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G.R. No.

L-4420 May 19, 1952

CESAR REYES, ET ALS., plaintiffs-appellants,


vs.
MAX BLOUSE, ET ALS., defendants-appellees.

Reyes, Albert and Agcaoili for appellants.


Gibbs, Gibbs, Chuidian and Quasha for appellees.

BAUTISTA ANGELO, J.:

This is an action instituted by the plaintiffs as minority stockholders of the Laguna Tayabas Bus Co.
to restrain its Board of Directors composed of the defendants from carrying out a resolution
approved by approximately 92 per cent of the stockholders in a meeting held on July 30, 1947,
authorizing said Board of Directors to take the necessary steps to consolidate the properties and
franchises of the Laguna Tayabas Bus Co. with those of the Batangas Transportation Co. The
grounds on which plaintiffs predicate their action are:

1. That the proposed consolidation or merger of the two companies would be prejudicial to
the L.T.B. Co. and to the appellants in particular who do not own shares of stock of B.T. Co.
in that:

a. During the last ten years prior to the last war, the dividends declared by L.T.B. Co. were
increasing, whereas the dividends declared by B.T. Co. were decreasing in amount.

b. In 1941, the shares of L.T.B. Co. cost P250 each in the market, whereas the shares of B.T.
Co. cost only P150 each.

c. A comparative study of the net gains of each company for the first six months of 1947
showed that the profits of the L.T.B. Co. exceeded B.T. Co. by approximately P67,000. As a
consequence, the shares of L.T.B. Co. were costing P360 a share, while the shares of the
B.T. Co. were quoted at only P200.

2. That the proposed consolidation or merger was illegal because the unanimous vote of the
stockholders was not secured and that the same was contrary to the spirit of our laws. (Rec.
on Appeal, pp. 19-20)

After the filing of the complaint, the court granted the writ of preliminary injunction prayed for therein
upon a nominal bond of P5,000, which later was increased to P10,000.

Defendants twice moved to dissolve the writ of preliminary injunction, but both motions were denied
by the lower court.

The defendants also asked for the dismissal of the complaint on the ground that the facts, therein
alleged do not constitute sufficient cost of action. In connection with the determination of this
incident, defendants submitted an affidavit of Max Blouse, President of the Laguna Tayabas Bus Co.,
outlining the steps to be taken by the Board of Directors in carrying out the merger or consolidation
authorized in the disputed resolution. the court however, deferred its resolution on the motion until
after trial on the merits. After due trial, at which both parties presented their respective evidence, the
lower court rendered its decision, the dispositive portion of which reads:

For all the foregoing considerations, the court is of the opinion and so holds that the
contoversial proposed acts to be performed by the defendants, directors of the Laguna
Tayabas Bus Co., are with in the authority granted under Section 28 of the Corporation
Law. The complaint, therefore, is dismissed and the preliminary injunction is hereby lifted
without pronouncement as to costs. (Record on Appeal, p. 182)

On the motion of the plaintiffs, the court a quo revived the writ of preliminary injunction which was
dissolved in its decision above mentioned and maintained the status quo of the case pending appeal
upon a new indemnity bond of P30,000, which was subsequently increased to P50,000.

The case is now before this Court on appeal interposed by the plaintiffs who impute six errors to the
lower court.

The principal issue involved in this appeal is whether the real purpose of the disputed resolution is
the merger or consolidation of the properties and franchises of the Laguna Tayabas Bus Co. with
those of the Batangas Transportation Co. within the meaning of the law, and in the affirmative case,
whether said merger or consolidation can be carried out under the law now existing and in force in
the Philippines. On one hand counsel for plaintiffs contends that its real purpose is to effect a merger
or consolidation, and as such there is no law in the Philippines under which it may properly be
carried out; on the other hand, counsel for the defendants maintains the negative view, holding that it
is merely an exchange of properties sanctioned by our corporation law, as amended, and that even if
it be considered as a consolidation, the same can still be carried out under Commonwealth Act No.
146, section 20, otherwise known as the Public Service Law.

The disputed resolution, which was approved on July 20, 1947, at a special meeting held by the
stock holders of the Laguna Tayabas Bus Co. reads as follows:

Resolved that the Board of Directors of the Laguna Tayabas Bus Company, be as it hereby
is, authorized to take the necessary steps to consolidate the properties and franchises of the
corporation with those of the Batangas Transportation Company under a single corporation
by the organization of a new corporation and to dispose to such new corporation all the
properties and franchises of the corporation in return for stock of the new corporation, or by
the exchange of stock, and/or through such other means as may be deemed most advisable
by the Board of Directors.

It should be noted that under the above resolution, the Board of Directors is charged with the
authority to take the necessary steps to consolidate the properties and franchises of the Laguna
Tayabas Bus Co. with those of the Batangas Transportation Co. under a new corporation in return
for stock of the new corporation, or by exchange of stock, and/or through such other means as may
be deemed most advisable by the Board of Directors. The way and manner the consolidation shall
be effected is, therefore, left to the discretion of the Board of Directors. In pursuance of this broad
authority, the Board of Directors acted and the steps it has taken having in view the interest of both
corporations are outlined in the affidavit attached to the memorandum submitted to the court by Max
Blouse, president of the two corporations above mentioned. The substance of this affidavit is; that
both corporations have passed similar resolutions authorizing the Board of Directors to take such
steps as may be necessary to effect the consolidation; that the Board of Directors of the Laguna
Tayabas Bus Co. has decided to transfer its assets, franchises and other properties to the new
corporation, from which shall be excluded the claims that it has against the United States Army and
the cash it has received from it for the use and commandering of its busses and other stock and
equipment during the war; that the Laguna Tayabas Bus Co., will not transfer any liabilities to the
new corporation; and that said company will not be dissolved but will continue existing, although not
operating, until the stockholders decide to dissolve the same.

It is apparent that the purpose of the resolution is not to dissolve the Laguna Tayabas Bus Co. but
merely to transfer its assets to a new corporation in exchange for its corporation stock. This intent is
clearly deducible from the provision that the Laguna Tayabas Bus Co. will not be dissolved but will
continue existing until its stockholders decide to dissolve the same. This comes squarely within the
purview of section 28 of the corporation may sell, exchange, lease or otherwise dispose of all its
property and assets, including its good will, upon such terms and conditions as its Board of Directors
may deem expedient when authorized by the affirmative vote of the shareholders holding at least 2/3
of the voting power. The words "or other wise disposed of" is very broad and in a sense covers a
merger or consolidation. The action of the corporation was taken having in view this provision of our
corporation law and in our opinion the corporation has acted correctly.

But appellants contend that the disputed resolution calls for a real merger or consolidation in the
sense and in the manner said terms are intended and understood under the law and authorities of
the United States, citing in support of their contention a long line of American authorities, and that
view the resolution in that light, the same cannot come within the purview of section 28__ of our
corporation law, as claimed by appellees. But even if we view the resolution in the light of the
American authorities, we are of the opinion that the transaction called for therein cannot be
considered, strickly speaking, as a merger or consolidation of the two corporations because, under
said authorities, a merger implies necessarily the termination or cessation of the merged
corporations and not merely a merger of their properties and assets. This situation does not here
obtain. The two corporations will not lose their corporate existence or personality, or at least the
Laguna Tayabas Bus Co., but will continue to exist even after the consolidation. In other words, what
is intended by the resolution is merely a consolidation of properties and assets, to be managed and
operated by a new corporation, and not a merger of the corporations themselves.

Granting arguendo that the disputed resolution has really the intention and the purpose of carrying
out the merger or consolidation both of the assets and properties of the two corporations as well as
of the two corporations themselves in the true sense of the word, or in the light of the American
authorities, still we believe that this can be carried out in this jurisdiction in the light of our Public
Service Law. Thus, section 20(g) of Commonwealth Act No. 146, as amended, prohibits any public
service operators, unless with the approval of the Public Service Commission, "to sell, alienate,
mortgage, encumber or lease its property, franchises, certificates, privileges, or rights, or any part
thereof, or merge or consolidate its property, franchises, privileges or rights or any part thereof, with
those of any other public service". This law speaks of merger or consolidation of public service
engaged in land transportation. It does not impose any qualification except that it shall be done with
the approval of the Public Service Commission. There is no doubt that the intended merger or
consolidation comes within the purview of this legal provision.

The claim that the merger or consolidation of two land transportation companies cannot be carried
out in this jurisdiction because it is prohibited by Act No. 2772, is untenable in the light of the very
provisions of said Act. A careful analysis of said act will show that it only regulates the merger or
consolidation of railroad companies, or of a railroad company with any other carrier by land or water.
Said Act does not apply to the merger or consolidation of two corporations exclusively engaged in
land transportation. To extend the meaning and scope of said Act 2772 to the merger or
consolidation of land carries would be to render nugatory the provisions of the Public Service Law,
which effect cannot be implied because the latter law (1936) is of more recent enactment than the
former (1918). As to how the merger or consolidation shall be carried out, our corporation law
contains ample provisions to this effect (sections 17, 18 and 25). This law does not require that
there be an express legislative authority, or a unanimous consent of all stockholders, to effect a
merger or consolidation of two corporations.

Plaintiffs object to the use made by the lower court of the affidavit submitted by Max Blouse,
president of the merging corporations, in connection with the incident relative to the motion to
dismiss filed by the defendants to which affidavit no objection has been interposed by the plaintiffs
and for that reason that affidavit became part or the record. As said Affidavit was submitted with the
motion to dismiss and other exhibits presented by both parties for the consideration of the court, we
find no reason why the lower court should err in considering it in its decision and why it cannot now
be considered in this appeal. This action of the court was merely in line with the move of the parties
when they submitted for consideration the motion to dismiss filed by the defendants.

The remaining question to be determined refers to the claim that the proposed consolidation or
merger of the two corporations would be prejudicial to the Laguna Tayabas Bus Co. and to the
appellants in particular who do not own shares of stock of the Batangas Transportation Co. This is a
question of fact which much depends upon the evidence submitted by the parties. After weighing the
evidence, the lower court reached the conclusion that the merger would not be prejudicial or
disadvantageous to the appellants or to the stockholders of the Laguna Tayabas Bus Co. On this
point the court said: "The testimony of Max Blouse, who had founded both the Laguna Tayabas Bus
Co. and the Batangas Transportation Co., should be given consideration weight and credence not
only because of the position which he enjoys in both companies, but also because of his long
experience in the transportation business in this country. His opinion, therefore, insofar as he states
that the earnings of both companies should be about equal, in normal circumstances, is entitled to
more weight and credit than that of the plaintiffs".

To the foregoing we may add the following: the Laguna Tayabas Bus Co. and the Batangas
Transportation Co. are pre-war corporations organized in 1928 and 1918, respectively. They ceased
operating during the war. In April, 1945, they resumed operations, and pursuant to the authority
granted by the respective Board of Directors, the two companies were jointly operated under a single
management. In view of the success of this joint operation, it was strongly recommended that it be
continued and made permanent. For this purpose a meeting of the stockholders was called, and the
disputed resolution was approved. And this resolution was approved because the stockholders found
that with the consolidation, the two companies would enjoy the services of the same technical men,
would invest much less in the purchase of spare parts, would effect savings in running one machine
shop, instead of two, would employ less personel, and in general, both companies would effect a
substantial economy in men, materials and operation expenses. The merger or the consolidation has
been voted upon by two-thirds vote of the stockholders. Their action is decisive. They have acted
having in view only the best interests of both companies. It is not fair to allow a small minority to
undo or set at naught what they have done. The remedy of the appellants is to register their
objection in writing and demand payment of their shares from the corporation as provided for in
section 28 of the corporation law.

Wherefore, the decision is hereby affirmed, with cost against appellants.


[G.R. No. L-11528. March 15, 1918. ]

MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.) , Plaintiff-Appellant, v.
JEAN M. POIZAT, Defendant-Appellee.

Vicente Rodriguez for Appellant.

A.J. Burke for Appellee.

SYLLABUS

1. CORPORATIONS; SUBSCRIPTION TO CAPITAL STOCK. A stock subscription is a contract between the


corporation and the subscriber, and courts will enforce it for or against either. No express promise to pay is
necessary to make the subscriber liable.

2. ID.; ID.; REMEDIES FOR ENFORCEMENT OF SUBSCRIPTION FOR STOCK. The corporation has two
remedies against the subscriber to the corporate shares, namely (1) to sell the stock for the account of the
delinquent subscriber, and (2) to bring a legal action against him for the amount due.

3. ID.; ID.; ACTION TO RECOVER STOCK SUBSCRIPTION. The provisions of section 38 to 48, inclusive, of
the Corporation Law are applicable only where the directors of a corporation intend to subject the stock of
the delinquent subscriber to sale in order to enforce payment of the subscription. They have no application
in case a legal action is brought to recover upon the stock subscription.

4. ID.; ID.; ID.; INSOLVENCY OF CORPORATION. When insolvency supervenes upon a corporation and the
court assumes jurisdiction demand, and are at once recoverable in an action instituted by the assignee in
insolvency.

5. ID.; ID.; RELEASE OF SUBSCRIBER. A corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares; and any agreement to this effect is invalid.

DECISION

STREET, J. :

From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as
assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the
defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of
said company. It appears that the corporation in question was originally organized by several residents of
the city of Manila, where the company had its principal place of business, with a capital of P50,000, divided
into 500 shares. The defendant subscriber for 20 shares of the stock of the company, and paid in upon his
subscription the sum of P500, the par value of 5 shares. The action was brought to recover the amount
subscribed upon the remaining shares.

It appears that the defendant was a stockholder in the company from the inception of the enterprise, and for
sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all
subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and
another 15 shares owned by Jose R. Infante.

Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of the
stock was represented. Upon this occasion two resolutions, important to be here noted, were adopted. The
first was a proposal that the directors, or shareholders, of the company should make good by new
subscription, in proportion to their respective holdings, 15 shares which had been surrendered in Infante. It
seems that this shareholder had already paid 25 per cent of his subscription upon 20 shares, leaving 15
shares unpaid for, and an understanding had been reached by him and the management by which he was to
be released from the obligation of his subscription, it being understood that what he had already paid should
not be refunded. Accordingly the directors present at this meeting subscribed P1,200 toward taking up his
shares, leaving a deficiency of P300 to be recovered by voluntary subscription from stockholders not present
at the meeting.

