Business Org.

II, Corporations
Philippine Law School
Atty. Jose Gerardo A. Medina
Part VIII
x----------------------------------------------------------------------------x

DISSOLUTION

Section 117. Methods of dissolution. – A corporation formed or organized under

the provisions of this Code may be dissolved voluntarily or involuntarily. (n)

Section 118. Voluntary dissolution where no creditors are affected. – If

dissolution of a corporation does not prejudice the rights of any creditor having
a claim against it, the dissolution may be effected by majority vote of the board
of directors or trustees, and by a resolution duly adopted by the affirmative vote
of the stockholders owning at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members of a meeting to be held upon
call of the directors or trustees after publication of the notice of time, place and
object of the meeting for three (3) consecutive weeks in a newspaper published
in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each stockholder or
member either by registered mail or by personal delivery at least thirty (30) days
prior to said meeting. A copy of the resolution authorizing the dissolution shall
be certified by a majority of the board of directors or trustees and countersigned
by the secretary of the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)

Section 119. Voluntary dissolution where creditors are affected. – Where the
dissolution of a corporation may prejudice the rights of any creditor, the petition
for dissolution shall be filed with the Securities and Exchange Commission. The
petition shall be signed by a majority of its board of directors or trustees or other
officers having the management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set forth all claims and
demands against it, and that its dissolution was resolved upon by the affirmative
vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.

If the petition is sufficient in form and substance, the Commission shall, by an

order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less than
thirty (30) days nor more than sixty (60) days after the entry of the order. Before
such date, a copy of the order shall be published at least once a week for three
(3) consecutive weeks in a newspaper of general circulation published in the
municipality or city where the principal office of the corporation is situated, or
Page 1 of 38
if there be no such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3) consecutive weeks
in three (3) public places in such municipality or city.

Upon five (5) day’s notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such
objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition
of its assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation.

Section 11. Corporate term. – A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as originally
stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no extension can
be made earlier than five (5) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Securities and Exchange Commission.

Company Registration and Monitoring Department v. Ching Bee Trading Corp., G.R.
No. 205291 (Notice), [November 12, 2014])

Facts: CBTC filed for the renewal of its corporate term one day before the expiry date.
SEC denied the renewal.

The overarching rule in this jurisdiction is that a corporation ceases to exist upon the
expiration of the corporate term indicated in its articles of incorporation. Once that
occurs, all corporate acts, except those conferred by law, are considered ultra vires, if
not outright invalid. Thus, the moment a corporation's right to exist as an "artificial
person" ceases, its corporate powers are terminated "just as the powers of a natural
person to take part in mundane affairs cease to exist upon his death."

Nevertheless, corporate death may be avoided as the State practically allows the
unlimited perpetuation of a corporation by operation of Section 11 of the Code, to wit:

Section 11. Corporate term. — A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this
Code; Provided, That no extension can be made earlier than five (5)
years prior to the original or subsequent expiry date(s) unless there
Page 2 of 38
 are justifiable reasons for an earlier extension as may be determined
by the Securities and Exchange Commission. (Emphasis Supplied)

This privilege of extending corporate term must be done within the limited period of
five (5) years prior to the original or subsequent expiry date. It is in this regard that the
SEC argues that CBTC should have done it earlier, not one day before the expiration
of the term, and that the failure to do so constitutes negligence with which the CBTC
must bear the consequences, particularly the loss of its corporate life.

The Court acts on the matter with liberality. The Code is silent as to how early within
the five (5) year period the application for extension should be made. Reading plainly
from Section 11 of the Code would reveal that an applicant may seek the approval of
the SEC for the extension of its life at any time within the given five year period.
Evidently, a corporation may seek extension even one day prior to the date of
expiration as the law does not impose an earlier limitation.

In this case, CBTC sought to extend its corporate term by filing the required documents
with the CRMD on December 22, 2010 — obviously within the period allowed and
granted by the Code to seek for extension. It had a day to seek the approval of the
proposed extension of the corporate existence. Unfortunately, the CRMD processor
refused to receive the application on the ground that there was failure to state in the
required Director's Certificate that the stockholders, owning and representing at least
two (2/3) of CBTC's capital stock, voted and approved the amendment. To the SEC,
the rejection was valid as it was authorized under Section 17 of the Code if an
applicant did not substantially comply with the requirements of the Code as to the
form. AEITD
H
Under Section 17 of the Code, however, the SEC must give a reasonable time to an
applicant within which to make the necessary corrections should there be
objectionable portions in the amendment. As cited by the CA, a reasonable time is
defined as so much time as is necessary under the circumstances for a reasonably
prudent and diligent man to do, conveniently, what the contract or duty requires that
should be done, having regard for the rights and possibility of loss, if any to the
other. In this case, the CRMD failed to at least provide CBTC a reasonable time within
which compliance with the requirements for extension may be made in full. Instead,
the processor only verbally advised CBTC to submit a letter-request asking for an
extension to file the deficient documentary requirements. What the SEC should have
done was to give a formal notice to CBTC that the latter had one day to cure any defect
before CBTC's life would expire. That one (1) day, which was lost because of
miscommunication, would have been enough to complete the process of filing the
application within the period specified by the Code and would have sufficed for the
approval of the corporate extension being requested. Therefore, CBTC remains
entitled to a day to submit all the requirements prescribed by the Code.

