime importance to the separate personality of the
corporation, disregarding the corporate personality only after the wrongdoing is first clearly and
convincingly established. It thus behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done.
Although nowhere in Printwells amended complaint or in the testimonies Printwell offered can it be read
or inferred from that the petitioner was instrumental in persuading BMPI to renege on its obligation to
pay; or that she induced Printwell to extend the credit accommodation by misrepresenting the solvency of
BMPI to Printwell, her personal liability, together with that of her co-defendants, remained because the
CA found her and the other defendant stockholders to be in charge of the operations of BMPI at the time
the unpaid obligation was transacted and incurred.
The trust fund doctrine enunciates a xxx rule that the property of a corporation is a trust fund for the
payment of creditors, but such property can be called a trust fund only by way of analogy or metaphor.
As between the corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.
The trust fund doctrine, first enunciated in the American case of Wood v. Dummer, was adopted in our
jurisdiction in Philippine Trust Co. v. Rivera, where this Court declared that:
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat, 37 Phil., 802) xxx
We clarify that the trust fund doctrine is not limited to reaching the stockholders unpaid subscriptions.
The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust fund for the payment of corporate
debts.36All assets and property belonging to the corporation held in trust for the benefit of creditors that
were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions,
may be reached by the creditor in satisfaction of its claim.
The petitioner was liable pursuant to the trust fund doctrine for the corporate obligation of BMPI by
virtue of her subscription being still unpaid. Printwell, as BMPIs creditor, had a right to reach her unpaid
subscription in satisfaction of its claim.
The prevailing rule is that a stockholder is personally liable for the financial obligations of the corporation
to the extent of his unpaid subscription. In view of the petitioners unpaid subscription being
worth P262,500.00, she was liable up to that amount.
G.R. No. 167530
March 13, 2013
PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES CONTRACTORS CORPORATION
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of
Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB
acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC
by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for
five qualifying shares. As of September 1984, the members of the Board of Directors of NMIC, namely,
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from
DBP or PNB.
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and Road
Construction Program in 1985 for a total contract price of P35,770,120. After computing the payments
already made by NMIC under the program and crediting the NMICs receivables from Hercon, Inc., the
latter found that NMIC still has an unpaid balance of P8,370,934.74. Hercon, Inc. made several demands
on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a
complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners
NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc. The case was docketed as Civil
Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.
RULING:
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced
when the corporation is just an alter ego of a person or of another corporation. For reasons of public
policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
Sarona v. National Labor Relations Commission has defined the scope of application of the doctrine of
piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend
a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
(Citation omitted.)
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of
DBP and PNB) should be held solidarily liable for using NMIC as alter ego. The RTC sustained the
allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it
concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB." The Court
of Appeals upheld such conclusion of the trial court. In other words, both the trial and appellate courts
relied on the alter ego theory when they disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego
theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of. (Emphases omitted.)
WARRIOR NOTES by: ATTY. BERNZ AMAGO
IV

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporations
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to
establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting
through the subsidiary in form and appearance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent corporations conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary
in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal
connection between the fraudulent conduct committed through the instrumentality of the subsidiary and
the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will have been treated unjustly by the defendants exercise of
control and improper use of the corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair
act of the corporation. The absence of any of these elements prevents piercing the corporate veil.
This Court finds that none of the tests has been satisfactorily met in this case.
Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of
NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC,
and (2) the alleged interlocking directorates of DBP, PNB and NMIC. Unfortunately, the conclusion of the
trial and appellate courts that the DBP and PNB fit the alter ego theory with respect to NMICs
transaction with HRCC on the premise of complete stock ownership and interlocking directorates
involved a quantum leap in logic and law exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of stocks of another corporation and their
interlocking directorates may serve as indicia of control, by themselves and without more, however, these
circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB
on the one hand and NMIC on the other hand, that will justify the puncturing of the latters corporate
cover. This Court has declared that "mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality." This Court has likewise ruled that the "existence of interlocking directors,
corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations."

WARRIOR NOTES by: ATTY. BERNZ AMAGO

IV