The other proposition was to the effect that Juan [Jean] M. Poizat, who was absent, should be required to
pay the amount of his subscription upon the 15 shares for which he was still indebted to the company. The
resolution further provided that, in case he should refuse to make such payment, the management of the
corporation should be authorized to undertake judicial proceedings against him. When notification of this
resolution reached Poizat through the mail it evoked from him a manifestation of surprise and pain, which
found expression in a letter written by him a reply, dated July 27, 1914, and addressed to Velasco, as
treasurer and administrator. In this letter Poizat states that he had been given to understand by some
member of the board of directors that he was to be relieved from his subscription upon the terms conceded
to Infante; and he added: jgc:chanrobles.com .ph

"My desire to be relieved from the payment of the remaining 75 per cent arises from the poor opinion which
I entertain of the business and the faint hope of ever recovering any money invested. In consequence, I
prefer to lose the whole of the 25 per cent I have already paid rather than to continue investing more money
in what I consider to be a ruinous proposition." cralaw virtua1aw library

Within a short while the unfavorable opinion entertained by Poizat as to the prospect of the company was
found to be fully justified, as the company soon went into voluntary insolvency, Velasco being named as the
assignee. He qualified at once by giving bond, and was duly inducted into the office of assignee upon
November 25, by virtue of a formal transfer executed by the clerk in pursuance of section 32 of Act No.
1956.

The answer of the defendant consisted of a general denial and a so-called special defense, consisting of a
concatenation of statements more appropriate for a demurrer than as material for a special defense. The
principal contention is that the call made by the board of directors of the company on July 13, 1914, was not
made pursuant to the requirements of sections 37 and 38 of the Corporation Law (Act No. 1459), and in
particular that the action was instituted before the expiration of the 30 days specified in section 38.

At the hearing of the Court of First Instance, judgment was rendered in favor of the defendant, and the
complaint was dismissed. From this action the plaintiff has appealed.

We think that Poizat is liable upon this subscription. A stock subscription is a contract between the
corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is
a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does not
require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of
the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the Corporation Law clearly recognizes that a
stock subscription is a subsisting liability from the time the subscription is made, since it requires the
subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of
the corporation. The subscriber is a much bound to pay the amount of the share subscriber by him as he
would be to pay any other debt, and the right of the company to demand payment is no less incontestable.

The provisions of the Corporation Law (Act No. 1459) give recognition to two remedies for the enforcement
of stock subscriptions. The first and most special remedy given by the statute consists in permitting the
corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber.
In this case the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be
followed. The other remedy is by action in court, concerning which we find in section 49 the following
provision:jgc:chanroble s.com.ph

"Nothing in this Act shall prevent the directors from collecting, by action in any court of proper jurisdiction,
the amount due on any unpaid subscription, together with accrued interest and costs and expenses
incurred."cralaw virtua1aw library

It is generally accepted doctrine that the statutory right to sell the subscribers stock is merely a remedy in
addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by
action exists even though no express mention thereof is made in the statute. (Instone v. Frankfort Bridge
Co., 2 Bibb [Ky. ], 576; 5 Am. Dec., 638.)
No attempt is made in the Corporation Law to define the precise conditions under which an action may be
maintained upon a stock subscription, as such conditions should be determined with reference to the rules
governing contract liability in general; and where it appears as in this case that a matured stock subscription
is unpaid, none of the provisions contained in sections 38 to 48, inclusive, of Act No. 1459 can be permitted
to obstruct or impede the action to recover thereon. By virtue of the first subsection of section 36 of the
Insolvency Law (Act No. 1956) the assignee of the insolvent corporation succeeds to all the corporate rights
of action vested in the corporation prior to its insolvency; and the assignee therefore has the same freedom
with respect to suing upon a stock subscription as the directors themselves would have had under section 49
above cited.

But there is another reason why the present plaintiff must prevail in this case, even supposing that the
failure of the directors to comply with the requirements of the provisions of sections 38 to 48 , inclusive, of
Act No. 1459 might have been an obstacle to a recovery by the corporation itself. That reason is this: When
insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid stock
subscriptions become payable on demand, and are at once recoverable in an action instituted by the
assignee or receiver appointed by the court. This rule apparently had its origin in a recognition of the
principle that a court of equity, having jurisdiction of the insolvency proceedings, could, if necessary, make
the cale itself, in its capacity as successor to the powers exercised by the board of directors of the defunct
company. Later a further rule gained recognition to the effect that the receiver or assignee, in an action
instituted by proper authority, could himself proceed to collect the subscription without the necessity of any
prior call whether. This conclusion is well supported by reference to the following authorities:jgc:chanrobles.com .ph

". . . a court of equity may enforce payment of stock subscriptions, although there have been no calls for
them by the company." (Hatch v. Dana, 101 U.S., 205.)

"It is again insisted that plaintiffs cannot recover because the suit was not preceded by a call or assessment
against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a
solvent going corporation to collect a subscription, and in certain suits provided by statute this would be
true; but it is now quite well settled that when the corporation becomes insolvent, with proceedings
instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balances on subscription." (Ross-Meehan Shoe F. Co. v. Southern
Malleable Iron Co., 72 Fed., 957, 960; see also Henry v. Vermillion etc. R. R. Co., 17 Ohio, 187, and
Thompson on Corporations, 2d ed., vol. 3, sec. 2697.)

It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the
failure of the officers of the corporation to perform their duty in making a call; and when the original mode
of making the call becomes impracticable, the obligation must be treated as due upon demand. If the
corporation were still an active entity, and this action should be dismissed for irregularity in the making of
the call, other steps could be taken by the board to cure the defect and another action taken by the board to
cure the defect and another action could be brought; but where the company is being wound up, no such
procedure would be practicable. The better doctrine is that when insolvency supervenes all unpaid
subscription become at once due and enforceable.

The printed bill of exceptions in this cause does not contain the original complaint, nor does it state who was
plaintiff therein or the date when the action was instituted. It may, however, be gathered from the papers
transmitted to this court that the action was originally instituted in the name of the Philippine Chemical
Product Co. (Ltd.) , prior to its insolvency, and that later the assignee was substituted as plaintiff and then
filed the amended complaint, with the permission of the court. Now, if we concede that no right of action
existed when the original complaint was filed, a right of action certainly existed when the assignee filed his
amended complaint; and as the bill of exceptions fails to show that any exception was taken to the action of
the court in allowing the amended complaint to be filled, no objection would be here entertained on the
ground that the action was prematurely brought.

The circumstance that the board of directors in their meeting of July 13, 1914, resolved to release Infante
from his obligation upon a subscription for 15 shares is in no wise prejudicial to the right of the corporation
or its assignee to recover from Poizat upon a subscription made by him. In releasing Infante the board
transcended its powers, and he no doubt still remained liable on such of his shares as were not taken up and
paid for by other persons.

"The general doctrine is that the corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation of paying for his shares, in whole or in part, . . ." (10 Cyc., 450.)
The suggestion contained in Poizats letter of July 27, 1914, to the effect that he understood that he was to
be relieved upon the same terms as Infante is, for the same reason, of no merit as matter of defense, even
if an agreement to that effect had been duly proved.

From what has been said it is manifest that the defendant is liable for P1,500, the amount of his subscription
upon the unpaid shares. Under section 36 of the Corporation Law he is also liable for interest at the lawful
rate from the date of his subscription, unless relieved from this liability by the by-laws of the company.
These by-laws showing the exact date upon which the subscription was made, though it is alleged in the
original complaint that the company was organized upon march 23, 1914. This allegation is not admitted in
the agreed statement of facts. The defendant, however, inferentially admits in his letter of July 27, 1914,
that this subscription had been made prior to July 13, 1914. It results that in our opinion he should be held
liable for interest from that date.

The judgment of the lower court is therefore reversed, and judgment will be rendered in favor of the plaintiff
and against the defendant for the sum of one thousand five hundred pesos (P1,500), with interest from July
13, 1914, and costs of both instances. So ordered.

G.R. No. L-61523 July 31, 1986

ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING CORPORATION and AURORA


CONSOLIDATED SECURITIES and INVESTMENT CORPORATION, petitioners,
vs.
THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C. ASUNCION (Court of First
Instance of Laguna, Branch II [Sta. Cruz]) and STOKELY VAN CAMP, INC., respondents.

Siguion Reyna, Montecillo & Ongsiako Law Offices for petitioners.

Bito, Misa & Lozada Law Offices for respondents.

GUTIERREZ, JR., J.:

This petition for certiorari and prohibition seeks to set aside the order of the Regional Trial Court of
Laguna which denied the petitioners' motion to dismiss on the ground that the reason relied upon by
them does not appear to be indubitable. Petitioners also seek to set aside the decision and
resolution of the Intermediate Appellate Court which respectively upheld the order of the trial court
and denied the petitioners' motion for reconsideration of the same.

On April 9, 1981, respondent Stokely Van Camp. Inc. (Stokely) filed a complaint against Banahaw
Milling Corporation (Banahaw), Antam Consolidated, Inc., Tambunting Trading Corporation
(Tambunting), Aurora Consolidated Securities and Investment Corporation, and United Coconut Oil
Mills, Inc. (Unicom) for collection of sum of money.

In its complaint, Stokely alleged: (1) that it is a corporation organized and existing under the laws of
the state of Indiana, U.S.A. and has its principal office at 941 North Meridian Street, Indianapolis,
Indiana, U.S.A., and one of its subdivisions "Capital City Product Company" (Capital City) has its
office in Columbus, Ohio, U.S.A.; (2) that Stokely and Capital City were not engaged in business in
the Philippines prior to the commencement of the suit so that Stokely is not licensed to do business
in this country and is not required to secure such license; (3) that on August 21, 1978, Capital City
and Coconut Oil Manufacturing (Phil.) Inc. (Comphil) with the latter acting through its broker Roths
child Brokerage Company, entered into a contract (No. RBS 3655) wherein Comphil undertook to
sell and deliver and Capital City agreed to buy 500 long tons of crude coconut oil to be delivered in
October/November 1978 at the c.i.f. price of US$0.30/1b. but Comphil failed to deliver the coconut
oil so that Capital City covered its coconut oil needs in the open market at a price substantially in
excess of the contract and sustained a loss of US$103,600; that to settle Capital City's loss under
the contract, the parties entered into a second contract (No. RBS 3738) on November 3, 1978
wherein Comphil undertook to buy and Capital City agreed to sell 500 long tons of coconut crude oil
under the same terms and conditions but at an increased c.i.f. price of US$0.3925/lb.; (4) that the
second contract states that "it is a wash out against RBS 3655" so that Comphil was supposed to
repurchase the undelivered coconut oil at US$0.3925 from Capital City by paying the latter the sum
of US$103,600.00 which is the same amount of loss that Capital City sustained under the first
contract; that Comphil again failed to pay said amount, so to settle Capital City's loss, it entered into
a third contract with Comphil on January 24, 1979 wherein the latter undertook to sell and deliver
and Capital City agreed to buy the same quantity of crude coconut oil to be delivered in April/May
1979 at the c.i.f. price of US$0.3425/lb.; (5) that the latter price was 9.25 cents/lb. or US$103,600 for
500 long tons below the then current market price of 43.2 cents/lb. and by delivering said quantity of
coconut oil to Capital City at the discounted price, Comphil was to have settled its US$103,600
liability to Capital City; (6) that Comphil failed to deliver the coconut oil so Capital City notified the
former that it was in default; (7) that Capital City sustained damages in the amount of US$175,000;
and (8) that after repeated demands from Comphil to pay the said amount, the latter still refuses to
pay the same.

Respondent Stokely further prayed that a writ of attachment be issued against any and all the
properties of the petitioners in an amount sufficient to satisfy any lien of judgment that the
respondent may obtain in its action. In support of this provisional remedy and of its cause of action
against the rest of the petitioners other than Comphil, the respondent alleged the following: 1) After
demands were made by respondent on Comphil, the Tambuntings ceased to be directors and
officers of Comphil and were replaced by their five employees, who were managers of Tambunting's
pawnshops and said employees caused the name of Comphil to be changed to "Banahaw Milling
Corporation" and authorized one of the Tambuntings, Antonio P. Tambunting, Jr., who was at that
time neither a director nor officer of Banahaw to sell its oil mill; 2) Unicom has taken over the entire
operations and assets of Banahaw because the entire and outstanding capital stock of the latter was
sold to the former; 3) ALL of the issued and outstanding capital stock of Comphil are owned by the
Tambuntings who were the directors and officers of Comphil and who were the ones who benefited
from the sale of Banahaw's assets or shares to Unicorn; 4) ALL of the petitioners evaded their
obligation to respondent by the devious scheme of using Tambunting employees to replace the
Tambuntings in the management of Banahaw and disposing of the oil mill of Banahaw or their entire
interests to Unicorn; and 5) Respondent has reasonable cause to believe and does believe that the
coconut oil milk which is the only substantial asset of Banahaw is about to be sold or removed so
that unless prevented by the Court there will probably be no assets of Banahaw to satisfy its claim.

On April 10, 1981, the trial court ordered the issuance of a writ of attachment in favor of the
respondent upon the latter's deposit of a bond in the amount of P l,285,000.00.

On June 3, 1981, the respondent filed a motion for reconsideration to reduce the attachment bond.
Attached to this motion is an affidavit by the assistant attorney of the respondent's counsel stating
that he has verified with the records of Comphil and the Securities and Exchange Commission
(SEC) the facts he alleged in the prayer for the attachment order.
On June 11, 1981, the petitioners filed a motion to dismiss the complaint on the ground that the
respondent, being a foreign corporation not licensed to do business in the Philippines, has no
personality to maintain the instant suit.

After the respondent had filed an opposition to the motion to dismiss and petitioner has opposed the
attachment and the motion to reduce the attachment bond, the trial court issued an order, dated
August 10, 1981, reducing the attachment bond to P 500,000.00 and denying the motion to dismiss
by petitioners on the ground that the reason cited therein does not appear to be indubitable.

Petitioners filed a petition for certiorari before the Indianapolis intermediate Appellate Court.