On this point, the SEC points out that even assuming that CBTC had at least a day to
complete the requirements, such a time would not have been sufficient to extend
Page 3 of 38
CBTC's corporate life. It is of the position that the approval of the extension must
likewise happen while CBTC is alive, albeit in fiction. Considering that CBTC had been
ipso facto dissolved after December 23, 2010, SEC submits that no more extension
could be granted.

This perspective seems to provide an expectation that a corporation seeking to extend

its corporate life must secure the SEC approval anytime before the expiration of the
term — meaning that the corporation must make sure that the SEC approves the
amendment. While the Court agrees that extension (including the SEC approval) must
happen before the expiration of the corporate term, the burden of doing so does not
only fall to the applicant, but also on the SEC. The requirement pronounced
in Alhambra, requiring that all steps must be undertaken while life still subsists, is both
the responsibility of the State, acting through the SEC, and the corporation. To say
that the corporation alone has this burden is unfair as the Code does not impose this
obligation solely on the corporation.
|
x----------------------------------------x

Philippine National Bank v. Court of First Instance of Rizal, Pasig

G.R. No. 63201, May 27, 1992,

Section 11 of Corporation Code provides that a corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner dissolved or
unless said period is extended. Upon the expiration of the period fixed in the articles
of incorporation in the absence of compliance with the legal requisites for the extension
of the period, the corporation ceases to exist and is dissolved ipso facto (16 Fletcher
671 cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988
Edition p. 617). When the period of corporate life expires, the corporation ceases to
be a body corporate for the purpose of continuing the business for which it was
organized. But it shall nevertheless be continued as a body corporate for three years
after the time when it would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its assets (Sec.
122, Corporation Code). There is no need for the institution of a proceeding for quo
warranto to determine the time or date of the dissolution of a corporation because the
period of corporate existence is provided in the articles of incorporation. When such
period expires and without any extension having been made pursuant to law, the
corporation is dissolved automatically insofar as the continuation of its business is
concerned. The quo warranto proceeding under Rule 66 of the Rules of Court, as
amended, may be instituted by the Solicitor General only for the involuntary dissolution
of a corporation on the following grounds: a) when the corporation has offended
against a provision of an Act for its creation or renewal; b) when it has forfeited its
privileges and franchises by non-user; c) when it has committed or omitted an act
which amounts to a surrender of its corporate rights, privileges or franchises; d) when
it has misused a right, privilege or franchise conferred upon it by law, or when it has
exercised a right, privilege or franchise in contravention of law. Hence, there
Page 4 of 38
is no need for the SEC to make an involuntary dissolution of a corporation whose
corporate term had ended because its articles of incorporation had in effect expired
by its own limitation.

Considering the foregoing in relation to the contract of lease between the parties
herein, when PBM's corporate life ended on January 19, 1977 and its 3-year period
for winding up and liquidation expired on January 19, 1980, the option of extending
the lease was likewise terminated on January 19, 1977 because PBM failed to renew
or extend its corporate life in accordance with law. From then on, the respondents can
exercise their right to terminate the lease pursuant to the stipulations in the contract.

Section 120. Dissolution by shortening corporate term. – A voluntary

dissolution may be effected by amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the shortened term, as the
case may be, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)

Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of Commerce in

the Philippines, Inc., G.R. No. 184008, August 3, 2016

When the term of existence of the defunct FICCPI expired on November 24, 2001, its
corporate name cannot be used by other corporations within three years from that
date, until November 24, 2004. FICCPI reserved the name "Filipino Indian Chamber
of Commerce in the Philippines, Inc." on January 20, 2005, or beyond the three-year
period. Thus, the SEC was correct when it allowed FICCPI to use the reserved
corporate name

Section 121. Involuntary dissolution. – A corporation may be dissolved by the

Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds provided by existing laws, rules
and regulations. (n)

Section 122. Corporate liquidation. – Every corporation whose charter expires

by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.

Page 5 of 38
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which
the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.

Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)

Bio v. Intermediate Appellate Court,

G.R. No. 71837, July 26, 1988

The Philippine Blooming Mills Company, Inc. was incorporated on January 19, 1952,
for a term of 25 years which expired on January 19, 1977. On May 14, 1977, the
members of its board of directors executed a deed of assignment of all of the accounts
receivables, properties, obligations and liabilities of the old PBM in favor of Chung
Siong Pek in his capacity as treasurer of the new PBM, then in the process of
reincorporation. On June 14, 1977, the new PMB was issued a certificate of
incorporation by the Securities and Exchange Commission.