On June 14, 1982, the appellate court dismissed the petition stating that the respondent judge did
not commit any grave abuse of discretion in deferring the petitioners' motion to dismiss because the
said judge is not yet satisfied that he has the necessary facts which would permit him to make a
judicious resolution. The appellate court further ruled that in another case entitled United Coconut Oil
Mills, Inc. and Banahaw Milling Corporation v. Hon. Maximiano C. Asuncion and Stokely Van Camp,
Inc. where the facts and issues raised therein are intrinsically the same as in the case at bar, it has
already denied the petition for certiorari filed by Unicom and Banahaw for lack of merit and the same
was upheld by the Supreme Court.

Petitioners filed a motion for reconsideration but the same was denied. Hence, they filed this instant
petition for certiorari and prohibition with prayer for temporary restraining order, questioning the
propriety of the appellate court's decision in: a) affirming the deferment of the resolution on petitioner'
motion to dismiss; and b) denying the motion to set, aside the order of attachment.

With regards to the first question, petitioners maintain that the appellate court erred in denying their
motion to dismiss since the ground relied upon by them is clear and indubitable, that is, that the
respondent has no personality to sue. Petitioners argue that to maintain the suit filed with the trial
court, the respondent should have secured the requisite license to do business in the Philippines
because, in fact, it is doing business here. Petitioners anchor their argument that the respondent is a
foreign corporation doing business in the Philippines on the fact that by the respondent's own
allegations, it has participated in three transactions, either as a seller or buyer, which are by their
nature, in the pursuit of the purpose and object for which it was organized. Petitioners further argue
that the test of whether one is doing business or not is "whether there is continuity of transactions
which are in the pursuance of the normal business of the corporation" and that the transactions
entered into by respondent undoubtedly fall within this category.

We reject the petitioners' arguments.

In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. (138 SCRA 118,127-128), we stated:

There is no general rule or governing principle laid down as to what


constitutes'doing'or'engaging in' or 'transacting business in the Philippines. Each
case must be judged in the Light of its peculiar circumstance (Mentholatum Co. v.
Mangaliman, 72 Phil.524). Thus, a foreign corporation with a settling agent in the
Philippines which issues twelve marine policies covering different shipments to the
Philippines (General Corporation of the Philippines v. Union Insurance Society of
Canton, Ltd., 87 Phil. 313) and a foreign corporation which had been collecting
premiums on outstanding policies (Manufacturing Life Insurance Co., v. Meer, 89
Phil. 351) were regarded as doing business here. The acts of these corporations
should be distinguished from a single or isolated business transaction or occasional,
incidental and casual transactions which do not come within the meaning of the law.
Where a single act or transaction , however, is not merely incidental or casual but
indicates the foreign corporation's intention to do other business in the Philippines,
said single act or transaction constitutes 'doing' or 'engaging in' or 'transacting'
business in the Philippines. (Far East International Import and Export Corporation v.
Nankai Kogyo, Co., 6 SCRA 725).

In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:

xxx xxx xxx

...The true test, however, seems to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it warning-organized or
whether it has substantially was retired from it and turned it over to another. (Traction
Cos. v. Collectors of Int. Revenue [CCA., Ohio], 223 F. 984, 987.) The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or workers or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its
organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77,
Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111;
Automotive Material Co. v. American Standard Metal Products Corp., 158 N.E. 698,
703, 327 111. 367.) '

In the case at bar, the transactions entered into by the respondent with the petitioners are not a
series of commercial dealings which signify an intent on the part of the respondent to do business in
the Philippines but constitute an isolated one which does not fall under the category of "doing
business." The records show that the only reason why the respondent entered into the second and
third transactions with the petitioners was because it wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude coconut oil under the first transaction and in order to
give the latter a chance to make good on their obligation. Instead of making an outright demand on
the petitioners, the respondent opted to try to push through with the transaction to recover the
amount of US$103,600.00 it lost. This explains why in the second transaction, the petitioners were
supposed to buy back the crude coconut oil they should have delivered to the respondent in an
amount which will earn the latter a profit of US$103,600.00. When this failed the third transaction
was entered into by the parties whereby the petitioners were supposed to sell crude coconut oil to
the respondent at a discounted rate, the total amount of such discount being US$103,600.00.
Unfortunately, the petitioners failed to deliver again, prompting the respondent to file the suit below.

From these facts alone, it can be deduced that in reality, there was only one agreement between the
petitioners and the respondent and that was the delivery by the former of 500 long tons of crude
coconut oil to the latter, who in turn, must pay the corresponding price for the same. The three
seemingly different transactions were entered into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as a foreign corporation doing business in the
Philippines. Thus, the trial court, and the appellate court did not err in denying the petitioners' motion
to dismiss not only because the ground thereof does not appear to be indubitable but because the
respondent, being a foreign corporation not doing business in the Philippines, does not need to
obtain a license to do business in order to have the capacity to sue. As we have held in Eastboard
Navigation Ltd. v. Juan Ysmael and Co., Inc. (102 Phil. 1, 18):

xxx xxx xxx

(d) While plaintiff is a foreign corporation without license to transact business in the
Philippines, it does not follow that it has no capacity to bring the present action. Such
license is ' not necessary because it is not engaged in business in the Philippines. In
fact, the transaction herein involved is the first business undertaken by plaintiff in the
Philippines, although on a previous occasion plaintiff's vessel was chartered by the
National Rice and Corn Corporation to carry rice cargo from abroad to the
Philippines. These two isolated transactions do not constitute engaging in business
in the Philippines within the purview of Sections 68 and 69 of the Corporation Law so
as to bar plaintiff from seeking redress in our courts (Marshall-Wells Co. v. Henry W.
Elser & Co. 49 Phil. 70; Pacific Vegetable Oil Corporation v. Angel 0. Singson, G.R.
No. L-7917, April 29, 1955; also cited in Facilities Management Corporation v. De la
Osa, 89 SCRA 131, 138).

We agree with the respondent that it is a common ploy of defaulting local companies which are sued
by unlicensed foreign companies not engaged in business in the Philippines to invoke lack of
capacity to sue. The respondent cites decisions from 1907 to 1957 recognizing and rejecting the
improper use of this procedural tactic. (Damfschieffs Rhedered Union v. Cia Trans-atlantica, 8 Phil.
766 11907]; Marshall-Wells Co. v. Henry W. Elser & Co., 49 Phil. 70 [1924]; Western Equipment Co.
v. Reyes, 51 Phil. 115 [1927]; Central Republic Bank v. Bustamante, 71 Phil. 359 [1941]; Pacific
Vegetable Oil Co. v. Singson, 96 Phil.-986 [1955]; Eastboard Navigation, Ltd. v. Juan Ysmael and
Co., Inc., 102 Phil. 1 [1957]). The doctrine of lack of capacity to sue based on failure to first acquire a
local license is based on considerations of sound public policy. It intended to favor domestic
corporations who enter was never into solitary transactions with unwary foreign firms and then
repudiate their obligations simply because the latter are not licensed to do business in this country.
The petitioners in this case are engaged in the exportation of coconut oil, an export item so vital in
our country's economy. They filed this petition on the ground that Stokely is an unlicensed foreign
corporation without a bare allegation or showing that their defenses in the collection case are valid
and meritorious. We cannot fault the two courts below for acting as they did.

Anent the second issue they raise, the petitioners contend that the trial court should not have issued
the order of attachment and the appellate court should not have affirmed the same because the
verification in support of the prayer for attachment is insufficient. They state that the person who
made such verification does not personally know the facts relied upon for the issuance of the
attachment order. Petitioners capitalize on the fact that Renato Calma, the assistant attorney of Bito,
Misa, and Lozada, counsel for respondent, stated in his verification that "he has read the foregoing
complaint and that according to his information and belief the allegations therein contained are true
and correct."

The above contention deserves scant consideration.

We rule that the defect in the original verification was cured when Renato Calma subsequently
executed an affidavit to the effect that the allegations he made in support of the prayer for
attachment were verified by him from the records of Comphil and the Securities and Exchange
Commission. Moreover, petitioner had the opportunity to oppose the issuance of the writ.
As to the merit of the attachment order itself, we find that the allegations in the respondent's
complaint satisfactorily justify the issuance of said order.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is DISMISSED for lack of merit. The
Temporary Restraining Order dated February 2, 1983 is hereby DISSOLVED. Costs against the
petitioners.

SO ORDERED.

G.R. No. L-44944 August 9, 1985

TOP-WELD MANUFACTURING, INC., petitioner,


vs.
ECED, S.A., IRTI, S.A., EUTECTIC CORPORATION, VICTOR C. GAERLAN, and THE HON.
COURT OF APPEALS, respondents.

Angara, Conception, Regula & Cruz Law Office for petitioner.

Alonzo Q. Ancheta for respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision of the Court of Appeals now Intermediate Appellate Court
annulling portions of the orders issued by Judge Gregorio Pineda of the Court of First Instance of
Rizal.

Petitioner Top-weld Manufacturing, Inc. (Top-weld) is a Philippine corporation engaged in the


business of manufacturing and selling welding supplies and equipment.

In pursuance of its business, the petitioner entered into separate contracts with two different foreign
entities. One contract, entitled a "LICENSE AND TECHNICAL ASSISTANCE AGREEMENT" and
dated January 2, 1972 was entered into with IRTI, S.A., (IRTI), a corporation organized and existing
under the laws of Switzerland with principal office at Fribourg, Switzerland. By virtue of this
agreement, the petitioner was constituted a licensee of IRTI to manufacture welding products under
certain specifications, with raw materials to be purchased by the former from suppliers designated by
IRTI, for a period of three (3) years or up to January 1, 1975. This contract was later extended up to
December 31, 1975 in a subsequent agreement.

The other contract was a "DISTRIBUTOR AGREEMENT" dated January 1, 1975 entered into with
ECED, S.A., (ECED), a company organized and existing under the laws of Panama with principal
office at Apartado 1903, Panama I, City of Panama. Under this agreement, the petitioner was
designated as ECED's distributor in the Philippines of certain welding products and equipment. By its
terms, the contract was to remain effective until terminated by either party upon giving six (6) months
or 180 days written notice to the other.

Upon learning that the two foreign entities were negotiating with another group to replace the
petitioner as their licensee and distributor, the latter instituted on June 16, 1975, Civil Case No.
21409 against IRTI, ECED another corporation named EUTECTIC Corporation, organized under the
laws of the State of New York, U.S.A., and an individual named Victor C. Gaerlan, a Filipino citizen
alleged to be the representative and employee of these three corporations.

In its complaint, the petitioner sought the issuance of a writ of preliminary injunction to restrain the
corporations from negotiating with third persons or from actually carrying out the transfer of its
distributorship and franchising rights, It also asked the court to prohibit the defendants from
terminating their contracts with the petitioner, and if said termination had already been
accomplished, from putting into effect and carrying out the terms and the consequences of said
termination until after good faith negotiations on existing contracts between them had been carried
out and completed.

On June 17, 1975, the lower court issued a restraining order against the corporation pending the
hearing on the issuance of a writ of preliminary injunction.

On July 25,1975, IRTI and ECED wrote Top-weld separate notices about the termination of their
respective contracts.

On September 3,1975, Top-weld filed an amended complaint together with a supplemental complaint
which embodied a new application for a preliminary mandatory injunction to compel ECED to ship
and deliver various items covered by the distributorship contract, and to prohibit the corporations
from importing into the Philippines directly or indirectly any EUTECTIC materials, supplies or
equipment except to and/or through the petitioner.

Among others, the petitioner invoked the provisions of No. 9. Section 4 of Republic Act 5455 on alien
firms doing business in the Philippines.

The corporations filed their answers setting up as affirmative defenses violations of the contracts
allegedly committed by the petitioner consisting of the following:

a) Failure to pay respondent IRTI the stipulated 3% royalties;

b) The use of other wrong materials in the manufacture of welding products bearing
the Eutectic label;

c) The use of the wrong core wire in the manufacture of Eutectic 680;

d) The use of obsolete and antiquated equipment;

e) Rebranding of other manufactured welding products or non-Eutectic products with


the Eutectic label;

f) The manufacture and sale of inferior and substandard quality products bearing the
Eutectic label resulting in numerous complaints from customers such as Saulog
Transit and Manila Mining Corporation;

g) The falsification of ECED pro-forma invoices in order to procure Eutectic goods at


lower prices;
h) The illegal channeling of sales of Eutectic products through the Que Pe Hardware
Store; and

i) The sale of welding products bearing brands other than Eutectic, such as Fujiweld,
and even Eutectic products not included in its authority and for which it has never
been supplied by respondent EUTECTIC with the raw materials for its manufacture
nor with finished products thereof.

The respondent corporation further alleged that Section 4 (9) of R.A. No. 5455 cannot possibly apply
to the instant case because:

a) With the violations of the contracts by the plaintiff and "other just causes" earlier
mentioned, the defendants IRTI and ECED are fully justified in terminating them
without being obliged to pay any compensation nor to reimburse plaintiff of
investment or other expenses;

b) In fact, the defendants have sent written notices dated July 25, 1975 of the
termination of their respective agreements with plaintiffs; and

c) Since no written certificate was applied for nor obtained by defendant entities from
the Board of Investments, the latter cannot legally require of them compliance with
No. 9, Section 4, R.A. No, 5455.

On October 9, 1975, the trial court issued an order granting the petitioner's application for
preliminary injunction embodied in the amended complaint and its application for a writ of mandatory
preliminary injunction embodied in the supplemental complaint,

The corporations filed with the trial court a motion for reconsideration.

On December 18, 1975, the trial court issued another order denying the said motion for
reconsideration with respect to the lifting of the writ of preliminary injunction but granting the prayer
for the lifting of the writ of preliminary mandatory injunction.

The case was elevated to the Court of Appeals on a petition for certiorari with preliminary injunction
filed by the corporations. In setting aside the questioned orders, the appelate court held that:

The determinative question defined by the contentions of the parties in this case is,
whether or not TOP-WELD may rightfully invoke the provisions of Sec. 4, Republic
Act No. 5455 to enjoin petitioner corporations from terminating the subject licensing
and distributorship contracts they have with TOP-WELD. The pertinent portion of the
provision reads:

Section 4. Licenses to do business.-No alien, and no firm,


association, partnership, corporation, or any other form of business
organization formed, organized, chartered or existing under any laws
other than those of the Philippines, or which is not a Philippine
National, or more than thirty per cent of the outstanding capital of
which is owned or controlled by aliens shall do business or engage in
any economic activity in alien the Philippines, or be registered,
licensed, or permitted by the Securities and Exchange Commission,
or by any other bureau, office, agency, political subdivision, or
instrumentality of the government, to do business, or engage in an
economic activity in the Philippines without first securing a written
certificate from the Board of Investments to the effect ... .

Upon granting said certificate, the Board shall impose the following
requirements on the alien or the firm, association, partnership,
corporation, or other form of business organization that is not
organized or existing under the laws of the Philippines. ... .

(9) Not to terminate any franchise, licensing or other agreement that


applicant may have with a resident of the Philippines, authorizing the
latter to assemble, manufacture or sell within the Philippines the
products of the applicant, except for violation thereof or other just
cause and upon payment of compensation and reimbursement and
other expenses incurred by the licensee in developing a market for
the said products; Provided. however, That in case of disagreement,
the amount of compensation or reimbursement shall be determined
by the court where the licensee is domiciled or has its principal office
who shall require the applicant to file a bond in such amount as, in its
opinion, is sufficient for this purpose.

By the licensing and distributorship arrangements had with TOPWELD, there is no


doubt that IRTI and ECED were doing business and engaging in economic activity in
the Philippines (see Sections 1 and 4, R.A. No. 5455), as a prerequisite to which they
should have first secured a written certificate from the Board of Investments. It is not
disputed, however, that IRTI and ECED have not secured such written certificate in
consequence of which there was no occasion for the Board of Investments to impose
the requirements prescribed in the aforequoted provisions of Sec. 4, R.A. No. 5455,
among which is that the grantee of the certificate shall not terminate any franchise,
licensing or other agreement it may have with a resident of the Philippines for the
assembly, manufacture or sale within the country of the products of said grantee,
except for violation thereof or other just cause and upon payment of compensation
and reimbursement and other expenses incurred by the resident licensee in
developing a market for said products. In this case, while the parties are in dispute as
to the existence of a violation of the contracts involved or of other just cause, there is
no quarrel over the fact that IRTI and ECED have not paid, and do not intend to pay,
such compensation or reimbursement contemplated in the law, maintaining that
TOPWELD is not entitled to the same.

Under the particular situation obtaining in this case, this Court is of the opinion that
petitioner corporations are not bound by the requirement on termination, and
TOPWELD cannot invoke the same against the former. The reason is not simply
because IRTI and ECED, by failing to get the required certificate from the Board of
Investment, were not made subject by the said Board to the requirement on
termination, as maintained by petitioners. To impose such requirement on petitioners
would be to perpetuate, and force them to remain in, an unlawful business operation.
Moreover, it was incumbent upon TOPWELD to know whether or not IRTI and ECED
were properly authorized to engage into the licensing and distributorship
agreements. At the very least TOPWELD has not come to court with clear hands,
and cannot be heard to invoke the equitable remedy of injunction to perpetuate an
illegal situation it voluntarily helped bring about.

If only for the foregoing considerations, there appears a grave abuse of discretion on
the part of respondent Judge in issuing the orders complained of.

Petitioner, TOP-WELD filed this present petition putting in issue the following assignments of errors:

Respondent Court of Appeals committed a grave error when it held that a foreign
corporation, which is admittedly 'doing business in the Philippines' but which has
failed to secure the required certificate and license to do business in the Philippines,
is not subject to the stricture imposed by Sec. 4 (9) of Republic Act No. 5455.

II

Respondent Court of Appeals committed a grave error when it held that the failure of
petitioner to know at the outset whether or not respondents were properly authorized
to engage in business in the Philippines stops petitioner to invoke the protection of
Sec. 4 (9) of Republic Act No. 5455.

III

Respondent Court of Appeals committed a grave error when it held that petitioner
cannot invoke the remedy of injunction against respondents.

At the vortex of the controversy is the issue whether or not respondent corporations can be
considered as "doing business" in the Philippines and, therefore, subject to the provisions of R.A.
No. 5455. There is no dispute that respondents are foreign corporations not licensed to do business
in the Philippines. More important, however, there is no serious objection interposed by the
respondents as to their amenability to the jurisdiction of our courts.

There is no general rule or governing principle laid down as to what constitutes "doing" or engaging
in" or "transacting" business in the Philippines. Each case must be judged in the light of its peculiar
circumstances. (Mentholatum Co. V. Mangaliman, 72 Phil. 524). Thus, a foreign corporation with a
settling agent in the Philippines which issued twelve marine policies covering different shipments to
the Philippines (General Corporation of the Philippines v. Union Insurance Society of Canton, Ltd.,
87 Phil. 313) and a foreign corporation which had been collecting premiums on outstanding policies
(Manufacturing Life Insurance Co. v. Meer, 89 Phil. 351) were regarded as doing business here. The
acts of these corporations should be distinguished from a single or isolated business transaction or
occasional, incidental and casual transactions which do not come within the meaning of the law.
Where a single act or transaction, however, is not merely incidental or casual but indicates the
foreign corporation's intention to do other business in the Philippines, said single act or transaction
constitutes "doing" or "engaging in" or "transacting" business in the Philippines. (Far East
International Import and Export Corporation v. Nankai Kogyo, Co., 6 SCRA 725).
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:

xxx xxx xxx

... The true test, however, seems to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another. (Traction
Cos. v. Collectors of Int. Revenue [C.C.A. Ohio], 223 F. 984, 987.) The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its
organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77,
Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111
Automotive Material Co. v. American Standard Metal Products Corp., 158 N.E. 698,
703, 327 111. 367.)

Judged by the foregoing standards, we agree with the Court of Appeals in considering the
respondents as "doing business" in the Philippines. When the respondents entered into the disputed
contracts with the petitioner, they were carrying out the purposes for which they were created, i.e. to
manufacture and market welding products and equipment. The terms and conditions of the contracts
as well as the respondents' conduct indicate that they established within our country a continuous
business, and not merely one of a temporary character. This fact is even more strengthened by the
admission of the respondents that they are negotiating with another group for the transfer of the
distributorship and franchising rights from the petitioner.

Respondents' acts enabled them to enter into the mainstream of our economic life in competition
with our local business interests. This necessarily brings them under the provisions of R.A. No. 5455.

The respondents contend that they should be exempted from the requirements of R.A. 5455
because the petitioner maintained an independent status during the existence of the disputed
contracts.

This may be true if the petitioner is an independent entity which buys and distributes products not
only of the petitioner but also of other manufacturers or transacts business in its name and for its
account and not in the name or for the account of the foreign principal.

A perusal of the agreements between the petitioner and the respondents shows that they are highly
restrictive in nature. The agreements provide in part the following terms:

xxx xxx xxx

10. No Sales in Territory by IRTI

IRTI shall not solicitor or cause or permit its employees, licensees or agents to solicit
or make any sales, directly or indirectly, of WELDING PRODUCTS within or to the
Philippines. IRTI agrees to refer to LICENSEE all product inquiries received by IRTI
for WELDING PRODUCTS destined for Philippines.

xxx xxx xxx


16. x x x x x x x x x

Restrictive Covenant

LICENSEE will not, directly or indirectly, without the written consent of IRTI at any
time during the continuance of this Agreement and for a period of two years after the
date of the termination of this Agreement, engage either directly or indirectly in the
business of selling products similar to said WELDING PRODUCTS, either as
principal, agent, employee or through stock or proprietary interests in a third part
entity.

xxx xxx xxx

RESTRICTI

VE COVENANT

6. DISTRIBUTOR shall not during the continuance of this agreement distribute


products of any other manufacturer or supplier in the Territory assigned to him, which
are similar to the Products.

Upon the termination of this agreement by either party, DISTRIBUTOR agrees not to
engage, directly or indirectly, in the commercialization, distribution and/or
manufacture of products competing with any EUTECTIC + CASTOLIN products
covered by this agreement, or of products likely to affect the sale of any EUTECTIC +
CASTOLIN products, either as principal, agent or employee in the Territory, this
prohibition to extend for a period of two (2) years from the date of termination, except
for the explicit purpose of selling any remaining Products still in DISTRIBUTOR's
possession on the date of termination of this agreement which sales shall not be
below the DISTRIBUTOR's pretermination selling price for such Products unless
such sale is to ECED or its nominee in which case Clause 19 hereof shall govern.

xxx xxx xxx

We can conclude that assuming the petitioner maintains an independent status, in essence it merely
extends to the Philippines the business of the foreign corporations.

On the basis of the foregoing, we uphold the appellate court's finding that "IRTI AND ECED were
doing business and engaging in economic activity in the Philippines ... as a prerequisite to which
they should have first secured a written certificate from the Board of Investments."

The respondent court, however, erred in holding that "IRTI and ECED have not secured such written
certificate in consequence of which there is no occasion for the Board of Investments to impose the
requirements prescribed in the aforequoted provisions of Sec. 4, R.A. No. 5455 ... ." To accept this
view would open the way for an interpretation that by doing business in the country without first
securing the required written certificate from the Board of Investments, a foreign corporation may
violate or disregard the safeguards which the law, by its provisions, seeks to establish.
We agree, however, that there is a more compelling reason behind the finding that the "corporations
are not bound by the requirement on termination, and TOP-WELD cannot invoke the same against
the former."

As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the contracts
entered into without first securing a license or certificate to do business in the Philippines. Neither
does it appear to intend to prevent the courts from enforcing contracts made in contravention of its
licensing provisions. There is no denying, though, that an "illegal situation," as the appellate court
has put it, was created when the parties voluntarily contracted without such license.

The parties are charged with knowledge of the existing law at the time they enter into the contract
and at the time it is to become operative. (Twiehaus v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227
SW 2d 98). Moreover, a person is presumed to be more knowledgeable about his own state law than
his alien or foreign contemporary. In this case, the record shows that, at least, petitioner had actual
knowledge of the applicability of R.A. No. 5455 at the time the contract was executed and at all times
thereafter. This conclusion is compelled by the fact that the same statute is now being propounded
by the petitioner to bolster its claim. We, therefore, sustain the appellate court's view that "it was
incumbent upon TOP-WELD to know whether or not IRTI and ECED were properly authorized to
engage in business in the Philippines when they entered into the licensing and distributorship
agreements." The very purpose of the law was circumvented and evaded when the petitioner
entered into said agreements despite the prohibition of R.A. No. 5455. The parties in this case being
equally guilty of violating R.A, No. 5455, they are in pari delicto, in which case it follows as a
consequence that petitioner is not entitled to the relief prayed for in this case.

In Bough v. Cantiveros (40 Phil. 210), the principle is laid down in these words: "The rule of pari
delicto is expressed in the maxims "ex dolo malo non eritur actio" and "in pari delicto potior est
conditio defedentis." The law will not aid either party to an illegal agreement. It leaves the parties
where it finds them."

No remedy could be afforded to the parties because of their presumptive knowledge that the
transaction was tainted with illegality. (Soriano v. Ong Hoo, 103 Phil. 829). Equity cannot lend its aid
to the enforcement of an alleged right claimed by virtue of an agreement entered into in
contravention of law.

Lastly, we come to the issue of "just cause" for the termination of the contracts or the alleged
violations of the contracts made by petitioner. Though properly ventilated below, this factual issue
was not determined by both the trial court and the appellate court.

The record shows that respondents, in opposing the injunction suit and alleging the violations of the
contracts, submitted and relied on their affidavits. The petitioner, however, to refute these charges,
submitted a "Reply to Opposition" which is neither verified nor supported by counter-affidavits. There
is no showing in the records before us whether oral testimony was presented by any of the parties or
whether the affiants were subjected to the test of cross-examination and if any, what was stated
during the oral testimony.

The burden of overcoming the responsive effect of the answer is upon the petitioner. He who alleges
a fact has the burden of proving it and a mere allegation is not evidence. (Legasca v. De Vera, 79
Phil. 376) Hearsay evidence alone may be insufficient to establish a fact in an injunction suit (Parker
v. Furlong, 62 P. 490) but, when no objection is made thereto, it is, like any other evidence, to be
considered and given the importance it deserves. (Smith v. Delaware & Atlantic Telegraph &
Telephone Co., 51 A 464). Although we should warn of the undesirability of issuing judgments solely
on the basis of the affidavits submitted, where as here, said affidavits are overwhelming,
uncontroverted by competent evidence and not inherently improbable, we are constrained to uphold
the allegations of the respondents regarding the multifarious violations of the contracts made by the
petitioner. Accordingly, we rule that there exists a just cause for respondents to move for the
termination of their contracts with the petitioner.

Moreover, the facts on record show that the "License and Technical Assistance Agreement" between
petitioner and respondent IRTI was extended only for a period of one year or to be precise, from
January 1, 1975 to December 31, 1975. The original injunction suit was brought in the court a quo in
June1975, the purpose being to stop the respondent from terminating the contract. This purpose
was realized when the court granted the injunction. By the time respondents' appeal was decided by
the Court of Appeals, it was already past the extended period. The dispute between the parties had
been rendered moot and academic. It should be stated that the courts be it the original trial court or
the appellate court have no power to make contracts for the parties. No court would be justified in
extending the life of the contracts, subject of this controversy, since that would do violence to the
basic principle that contracts must be the voluntary agreements of parties,

Parties can not be coerced to enter into a contract where no agreement is had between them as to
the principal terms and condition of the contract (Republic v. Philippine Long Distance Telephone
Co., 26 SCRA 620).

With the above observations, there is nothing more for this Court to do except to dismiss the petition.

ACCORDINGLY, the petition is hereby dismissed. The appealed decision of the Court of Appeals is
AFFIRMED,

SO ORDERED.

G.R. No. L-20850 November 29, 1965

THE EDWARD J. NELL COMPANY, petitioner,


vs.
PACIFIC FARMS, INC., respondent.

Agrava & Agrava for petitioner.


Araneta, Mendoza & Papa for respondent.
CONCEPCION, J.:

Appeal by certiorari, taken by Edward J. Nell Co. hereinafter referred to as appellant from a
decision of the Court of Appeals.

On October 9, 1958, appellant secured in Civil Case No. 58579 of the Municipal Court of Manila
against Insular Farms, Inc. hereinafter referred to as Insular Farms a judgment for the sum of
P1,853.80 representing the unpaid balance of the price of a pump sold by appellant to Insular
Farms with interest on said sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ of
execution, issued after the judgment had become final, was, on August 14, 1959, returned
unsatisfied, stating that Insular Farms had no leviable property. Soon thereafter, or on November 13,
1959, appellant filed with said court the present action against Pacific Farms, Inc. hereinafter
referred to as appellee for the collection of the judgment aforementioned, upon the theory that
appellee is the alter ego of Insular Farms, which appellee has denied. In due course, the municipal
court rendered judgment dismissing appellant's complaint. Appellant appealed, with the same result,
to the court of first instance and, subsequently, to the Court of Appeals. Hence this appeal
by certiorari, upon the ground that the Court of Appeals had erred: (1) in not holding the appellee
liable for said unpaid obligation of the Insular Farms; and (2) in not granting attorney's fees to
appellant.

With respect to the first ground, it should be noted that appellant's complaint in the municipal court
was anchored upon the theory that appellee is an alter ego of Insular Farms, because the former
had purchased all or substantially all of the shares of stock, as well as the real and personal
properties of the latter, including the pumping equipment sold by appellant to Insular Farms. The
record shows that, on March 21, 1958, appellee purchased 1,000 shares of stock of Insular Farms
for P285,126.99; that, thereupon, appellee sold said shares of stock to certain individuals, who
forthwith reorganized said corporation; and that the board of directors thereof, as reorganized, then
caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold
to herein appellee for P10,000.00. We agree with the Court of Appeals that these facts do not prove
that the appellee is an alter ego of Insular Farms, or is liable for its debts. The rule is set forth in
Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:

Generally where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1)
where the purchaser expressly or impliedly agrees to assume such debts; (2) where the
transaction amounts to a consolidation or merger of the corporations; (3) where the
purchasing corporation is merely a continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability for such debts.

In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly
agreed to assume the debt of Insular Farms in favor of appellant herein, or that the appellee is a
continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular
Farms to the appellee has been entered into fraudulently, in order to escape liability for the debt of
the Insular Farms in favor of appellant herein. In fact, these sales took place (March, 1958) not only
over six (6) months before the rendition of the judgment (October 9, 1958) sought to be collected in
the present action, but, also, over a month before the filing of the case (May 29, 1958) in which said
judgment was rendered. Moreover, appellee purchased the shares of stock of Insular Farms as
the highest bidder at an auction sale held at the instance of a bank to which said shares had been
pledged as security for an obligation of Insular Farms in favor of said bank. It has, also, been
established that the appellee had paid P285,126.99 for said shares of stock, apart from the sum of
P10,000.00 it, likewise, paid for the other assets of Insular Farms.

Neither is it claimed that these transactions have resulted in the consolidation or merger of the
Insular Farms and appellee herein. On the contrary, appellant's theory to the effect that appellee is
an alter ego of the Insular Farms negates such consolidation or merger, for a corporation cannot be
its own alter ego.

It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a
grossly inadequate price, because, appellant now claims, said assets were worth around
P285,126.99, and that, consequently, the sale must be considered fraudulent. However, the sale
was submitted to and approved by the Securities and Exchange Commission. It must be presumed,
therefore, that the price paid was fair and reasonable. Moreover, the only issue raised in the court of
origin was whether or not appellee is an alter ego of Insular Farms. The question of whether the
aforementioned sale of assets for P10,000.00 was fraudulent or not, had not been put in issue in
said court. Hence, it may, not be raised on appeal.

Being a mere consequence of the first assignment of error, which is thus clearly untenable,
appellant's second assignment of error needs no discussion.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the appellant. It is
so ordered.

G.R. No. L-56655 July 25, 1983

DATU TAGORANAO BENITO, petitioner,


vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA,
INC., respondents.

The Solicitor General for respondent.

Tacod D. Macaraya for private respondent.

RELOVA, J.:

On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc.
(originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission
(SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock
of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital
stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Herein petitioner Datu
Tagoranao Benito subscribed to 460 shares worth P4,600.00.

On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock
from P200,000.00 to P1,000,000.00. It was shown in said certificate that P191,560.00 worth of
shares were represented in the stockholders' meeting held on November 25, 1975 at which time the
increase was approved. Thus, P110,980.00 worth of shares were subsequently issued by the
corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the
increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs.
Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.

On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and Exchange
Commission a petition alleging that the additional issue (worth P110,980.00) of previously
subscribed shares of the corporation was made in violation of his pre-emptive right to said additional
issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to
P1,000,000.00 was illegal considering that the stockholders of record were not notified of the
meeting wherein the proposed increase was in the agenda. Petitioner prayed that the additional
issue of shares of previously authorized capital stock as well as the shares issued from the increase
in capital stock of respondent corporation be cancelled; that the secretary of respondent corporation
be ordered to register the 2,540 shares acquired by him (petitioner) from Domocao Alonto and Moki-
in Alonto; and that the corporation be ordered to render an accounting of funds to the stockholders.

In their answer, respondents denied the material allegations of the petition and, by way of special
defense, claimed that petitioner has no cause of action and that the stock certificates covering the
shares alleged to have been sold to petitioner were only given to him as collateral for the loan of
Domocao Alonto and Moki-in Alonto.

On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange Commission,
after due proceedings, rendered a decision which was affirmed by the Commission En Banc during
its executive session held on March 9, 1981, as follows:

RESOLVED, That the decision of the hearing Officer in SEC Case No. 1392, dated
July 11, 1980, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing considerations, this


Commission hereby rules: (a) That the issuance by the corporation of
its unissued shares was validly made and was not subject to the pre-
emptive rights of stockholders, including the petitioner, herein; (b)
That there is no sufficient legal basis to set aside the certificate
issued by this Commission authorizing the increase in capital stock of
respondent corporation from P200,000.00 to Pl,000,000.00.
Considering, however, that petitioner has not waived his pre-emptive
right to subscribe to the increased capitalization, respondent
corporation is hereby directed to allow petitioner to subscribe thereto,
at par value, proportionate to his present shareholdings, adding
thereto the 2,540 shares transferred to him by Mr. Domocao Alonto
and Mrs. Moki-in Alonto; (c) To direct as it hereby directs, the
respondent corporation to immediately cancel Certificates of Stock
Nos. 216, 223, 302, all in the name of Domocao Alonto, and
Certificate of Stock No. 217, in the name of Moki-in Alonto, upon their
presentation by the petitioner and to issue new certificates
corresponding thereto in the name of petitioner herein; (d) To direct,
as it hereby directs, respondent corporation to religiously comply with
the requirement of filing annual financial statements under pain of a
more drastic action; (e) To declare, as it hereby declares, as irregular,
the election of the nine (9) members of the Board of Trustees of
respondent corporation on October 30, 1976, for which reason,
respondent corporation is hereby ordered to call a stockholders'
meeting to elect a new set of five (5) members of the Board of
Trustees, unless in the meantime the said number is accordingly
increased and the requirement of law to make such increase effective
have been complied with. It is understood that the said stockholders'
meeting be called within thirty (30) days from the time petitioner shall
have subscribed to the increased capitalization.'

be, as the same is hereby AFFIRMED, the same being in accordance with law and
the facts of the case. (pp. 28-29, Reno)

Hence, this petition for review by way of appeal from the aforementioned decision of the Securities
and Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without
the consent of the stockholders or of the Board of Directors, and in the absence of consideration, is
null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00
without the consent or express waiver of the stockholders, is null and void; (3) he is entitled to
attorneys' fees, damages and expenses of litigation in filing this suit against the directors of
respondent corporation.

We are not persuaded. As aptly stated by the Securities and Exchange Commission in its decision:

xxx xxx xxx

... the questioned issuance of the unsubscribed portion of the capital stock worth
P110,980.00 is ' not invalid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders' meeting is
necessary to consider it because additional issuance of shares of stocks does not
need approval of the stockholders. The by-laws of the corporation itself states that
'the Board of Trustees shall, in accordance with law, provide for the issue and
transfer of shares of stock of the Institute and shall prescribe the form of the
certificate of stock of the Institute. (Art. V, Sec. 1).

Petitioner bewails the fact that in view of the lack of notice to him of such subsequent
issuance, he was not able to exercise his right of pre-emption over the unissued
shares. However, the general rule is that pre-emptive right is recognized only with
respect to new issue of shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at its inception offers
its first shares, it is presumed to have offered all of those which it is authorized to
issue. An original subscriber is deemed to have taken his shares knowing that they
form a definite proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution
of interest. (Campos and Lopez-Campos Selected Notes and Cases on Corporation
Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34,
Rollo)

With respect to the claim that the increase in the authorized capital stock was without the consent,
expressed or implied, of the stockholders, it was the finding of the Securities and Exchange
Commission that a stockholders' meeting was held on November 25,1975, presided over by Mr.
Ahmad Domocao Alonto, Chairman of the Board of Trustees and, among the many items taken up
then were the change of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul
Philippine-Al Islamia, Inc., the increase of its capital stock from P200,000.00 to P1,000,000.00, and
the increase of the number of its Board of Trustees from five to nine. "Despite the insistence of
petitioner, this Commission is inclined to believe that there was a stockholders' meeting on
November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the
evidence of respondents that such meeting was in fact held. What petitioner successfully proved,
however, was the fact that he was not notified of said meeting and that he never attended the same
as he was out of the country at the time. The documentary evidence of petitioner conclusively
proved that he was attending the Mecca pilgrimage when the meeting was held on November 25,
1975. (Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged
minutes of the proceedings (Exh. '4'), the Commission notes with significance that said minutes
contain numerous details of various items taken up therein that would negate any claim that it was
not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate
of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of capital stock
have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived
his pre-emptive right to subscribe as he could not have done so for the reason that he was not
present at the meeting and had not executed a waiver, thereof. Not having waived such right and for
reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to
his present shareholdings." (pp. 36-37, Rollo)

Well-settled is the rule that the findings of facts of administrative bodies will not be interfered with by
the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the
aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97
SCRA 78). In a long string of cases, the Supreme Court has consistently adhered to the rule that
decisions of administrative officers are not to be disturbed by the courts except when the former
have acted without or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs.
Board of Commissioners of Immigration, 94 SCRA 61). Thus, in the case of Deluao vs. Casteel ( L-
21906, Dec. 24, 1968, 26 SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960)
and Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966),
the Supreme Court held that:

... Findings of fact by an administrative board or official, following a hearing, are


binding upon the courts and win not be disturbed except where the board or official
has gone beyond his statutory authority, exercised unconstitutional powers or clearly
acted arbitrarily and without regard to his duty or with grave abuse of discretion. ...

ACCORDINGLY, this petition is hereby dismissed for lack of merit.

SO ORDERED.

G.R. No. L-32991 June 29, 1972

SALVADOR P. LOPEZ, President of the University of the Philippines; BOARD OF REGENTS,


University of the Philippines; and OSEAS DEL ROSARIO, Officer-in-Charge, College of
Education, University of the Philippines, petitioners,
vs.
HON. VICENTE ERICTA, Judge of the Court of First Instance of Rizal, Branch XVIII (Quezon
City), and DR. CONSUELO S. BLANCO, respondents.

Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor General Jaime M. Lantin and
Special Counsel Jose Espinosa for petitioners.

Sison, Dominguez & Magno for respondents.

MAKALINTAL, J.:p

This case presents the question of whether or not respondent Dr. Consuelo S. Blanco was duly
elected Dean of the College of Education, University of the Philippines, in the meeting of the Board
of Regents on July 9, 1970, at which her ad interim appointment by University President Salvador P.
Lopez, one of the petitioners here, was submitted for consideration.

The question was originally ventilated in a petition for certiorari filed by Dr. Blanco in the Court of
First Instance of Quezon City, presided by respondent Judge Vicente Ericta, who decided the
question affirmatively on December 3, 1970. The dispositive portion of the decision was amended
three days later, or on December 6, to read as follows:

WHEREFORE, the Court renders judgment:

(1) Declaring petitioner, CONSUELO S. BLANCO, the duly elected Dean of the
College of Education, University of the Philippines, and as such entitled to occupy
the position with a three-year term of office from May 1, 1970 to April 30, 1973;

(2) Declaring null and void the appointment of respondent Oseas A. del Rosario as
Officer-in-Charge of the College of Education, University of the Philippines; and

(3) Issuing a permanent injunction (a) commanding respondent Oseas A. del Rosario
to desist from further exercising the functions and duties pertaining to the Office of
the Dean of the College of Education, University of the Philippines, and (b)
commanding respondent Board of Regents from further proceeding in the matter of
the appointment or election of another person as Dean of said college.

xxx xxx xxx

The case is before this Court on appeal by certiorari taken by the President and the Board of
Regents of the University and by Oseas A. del Rosario, respondents below, the last as officer-in-
charge appointed to discharge the duties and functions of the office of Dean of the College of
Education. 1 The petition for review was filed on January 5, 1971. On January 11, 1971 this Court,
pursuant to its resolution of January 7, issued a writ of preliminary injunction to stop the immediate
execution of the judgment appealed from, as ordered by respondent Judge.
The facts and circumstances surrounding the ad interim appointment of Dr. Consuelo S. Blanco and
the action taken thereon by the Board of Regents have a material bearing on the question at issue.
The first such appointment was extended on April 27, 1970, "effective May 1, 1970 until April 30,
1971, unless sooner terminated and subject to the appproval of the Board of Regents and to
pertinent University regulations." Pursuant thereto Dr. Blanco assumed office as ad interim Dean on
May 1, 1970.

The only provisions of the U.P. Charter (Act No. 1870) which may have a bearing on the question at
issue read as follows:

SEC. 7. A quorum of the Board of Regents shall consist a majority of all the members
holding office at the time the meeting of the Board is called. All processes against the
Board of Regents shall be served on the president or secretary thereof.

SEC. 10. The body of instructors of each college shall constitute its faculty, and as
presiding officer of each faculty, there shall be a dean elected from the members of
such faculty by the Board of Regents on nomination by the President of the
University.

Article 78 of the Revised Code of the University provides:

Art. 78. For each college or school, there shall be a Dean or Director who shall
be elected by the Board of Regents from the members of the faculty of the University
unit concerned, on nomination by the President of the University.

The Board of Regents met on May 26, 1970, and President Lopez submitted to it the ad
interim appointment of Dr. Blanco for reconsideration. The minutes of that meeting disclose that "the
Board voted to defer action on the matter in view of the objections cited by Regent Kalaw (Senator
Eva Estrada Kalaw) based on the petition against the appointment, addressed to the Board, from a
majority of the faculty and from a number of alumni ..." The "deferment for further study" having been
approved, the matter was referred to the Committee on Personnel, which was thereupon
reconstituted with the following composition: Regent Ambrosio F. Tangco, chairman; Regent Pio
Pedrosa and Regent Liceria B. Soriano, members. The opinion was then expressed by the
Chairman of the Board that in view of its decision to defer action, Dr. Blanco's appointment had
lapsed, but (on the President's query) that there should be no objection to another ad
interim appointment in favor of Dr. Blanco pending final action by the Board.

Accordingly, on the same day, May 26, 1970, President Lopez extended another ad
interim appointment to her, effective from May 26, 1970 to April 30, 1971, with the same conditions
as the first, namely, "unless sooner terminated, and subject to the approval of the Board of Regents
and to pertinent University regulations."

The next meeting of the Board of Regents was held on July 9, 1970. The minutes show:

xxx xxx xxx

2. Deanship of the College, the President having issued an ad interim appointment


for Dr. Consuelo Blanco as Dean effective May 26, 1970:
Note: The Personnel Committee, to which this case was referred,
recommended that the Board request the President of the University
to review his nomination for the Deanship of the College of Education
in the light of the testimonies received and discussions held during
the Commitee's meeting on June 4 and June 11, 1970 on this matter.

Chairman Tangco asked that the documents received by the


Committee on the matter be entered in the official record, the same
attached hereto as Appendix "A" pages 57 to 179.

Board action: Following some discussion on what Regent Tangco


explained to be the rationale or intention (i.e., that the President
would discuss with Dr. Consuelo S. Blanco a proposal to withdraw
her appointment as Dean) behind the wording of the Personnel
Committee's recommendation and in view of some uncertainty over
whether the Board would be acting upon the recommendation as
"diplomatically" stated in the agenda or as really intended according
to Regent Tangco's explanation, the Personnel Committee withdrew
its recommendation as stated in the Agenda. The Chairman took a
roll-call vote on the appointment of Dr. Blanco as Dean. The
Chairman having ruled that Dr. Blanco had not obtained the
necessary number of votes, the Board agreed to expunge the result
of the voting, and, on motion of Regent Agbayani duly seconded,
suspended action on the ad interim appointment of Dr. Blanco. The
Chair stated that this decision of the Board would in effect render the
case subject to further thinking and give the Board more time on the
question of the deanship the of the College of Education, and, since
the Board had not taken action on the appointment of Dr. Blanco
either adversely or favorably, her ad interim appointment as Dean
effective May 26, 1970 terminated as of July 9, 1970.

The roll-call voting on which the Chairman of the Board of Regents based his ruling aforesaid gave
the following results: five (5) votes in favor of Dr. Blanco's ad interim appointment, three (3) votes
against, and four (4) abstentions all the twelve constituting the total membership of the Board of
the time. 2 The next day, July 10, 1970, Dr. Blanco addressed a letter to the Board requesting "a
reconsideration of the interpretation made by the Board as to the legal effect of the vote of five in favor,
three against and four abstentions on my ad interim appointment." On August 18, 1970 Dr. Blanco wrote
the President of the University, protesting the appointment of Oseas A. del Rosario as Officer-in-Charge
of the College of Education. Neither communication having elicited any official reply, Dr. Blanco went to
the Court of First Instance of Quezon City on a petition for certiorari and prohibition with preliminary
injunction, the decision wherein is the subject of the present appeal.

Considerable arguments have been adduced by the parties on the legal effect and implications of
the 5-3-4 vote of the Board of Regents. Authorities, mostly judicial precedents in the American
jurisdictions, are cited in support of either side of the belabored question as to whether an abstention
should be counted as an affirmative or as a negative vote or a particular proposition that is being
voted on. Thus it is submitted, on the part of the petitioners, that if the abstentions were considered
as affirmative votes a situation might arise wherein a nominee (for the office of Dean as in this case)
is elected by only one affirmative vote with eleven members of the Board abstaining; and, on the part
of the respondent, that according to the prevailing view "an abstention vote should be recorded in
the affirmative on the theory that refusal to vote indicates acquiescence in the action of those who
vote;" ... that "the silence of the members present, but abstaining, is construed to be acquiescence
so far as any construction is necessary." A logician could make a creditable case for either
proposition. It does seem absurd that a minority even only one of the twelve members of the
Board of Regents who are present could elect a Dean just because the others abstain. On the other
hand, there is no lack of logic either in saying that a majority vote of those voting will be sufficient to
decide an issue on the ground that if construction is at all necessary the silence of the members who
abstain should be construed as an indication of acquiescence in the action of those who vote
affirmatively. This apparent dichotomy, indeed, accounts for the conflict in the American court
decisions, from which both parties here have drawn extensively in support of their respective
positions.

In the present case, however, this Court does not find itself confronted with an ineluctable choice
between the two legal theories. It should be noted that an abstention, according to the respondents'
citations, is counted as an affirmative vote insofar as it may be construed as an acquiescence in the
action of those who vote affirmatively. This manner of counting is obviously based on what is
deemed to be a presumption as to the intent of the one abstaining, namely, to acquiesce in the
action of those who vote affirmatively, but which presumption, being merely prima facie, would not
hold in the face of clear evidence to the contrary. It is pertinent, therefore, to inquire into the facts
and circumstances which attended the voting by the members of the Board of Regents on the ad
interim appointment of Dr. Blanco in order to determine whether or not such a construction would
govern. The transcript of the proceedings in the meeting of July 9, 1970 show the following
statements by the Regents who participated in the discussion:

Regent Tangco: Mr. Chairman, I would like to put on record that this
statement here is a compromise statement. The Committee, after
hearing the testimonies and going over the materials presented to the
Committee, was in favor of recommending to the Board that the
nomination of Professor Blanco cannot be accepted by the Board, but
it was felt that it should be presented in a more diplomatic way to
avoid any embarrassment on the part of both the appointee and the
President. And so means were studied as to how it could be done
and it was felt that it could be done in such a way that the appointee
could request relief from the appointment, that it would be the best to
save embarrassment all around. And so the final decision was to ask
the President to review the matter, but with the understanding that he
will talk this over with Dean Blanco and for the appointment to be
withdrawn. So actually although this statement here is not in that
light, again that is the decision of the Committee. Inasmuch as
apparently either the meaning of the decision was not made clear or
maybe was not understood very well, I would like to put that on the
record.

Regent Kalaw: I would like to take note of the comments of Dr.


Tangco here on a previous agreement. I understand that while
the Committee recommended the disapproval of the appointment of
Dr. Blanco, the Committee felt that it was more tactful and diplomatic
to present the motion to this level but premised by the findings of the
Committee that the President would make an agreement with Dean
Blanco to make a withdrawal ... .
Regent Tangco: Mr. Chairman, I wish to just make a correction that
the decision was to ask the President for her to request relief and not
to consult. I want to put that on record now. It was only that we
wanted to avoid anything on this on the record of the Board to save
embarrassment. But inasmuch as that statement has been made, I
want to make it of record that the agreement was for the President to
ask her to submit or better ask her to the withdrawal.

Regent Pedrosa: Mr. Chairman, in order to cut this matter once and
for all, may I suggest that the members of the Committee inhibit
themselves from voting in this matter. I don't think it would affect the
majority vote or whatever the rest of the members of the Board
decide.

Regent Tangco: Mr. Chairman, I was going to inhibit myself from the
start.

Regent Pedrosa: And I am inhibiting myself . We are only two


members now; Dr. Soriano is not here, so that we leave the votation
on this matter to the other members of the Board.

Regent Kalaw: Mr. Chairman, what is the votation for?

Chairman: The question before this Board is the Comittee


recommendation. Incidentally, if the Board accepts the Committee
recommendation it is also a lack of confirmation of the ad interim
appointment of Dean Blanco ... .

xxx xxx xxx

Chairman: There is only one more question before this Board to


discuss fully, I believe. The question is, the Chairman asks the Board
to vote on the Committee action in the form of a recommendation as
presented in the Agenda. Regent Tangco, the Chairman of that
Committee, says that this is merely a polite cover, a diplomatic cover,
according to Regent Kalaw, for the reaction of the Committee, and
Regent Tangco requests that we act not on the Committee
recommendation in this form as presented in the Agenda but in terms
of the gentleman's agreement.

Chairman: In brief, Regent Tangco informs the Board of the action


that the Committee was to request the President to call Dr. Blanco
and prevail upon her to withdraw.

Regent Escobar: On what basis?

Regent Tangco: On the testimonies presented to us and also to avoid


further embarrassment on the part of the appointee. The decision of
the Committee was to ask Dean Blanco because there will be too
much embarrassment which I think is not going to gain any matter
one way or the other.

Chairman: We have to make a ruling. I think that we cannot act on


the gentlemen's agreement because we do not have that gentlemen's
agreement before us.

Regent Pedrosa: Mr. Chairman, may I interrupt you. In view of the


fact that I have announced that I would desist from participating in the
Board and Regent Tangco has done likewise then I presume the
President will not also participate. Why doesn't the Board proceed to
the decision of whether ...

Chairman: Yes, I am saying, Mr. Regent, there is a ruling that this


Board will have to act on the Committee recommendation presented
here, unless the Committee withdraws this recommendation.

Regent Tangco: The Committee is so doing, Mr. Chairman.

Chairman: The Committee will widthdraw this recommendation, in


which case the issue is simply we only have to act on the issue of to
confirm or not to confirm the ad interim appointment issued to Dr.
Blanco.

xxx xxx xxx

Chairman: The Committee is withdrawing this recommendation.

Regent Silva: Per se, as it is written. But I think the Committee, if I get
it right, is actually putting a recommendation for non-confirmation.

Regent Kalaw: Since the Committee is withdrawing the


recomendation and the Board would act on it per se, I think Regent
Silva is right. (Emphasis supplied)

The voting which followed shows the following result:

Affirmative votes:

Regent Fonacier
" Escobar
" Barican
" Lopez
" Agbayani

Negative votes:
Regent Kalaw
" Silva
" Corpuz

Abstentions:

Regent Tangco
" Leocadio (Substituting for Regent Soriano)
" Pedrosa
" Virata

Regent Leonides Virata, who was not a member of the Personnel Committee, made the following
explanation before casting his vote:

A. I abstain, but I want to say this. There must be some other way of
solving this problem. I am at sea in this, because although I have
been reading all these documents here, but a decision is being asked
now that I am not ready myself.

After the result of the voting was known the Board Chairman Secretary Corpuz, announced that "the
vote is not a majority ... (and that) there is no ruling in the Code of the University on the counting of
votes and the treatment of abstention."

What transpired immediately afterwards appears in the transcript of the proceedings, as follows:

Regent Agbayani: Mr. Chairman, could I ask for another one minute
recess?

(ONE-MINUTE RECESS AT THIS POINT)

Chairman: The meeting is resumed. Mr. Regent? (Addressing Regent


Agbayani)

Regent Agbayani: Mr. Chairman, I move that we do not proceed with


the action now on this matter.

Chairman: To suspend in effect the action of the Board?

Regent Agbayani: The result brings us back to the previous status,


that no action has been taken.

Chairman: There is a motion to suspend action; that is to say, to


suspend the voting of the Board on this matter with the effect, first, to
return the case to its original status to render the case subject to
further thinking and second, that the Board has not confirmed the
appointment. The appointment, in other words, will be good from May
26 up to today.
Regent Agbayani: Mr. Chairman, the Board did not confirm exactly. It
cannot be said that the Board confirmed or did not confirm, but the
appointment terminates. The ad interim appointment terminates when
the Board meets, just like in Congress, where the ad
interim appointment is good only up to the first day of the session.

Chairman: So in effect, suspending action on this matter now, the


Board in effect gives itself time to study the question not of Dean
Blanco but the question of the deanship of the College, and the
Board has not taken action on the confirmation either adversely or
favorably, but that the ad interim appointment has terminated today.

Regent Escobar: Mr. Chairman, does it mean that all


the deliberations regarding to this matter should be erased from the
record? Because the record of the voting is there.

Chairman: Well, it follows.

Regent Escobar: It follows suit, because we are now asking for


a reconsideration of any deliberations to the effect that if there was a
voting it should be banned from appearing in the record.

Regent Silva: We have made statements here today.

Chairman: The record of the voting, which is incomplete by the way


because there was no circulation to consider, will not appear in the
record.

Regent Silva: The result of the votes; the deliberations regarding this
matter.

Regent Agbayani: I have no objection.

Chairman: The record of the voting will not appear. Any objection to
the motion for reconsideration? No objection, approved.

From the foregoing record of the meeting of the Board of Regents it is very clear: (1) that the
Personnel Committee, to which the matter of Dr. Blanco's appointment had been referred for study,
was for recommending that it be rejected; (2) that, however, the rejection should be done in a
diplomatic way "to avoid any embarrassment on the part of both the appointee and the President;"
and (3) that the "final decision" of the committee was to ask the President of the University to talk to
Dr. Blanco "for the appointment to be withdrawn." That decision, as announced by Regent Tangco,
Chairman of the Personnel Committee, was restated and clarified by Regent Kalaw, and then
reiterated first by Regent Tangco and then by the Chairman. On that note Regent Pedrosa
suggested that the members of the Personnel Committee, as well as the President, should inhibit
themselves from voting. When the matter was actually submitted to a vote, however, the definition of
the issue became somewhat equivocal. Regent Tangco announced that the committee was
withdrawing its recommendation, whereupon the Chairman stated that the issue was "to confirm or
not to confirm the ad interim appointment issued to Dr. Blanco." This was then followed by a remark
from Regent Silva that the withdrawal by the committee referred to the recommendation " per se, as
it is written," but that the committee, he thought, was "actually putting a recommendation for non-
confirmation." Regent Kalaw thereupon expressed her concurrence with Regent Silva's opinion.

The votes of abstention, viewed in their setting, can in no way be construed as votes for confirmation
of the appointment. There can be no doubt whatsoever as to the decision and recommendation of
the three members of the Personnel Committee: it was for rejection of the appointment. If the
committee opted to withdraw the recommendation it was on the understanding (also referred to in
the record as gentlemen's agreement) that the President would talk to Dr. Blanco for the purpose of
having her appointment withdrawn in order to save them from embarrassment. No inference can be
drawn from this that the members of the Personnel Committee, by their abstention, intended to
acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such
inference be drawn from the abstention that he was abstaining because he was not then ready to
make a decision.

All arguments on the legal question of how an abstention should be treated, all authorities cited in
support of one or the other position, become academic and purposeless in the face of the fact that
respondent Dr. Blanco was clearly not the choice of a majority of the members of the Board of
Regents, as unequivocally demonstrated by the transcript of the proceedings. This fact cannot be
ignored simply because the Chairman, in submitting the question to the actual vote, did not frame it
as accurately as the preceding discussion called for, such that two of the Regents present (Silva and
Kalaw) had to make some kind of clarification.

In any event, in the same meeting of July 9, 1970, before it adjourned, the Board of Regents
resolved, without a vote of dissent, to cancel the action which had been taken, including the result of
the voting, and "to return the case to its original status to render the case subject to further
thinking." In effect, as announced by the Chairman, "the Board has not acted on the confirmation
either adversely or favorably, but that the ad interim appointment has terminated." Indeed the formal
decision of the Board was that all deliberations on the matter should not appear in the record. And it
cannot be seriously argued that the Board had no authority to do what it did: the meeting had not yet
been adjourned, the subject of the deliberations had not yet been closed, and as in the case of any
deliberative body the Board had the right to reconsider its action. No title to the office of Dean of the
College of Education had yet vested in respondent Blanco at the time of such reconsideration.

One of the prayers of Dr. Blanco in her petition below is that she be declared duly elected as Dean of
the College of Education and, as such, legally entitled to the said position with a 3-year tenure of
office as provided in the Revised Code of the University of the Philippines (Art. 79, Ch. 6, Title Two).
Obviously this prayer is not in order inasmuch as she has not been elected to said position. On the
other hand, Dr. Blanco does not ask that she be recognized as Dean by virtue of her ad
interim appointment dated May 26, 1970, effective up to April 30, 1971. Aside from the fact that the
point has become moot, since the tenure has expired, it is seriously to be doubted whether such an
appointment is authorized under the law and regulations. It should be noted that both under the
Charter (See. 10) and under the Revised Code of the University (Art. 78) the Dean of a college is
elected by the Board of Regents on nomination by the President of the University. In other words the
President's function is only to nominate, not to extend an appointment, even if only ad interim; and
the power of the Board of Regents is not merely to confirm, but to elect or appoint. At any rate the ad
interim appointment extended to Dr. Blanco on May 26, 1970, although made effective until April 30,
1971, was subject to the following condition: "unless sooner terminated and subject to the approval
of the Board of Regents." The Board, as has been shown, not only did not elect Dr. Blanco in its
meeting of July 9, 1970, but declared the appointment terminated as of that day.

WHEREFORE, the decision appealed from is reversed and set aside; the petition of respondent
Consuelo S. Blanco for certiorari and prohibition before respondent Court is ordered dismissed; and
the writ of preliminary injunctton issued by this Court is made permanent, without pronouncement as
to costs.

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,


vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private
respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which
is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components


International Inc. the same property and providing that during the existence or after
the term of this lease the lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to buy under similar
conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its


rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back
of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso
in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion
of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the
plaintiffs preferential right to acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose area is 27,169 square meters only.
Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246-
247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate
court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution
denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from
petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for
only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no
"sale" or transfer of actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests,
private respondent will acquire the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as provided in the same
contractual provision invoked by private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which
had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased
property was transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of
stock which are equivalent to a 55% majority in the corporation because the other owners only
owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of
Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to
this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership
of the subject parcel of land since the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation
remained in the hands of the original co-owners, there was no transfer of actual ownership interests
over the land when the same was transferred to petitioner corporation in exchange for the latter's
shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In
reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in
effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no
sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such
transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter
or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp.
254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,
having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should be disregarded. It maintains that
there was actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing


stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson,
47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the
Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation
by subscription "The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition,
p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest
in the capital stock measured by value, but only an aliquot part of the whole number
of such shares of the issuing corporation. The holder of no-par shares may see from
the certificate itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated number of shares, such
as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention
of persons interested in the financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land
valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a
square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have
control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who
also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did
was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to
the spouses Hernandez and Pacheco in connection with their
execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?


A To take advantage for both spouses and corporation in entering in
the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to


the spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and


other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under


par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a corporation of which as a result of such
exchange said person alone or together with others not exceeding
four persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose
of flexibility. Can you explain flexibility in connection with the
ownership of the property in question?

A There is flexibility in using no par value shares as the value is


determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?

A Yes, since a corporation does not die it can continue to hold on to


the property indefinitely for a period of at least 50 years. On the other
hand, if the property is held by the spouse the property will be tied up
in succession proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a


particular person of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the


corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot
be considered a contract of sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their ownership from one form to
another. The ownership remained in the same hands. Hence, the private respondent has no basis
for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of
the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in
Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

G.R. No. L-15121 August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.

Antonio A. Saba for plaintiffs-appellants.


Mercado, Ver and Reyes for defendant-appellee.

REGALA, J.:

This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which
dismissed their complaint.

Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it
raises purely questions of law.
The parties in this case adopt the following findings of fact of the lower court:

In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things,
"that about December, 1952, the defendant company hired Alfredo Carillo as driver of AC-
787 (687) (a registration for 1952) owned and operated by the said defendant company; that
on December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was
driving AC-687 at Halcon Street, Quezon City, wilfully, unlawfully and feloniously and in a
negligent, reckless and imprudent manner, run over a child Mario Palacio of the herein
plaintiff Gregorio Palacio; that on account of the aforesaid injuries, Mario Palacio suffered a
simple fracture of the right tenor (sic), complete third, thereby hospitalizing him at the
Philippine Orthopedic Hospital from December 24, 1952, up to January 8, 1953, and
continued to be treated for a period of five months thereafter; that the plaintiff Gregorio
Palacio herein is a welder by occupation and owner of a small welding shop and because of
the injuries of his child he has abandoned his shop where he derives income of P10.00 a day
for the support of his big family; that during the period that the plaintiff's (Gregorio Palacio's)
child was in the hospital and who said child was under treatment for five months in order to
meet the needs of his big family, he was forced to sell one air compressor (heavy duty) and
one heavy duty electric drill, for a sacrifice sale of P150.00 which could easily sell at
P350.00; that as a consequence of the negligent and reckless act of the driver Alfredo Carillo
of the herein defendant company, the herein plaintiffs were forced to litigate this case in
Court for an agreed amount of P300.00 for attorney's fee; that the herein plaintiffs have now
incurred the amount of P500.00 actual expenses for transportation, representation and
similar expenses for gathering evidence and witnesses; and that because of the nature of
the injuries of plaintiff Mario Palacio and the fear that the child might become a useless
invalid, the herein plaintiff Gregorio Palacio has suffered moral damages which could be
conservatively estimated at P1,200.00.

On May 23, 1956, defendant Fely Transportation Co., filed a Motion to Dismiss on the
grounds (1) that there is no cause of action against the defendant company, and (2) that the
cause of action is barred by prior judgment..

In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged
in the Motion to Dismiss until the trial of this case.

On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1)
that complaint states no cause of action against defendant, and (2) that the sale and transfer
of the jeep AC-687 by Isabelo Calingasan to the Fely Transportation was made on
December 24, 1955, long after the driver Alfredo Carillo of said jeep had been convicted and
had served his sentence in Criminal Case No. Q-1084 of the Court of First Instance of
Quezon City, in which both the civil and criminal cases were simultaneously tried by
agreement of the parties in said case. In the Counterclaim of the Answer, defendant alleges
that in view of the filing of this complaint which is a clearly unfounded civil action merely to
harass the defendant, it was compelled to engage the services of a lawyer for an agreed
amount of P500.00.

During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the
case of "People of the Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084," in the
Court of First Instance of Rizal, Quezon City (Branch IV), as Exhibit "A". 1wph1.t
It appears from Exhibit "A" that Gregorio Palacio, one of the herein plaintiffs, testified that
Mario Palacio, the other plaintiff, is his son; that as a result of the reckless driving of accused
Alfredo Carillo, his child Mario was injured and hospitalized from December 24, 1952, to
January 8, 1953; that during all the time that his child was in the hospital, he watched him
during the night and his wife during the day; that during that period of time he could not work
as he slept during the day; that before his child was injured, he used to earn P10.00 a day on
ordinary days and on Sundays from P20 to P50 a Sunday; that to meet his expenses he had
to sell his compressor and electric drill for P150 only; and that they could have been sold for
P300 at the lowest price.

During the trial of the criminal case against the driver of the jeep in the Court of First Instance
of Quezon City (Criminal Case No. Q-1084) an attempt was unsuccessfully made by the
prosecution to prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio.
Likewise an attempt was made in vain by the private prosecutor in that case to prove the
agreed attorney's fees between him and plaintiff Gregorio Palacio and the expenses
allegedly incurred by the herein plaintiffs in connection with that case. During the trial of this
case, plaintiff Gregorio Palacio testified substantially to the same facts.

The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit
"2") determined and thoroughly discussed the civil liability of the accused in that case. The
dispositive part thereof reads as follows:

IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso guilty
beyond reasonable doubt of the crime charged in the information and he is hereby
sentenced to suffer imprisonment for a period of Two Months & One Day of Arresto Mayor; to
indemnify the offended party, by way of consequential damages, in the sum of P500.00
which the Court deems reasonable; with subsidiary imprisonment in case of insolvency but
not to exceed /3 of the principal penalty imposed; and to pay the costs.

On the basis of these facts, the lower court held action is barred by the judgment in the criminal case
and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to pay damages
is Isabel Calingasan, the employer, and not the defendant corporation.

Against that decision the plaintiffs appealed, contending that:

THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE


IS SUBSIDIARILY LIABLE FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-
1084 OF THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR THE REASON THAT
THE INCORPORATORS OF THE FELY TRANSPORTATION COMPANY, THE
DEFENDANT-APPELLEE HEREIN, ARE ISABELO CALINGASAN HIMSELF, HIS SON AND
DAUGHTERS;

THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF


ISABELO CALINGASAN IN INCORPORATING THE FELY TRANSPORTATION COMPANY,
THE DEFENDANT-APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A
RESULT OF THE CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN OWNED BY
HIM:
THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE
PLAINTIFFS-APPELLANTS IS BARRED BY PRIOR JUDGMENT.

With respect to the first and second assignments of errors, plaintiffs contend that the defendant
corporate should be made subsidiarily liable for damages in the criminal case because the sale to it
of the jeep in question, after the conviction of Alfred Carillo in Criminal Case No. Q-1084 of the Court
of First Instance of Quezon City was merely an attempt on the part of Isabelo Calingasan its
president and general manager, to evade his subsidiary civil liability.

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's
main purpose in forming the corporation was to evade his subsidiary civil liability 1 resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators
of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two
daughters. We believe that this is one case where the defendant corporation should not be heard to
say that it has a personality separate and distinct from its members when to allow it to do so would
be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of
justice. (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No.
L-5677, May 25, 1953) Furthermore, the failure of the defendant corporation to prove that it has
other property than the jeep (AC-687) strengthens the conviction that its formation was for the
purpose above indicated.

And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of
Alonso v. Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation
as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save the
parties unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79
Phil. 80; Quison v. Salud, 12 Phil. 109.)

Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily
liable for P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he
could not pay on account of insolvency.

We also sustain plaintiffs' third assignment of error and hold that the present action is not barred by
the judgment of the Court of First Instance of Quezon City in the criminal case. While there seems to
be some confusion on part of the plaintiffs as to the theory on which the is based whether ex-
delito or quasi ex-delito (culpa aquiliana) We are convinced, from the discussion prayer in the
brief on appeal, that they are insisting the subsidiary civil liability of the defendant. As a matter of
fact, the record shows that plaintiffs merely presented the transcript of the stenographic notes
(Exhibit "A") taken at the hearing of the criminal case, which Gregorio Palacio corroborated, in
support of their claim for damages. This rules out the defense of res judicata, because such liability
proceeds precisely from the judgment in the criminal action, where the accused was found guilty and
ordered to pay an indemnity in the sum P500.00.

WHEREFORE, the decision of the lower court is hereby reversed and defendants Fely
Transportation and Isabelo Calingasan are ordered to pay, jointly and severally, the plaintiffs the
amount of P500.00 and the costs.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon and
Makalintal, concur.
Reyes, J.B.L., J., took no part.

G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner,


vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and
NAZARIO DUMPIT respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P.
Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as
resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by
TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully
paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period
of one month, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The
last payment was made on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update
all his overdue accounts with interest, and seeking its written consent to the assignment of his rights
to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating
the same request. Replying petitioners informed respondent that his Contract to Sell had long been
rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as
President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974.
Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated
October 23, 1979. 1

On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to
law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the
Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the
present petition wherein the following issues are raised:

Whether notice or demand is not mandatory under the circumstances and, therefore,
may be dispensed with by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments
made by respondent Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the
case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of


discretion in upholding the decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by respondent Nazario M.
Dumpit thereby denying substantial justice to the petitioners, particularly petitioner
Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the
questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On
October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal
and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without
prior notice or demand upon respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other
payments herein agreed upon, the BUYER shall be granted a month of grace within
which to make the payment of the t in arrears together with the one corresponding to
the said month of grace. -It shall be understood, however, that should the month of
grace herein granted to the BUYER expire, without the payment & corresponding to
both months having been satisfied, an interest of ten (10%) per cent per annum shall
be charged on the amounts the BUYER should have paid; it is understood further,
that should a period of NINETY (90) DAYS elapse to begin from the expiration of the
month of grace hereinbefore mentioned, and the BUYER shall not have paid all the
amounts that the BUYER should have paid with the corresponding interest up to the
date, the SELLER shall have the right to declare this contract cancelled and of no
effect without notice, and as a consequence thereof, the SELLER may dispose of the
lot/lots covered by this Contract in favor of other persons, as if this contract had
never been entered into. In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in accordance with the
agreement, together with all the improvements made on the premises, shall be
considered as rents paid for the use and occupation of the above mentioned
premises and for liquidated damages suffered by virtue of the failure of the BUYER
to fulfill his part of this agreement : and the BUYER hereby renounces his right to
demand or reclaim the return of the same and further obligates peacefully to vacate
the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for violation of
any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent
to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de
los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We
quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as


cancelled or resolved in account of infractions by the other contracting party must be
made known to the other and is always provisional being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is justified it is
free to resort to judicial action in its own behalf, and bring the matter to court. Then,
should the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case,
the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).

We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil.
631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action win be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation
unless attack thereon should become barred by acquiescense, estoppel or
prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in
case of breach of contract may render nugatory the general rule requiring judicial
action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by the rescinder the other party is
not barred from questioning in court such abuse or error, the practical effect of the
stipulation being merely to transfer to the defaulter the initiative of instituting suit,
instead of the rescinder (Emphasis supplied).

Of similar import is the ruling in Nera vs. Vacante 4, reading:

A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex propio vigore confer upon the former the
right to take possession thereof if objected to without judicial intervention and
determination.

This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect
where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is
still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial
determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioners was
warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to
rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it should be
noted that even in that case notice in writing was made to the vendee of the cancellation and annulment
of the contract although the contract entitled the seller to immediate repossessing of the land upon default
by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days
from receipt by the buyer of the notice of cancellation or the demand for rescission of
the contract by a notarial act and upon full payment of the cash surrender value to
the buyer. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.

Neither sham rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the
loss.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots
are still available, private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable
if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate
the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who
was made jointly and severally liable with petitioner corporation for refund to private respondent of
the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by
law with a personality separate and distinct from those of the persons composing it as wen as from
that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be
made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be
connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a
shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the
law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or
to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or
as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the
corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 18 In this respect then, a modification of the Resolution under review is
called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of
the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.

No costs.

SO ORDERED.

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners,


vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO
PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL
ROSARIO, JR., respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.

Roco & Bunag Law Offices for respondent Ernest Kahn.

Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel
Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting Trust
Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was
elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres
Soriano III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent
reports" that "huge and unusual cash disbursements from the funds of SMC" had been irregularly made,
and the resources of the firm extensively used in support of the candidacy of Ferdinand Marcos during the
snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the
14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several
persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum
of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred
(P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement revoked the voting trust
above mentioned, and expressed the desire of the 14 corporations to sell the shares of stock "to pay
certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to
institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer
corps, mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving the highest
priority to its principal products and extensive support to agriculture programme of' the
Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the shares
was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San
Miguel International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was
Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the
proceeds of certain loans". 8

At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on
Good Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr.,
allegedly a close associate and dummy of former President Marcos, and the sale thereof was "in
direct contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and
March 12, 1986, respectively) which prohibit .. the transfer, conveyance, encumbrance, concealment
or liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his
wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale allowed to proceed, on representations by San Miguel
Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller corporations were
'fully owned' by said farmers and Cojuangco owned only 2 shares in one of the companies, etc. However,
the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 .. The same order
forbade the SMC corporate Secretary to register any transfer or encumbrance of any of the stock without
the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14)
seller corporations. The latter as promptly sued for rescission and damages. 11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the
corporation to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares
registered as street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be held in
trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or
whoever shall finally be determined to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans
incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined
that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an
indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the
SMC Group, and there were tax and other benefits which would redound to the SMC group of
companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the
PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it
was ever adopted, and stating that what in truth was agreed upon at the meeting of December 4,
1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the
assumption of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was
however overruled by private respondents. 14 When his efforts to obtain relief within the corporation and
later the PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC). lwph1.t
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel
Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to
approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended
Petition in the SEC recited substantially the foregoing antecedents and the following additional facts, to
wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation,
Ltd., had met and passed a resolution authorizing the company to borrow up to US
$26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to
enable the Soriano family to initiate steps and sign an agreement for the purchase of
some 33,133,266 shares of San ,Miguel Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding
loan agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At
the latter's request, the proceeds of the loan were deposited in different banks 17 for
the account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and
announcing that "the Soriano family, friends and affiliates acquired a considerable block
of San Miguel Corporation shares only a few days ago .., the transaction .. (having been)
made through the facilities of the Manila Stock Exchange, and 33,133,266 shares ..
(having thereby been) purchased for the aggregate price of' P3,313,326,600.00." The
letters also stated that the purchase was "an exercise of the Sorianos' right to buy back
the same number of shares purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase agreement
for which said loan was obtained, which assumption constituted an improper use of
corporate funds to pay personal obligations of Andres Soriano III, enabling him; to
purchase stock of the corporation using funds of' the corporation itself, the
respondents, through various subsequent machinations and manipulations, for
interior motives and in breach of fiduciary duty, compound the damages caused San
Miguel Corporation by, among other things: (1) agreeing to pay a higher price for the
shares than was originally covenanted in order to prevent a rescission of the
purchase agreement by the sellers; (2) urging UCPB to accept San Miguel
Corporation and Neptunia as buyers of the shares, thereby committing the former to
the purchase of its own shares for at least 25% higher than the price at which they
were fairly traded in the stock exchanges, and shifting to said corporations the
personal obligations of Soriano III under the purchase agreement; and (3) causing to
be applied to the part payment of P1,800,000.00 on said purchase, various assets
and receivables of San Miguel Corporation.

The complaint closed with a prayer for injunction against the execution or consummation of any
agreement causing San Miguel Corporation to purchase the shares in question or entailing the use
of its corporate funds or assets for said purchase, and against Andres Soriano III from further using
or disposing of the funds or assets of the corporation for his obligations; for the nullification of the
SMC Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase
agreement; and for damages.

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because

a) having been merely imposed by the PCGG as a


director on San Miguel, he has no standing to bring a
minority derivative suit;

b) he personally holds only 20 shares and hence


cannotfairly and adequately represent the minority
stockholders of the corporation;

c) he has not come to court with clean hands; and

2. The Securities & Exchange Commission has no jurisdiction over the controversy
because the matters involved are exclusively within the business judgment of the
Board of Directors. 19

Kahn's motion to dismiss was subsequently adopted by his correspondents . 20

The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated
September 4, 1987. 21 In her view

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law,
ownership of even one share only, sufficed to qualify a person to bring a derivative
suit;

2) it is indisputable that the action had been brought by de los Angeles for the benefit
of the corporation and all the other stockholders;

3) he was a stockholder at the time of the commission of the acts complained of, the
number of shares owned by him being to repeat, immaterial;

4) there is no merit in the assertion that he had come to Court with unclean hands, it
not having been shown that he participated in the act complained of or ratified the
same; and

5) where business judgment transgresses the law, the securities and Exchange
Commission always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of
this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with
SEC Case No. 3152.

A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that
de los Angeles had no legal capacity to institute the derivative suit, a conclusion founded on the following
propositions:

1) a party "who files a derivative suit should adequately represent the interests of the
minority stockholders;" since "De los Angeles holds 20 shares of stock out of
121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be
remotely said to adequately represent the interests of the minority stockholders,
(e)specially so when .. de los Angeles was put by the PCGG to vote the majority
stock," a situation generating "a genuine conflict of interest;"

2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position
as PCGG-nominated director is inconsistent with his assumed role of representative
of minority stockholders; not having been elected by the minority, his voting would
expectedly consider the interest of the entity which placed him in the board of
directors;

3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG
cannot exercise acts of dominion over sequestered property, (b) it has only powers of
administration, and (c) its voting of sequestered stock must be done only pursuant to its
power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for
the benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought
by de los Angeles because

1) the number of shares owned by him was immaterial, he being a stockholder in his
own right;

2) he had not voted in favor of the resolution authorizing the purchase of the shares;
and

3) even if PCGG was not the owner of the sequestered shares, it had the right to
seek the protection of the interest of the corporation, it having been held that even an
unregistered shareholder or an equitable owner of shares and pledgees of shares
may be deemed a shareholder for purposes of instituting a derivative suit.

De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of
Appeals, imputing to the latter the following errors:

1) having granted the writ of certiorari despite the fact that Kahn had not first resorted
to the plain remedy available to him, i.e., appeal to the SEC en banc and despite the
fact that no question of jurisdiction was involved;

2) having ruled on Kahn's petition on the basis merely of his factual allegations,
although he (de los Angeles) had disputed them and there had been no trial in the
SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as stockholder
and/or director of the San Miguel Corporation.

For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of
the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos.
74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25

2) de los Angeles was beholden to the controlling stockholder in the corporation


(PCGG), which had "imposed" him on the corporation; since the PCGG had a clear
conflict of interest with the minority, de los Angeles, as director of the former, had no
legal capacity to sue on behalf of the latter;

3) even assuming absence of conflict of interest, de los Angeles does not fairly and
adequately represent the interest of the minority stockholders;

4) the respondents had properly applied for certiorari with the Court of Appeals
because

a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies
exercising quasi-judicial functions, and hence file competence to issue the writ
of certiorari;

b) the principle of exhaustion of administrative remedies does not apply since the
issue involved is one of law;

c) said respondents had no plain, speedy and adequate remedy within SEC;

d) the Order of the SEC Investigating Officer denying the motion to dismiss was
issued without or in excess of jurisdiction, hence was correctly nullified by the Court
of Appeals; and

e) de los Angeles had not raised the issue of absence of a motion for reconsideration
by respondents in the SEC case; in any event, such a motion was unnecessary in
the premises.

De los Angeles' Reply seeks to make the following points:

1) since the law lays down three (3) requisites for a derivative suit, viz:

a) the party bringing suit should be a shareholder as of the time of the


act or transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a


demand on the board of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and

c) c)the cause of action actually devolves on the corporation, the


,wrongdoing or harm having been caused to the corporation and not
to .the particular stockholder bringing the suit;

and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired
those shares as early as 1977, (2) he had sought without success to have the board of' directors
remedy with wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the
corporation, generally, ,and not against him individually and it was the corporation, and not he,
particularly, that would be entitled to the appropriate' relief the propriety of his suit cannot be
gainsaid;

2) Kahn had not limited himself to questions of law in the proceedings in the Court of
Appeals and hence could not claim exclusion from the scope of the doctrine of
exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort
to certiorari. where a plain, speedy and accurate remedy was available to him in this
case, to wit, a motion for reconsideration before the Sec en banc and, contrary to the
respondent's claim, De Los Angeles had in fact asserted to this propositions before
the Appellate Tribunal; and

3) the respondent had not raised the issue of jurisdiction before the Court of Appeals;
indeed, they admit to their Comment that that

issue has not yet been resolved by the SEC," be this as it may, the derivative suit
does not fall within the BASECO doctrine since it does not involve any question of
ownership of the 33,133,266 sequestered SMC shares but rather, the validity of the
resolution of the board of directors for the assumption by the corporation, for the
benefit of certain of its officers and stockholders, of liability for loans contracted by
another corporation, which is an intra-corporate dispute within the exclusive
jurisdiction of the SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies
and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably
indicates his advocacy of the PCGG position. He does not here seek, and his
complaint in the SEC does not pray for, the annulment of the purchase by SMC of
the stock in question, or even the subsequent purchase of the same stock by
others 26 which proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2)
by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of the
Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3)
by Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo
Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the
sequestered stock in fact belonged to coconut planters and oil millers], said case later
having become subject of G.R. No. 79459 of this court . 27 Neither does de los Angeles
impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee
directors as was done by United Coconut Planters Bank and the 14 seller corporations
(in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned,
these two (2) cases later having become subject of G.R.No. 76397) as well as by one
Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court). 28lwph1.t

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's
Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena,
et al 29 an cases of the Commission regarding 'the funds, moneys, assets, and properties illegally
acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos,
their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or
criminal, are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents
arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's
exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His
complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any
incidents arising from, incidental to, or related to" any case involving such property, but assets
indisputably belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a sister corporation,
Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its
officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry
into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to
Marcos and his cronies or dummies (on which- issue, as already pointed out, de los Angeles, in
common with the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as
stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of
no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the
sequestered stock. The contention, therefore, that in view of this Court's ruling as regards the
sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles
complaint, cannot be sustained and must be rejected. The dispute concerns acts of the board of
directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest
of the stockholders, or is one arising out of intra-corporate relations between and among
stockholders, or between any or all of them and the corporation of which they are stockholders . 30

2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation because his stockholding is minuscule, and there is a "conflict of
interest" between him and the PCGG cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only.
00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly
and adequately represent the interests of the minority stockholders. The implicit argument that a
stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or
significant block of stock finds no support whatever in the law. The requisites for a derivative
suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his
plea; 33 and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with
standing to bring a derivative action for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him, individually, but in behalf and for
the benefit of the corporation.
3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise
that de los Angeles now sits in the SMC Board of Directors by the grace of the
PCGG, it does not follow that he is legally obliged to vote as the PCGG would have
him do, that he cannot legitimately take a position inconsistent with that of the
PCGG, or that, not having been elected by the minority stockholders, his vote would
necessarily never consider the latter's interests. The proposition is not only logically
indefensible, non sequitur, but also constitutes an erroneous conception of a
director's role and function, it being plainly a director's duty to vote according to his
own independent judgment and his own conscience as to what is in the best interests
of the company. Moreover, it is undisputed that apart from the qualifying shares given
to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot
from any aspect be deemed to be "beholden" to the PCGG, his ownership of these
shares being precisely what he invokes as the source of his authority to bring the
derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has
no power to vote sequestered shares of stock as an act of dominion but only in
pursuance to its power of administration. The inference is that the PCGG's act of
voting the stock to elect de los Angeles to the SMC Board of Directors was
unauthorized and void; hence, the latter could not bring suit in the corporation's
behalf. The argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a director in order to
bring a derivative action; all he had to be was a stockholder, and that he was owning
in his own right 20 shares of stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered
stock may not under any circumstances be voted by the PCGG to elect a director in the company in
which such stock is held. On the contrary, that it held such act permissible is evident from the context
of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending
the outcome of proceedings to determine the ownership of .. sequestered shares of stock,"'to vote
such shares .. at all stockholders' meetings called for the election of directors ..," the
only caveat being that the stock is not to be voted simply because the power to do so exists, whether
it be to oust and replace directors or to effect substantial changes in corporate policy, programs or
practice, but only "for demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting
petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced
in Baseco; and absent any showing to the contrary, consistently with the presumption that official
duty is regularly performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R.
SP No. 12857 setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and
dismissing said case is REVERSED AND SET ASIDE. The further disposition in the appealed
decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of
P500,000.00 by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and
any writ of injunction issued pursuant thereto is lifted. Costs against private respondents.

SO ORDERED.