On May 5, 1981, Chung Ka Bio and the other petitioners herein, all stockholders of the
old PBM, filed with the SEC a petition for liquidation (but not for dissolution) of both
the old PBM and the new PBM. The allegation was that the former had become legally
non-existent for failure to extend its corporate life and that the latter had likewise been
ipso facto dissolved for non-use of the charter and continuous failure to operate within
2 years from incorporation.

Ruling:

The petitioners insist that they have never given their consent to the creation of the
new corporation nor have they indicated their agreement to transfer their respective
stocks in the old PBM to the new PBM. The creation of the new corporation with the
transfer thereto of the assets of the old corporation was not within the powers of the
board of directors of the latter as it was authorized only to wind up the affairs of such
company and not in any case to continue its business. Moreover, no stockholders'
meeting had been convened to discuss the deed of assignment and the 2/3 vote

Page 6 of 38
required by the Corporation Law to authorize such conveyance had not been obtained.
xxxx

While we agree that the board of directors is not normally permitted to undertake any
activity outside of the usual liquidation of the business of the dissolved corporation,
there is nothing to prevent the stockholders from conveying their respective
shareholdings toward the creation of a new corporation to continue the business of the
old. Winding up is the sole activity of a dissolved corporation that does not intend to
incorporate anew. If it does, however, it is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved corporation to the new corporation
intended to be created as long as the stockholders have given their consent. This was
not prohibited by the Corporation Act. In fact, it was expressly allowed by Section 28-
1/2. xxxx

x---------------------------------------------x

Alabang Development Corp. v. Alabang Hills Village Association,

G.R. No. 187456, June 2, 2014

ADC's existence as a registered corporate entity was revoked by the Securities and
Exchange Commission (SEC) on May 26, 2003.

On October 19, 2006 ADC filed a case against Alabang Hills Village Association, Inc.
(AHVAI) claiming as the developer of Alabang Hills Village and still owns certain
parcels of land therein that are yet to be sold, as well as those considered open spaces
that have not yet been donated to [the] local government of Muntinlupa City or the
Homeowner's Association. ADC learned that AHVAI started the construction of a multi-
purpose hall and a swimming pool on one of the parcels of land still owned by ADC
without the latter's consent and approval, and that despite demand, AHVAI failed to
desist from constructing the said improvements. ADC thus prayed that an injunction
be issued enjoining defendants from constructing the multi-purpose hall and the
swimming pool at the Alabang Hills Village.

Ruling: Section 122 of the Corporation Code provides as follows: xxxxx

It is to be noted that the time during which the corporation, through its own officers,
may conduct the liquidation of its assets and sue and be sued as a corporation is
limited to three years from the time the period of dissolution commences; but there is
no time limit within which the trustees must complete a liquidation placed in their
hands. It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) that the conveyance to
the trustees must be made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce disputed
claims to judgment. The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or being sued (7
R.C.L., Corps., par. 750); but trustees to whom the corporate assets have been

Page 7 of 38
conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue and be sued
as such in all matters connected with the liquidation. . .

In the absence of trustees, this Court ruled, thus:

. . . Still in the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of
the corporation, acting for and in its behalf; might make proper representations with
the Securities and Exchange Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the corporate
concerns.

In the instant case, there is no dispute that petitioner's corporate registration was
revoked on May 26, 2003. Based on the above-quoted provision of law, it had three
years, or until May 26, 2006, to prosecute or defend any suit by or against it. The
subject complaint, however, was filed only on October 19, 2006, more than three years
after such revocation.

It is likewise not disputed that the subject complaint was filed by petitioner corporation
and not by its directors or trustees. In fact, it is even averred, albeit wrongly, in the first
paragraph of the Complaint 9 that "[p]laintiff is a duly organized and existing
corporation under the laws of the Philippines, with capacity to sue and be sued . . . ."

Petitioner, nonetheless, insists that a corporation may still sue, even after it has been
dissolved and the three-year liquidation period provided under Section 122 of the
Corporation Code has passed. Petitioner cites the cases of Gelano v. Court of
Appeals, Knecht v. United Cigarette Corporation, and Pepsi-Cola Products
Philippines, Inc. v. Court of Appeals, as authority to support its position. The Court,
however, agrees with the CA that in the abovecited cases, the corporations involved
filed their respective complaints while they were still in existence. In other words, they
already had pending actions at the time that their corporate existence was terminated.

The import of this Court's ruling in the cases cited by petitioner is that the trustee of a
corporation may continue to prosecute a case commenced by the corporation within
three years from its dissolution until rendition of the final judgment, even if such
judgment is rendered beyond the three-year period allowed by Section 122 of the
Corporation Code. However, there is nothing in the said cases which allows an already
defunct corporation to initiate a suit after the lapse of the said three-year period. On
the contrary, the factual circumstances in the abovecited cases would show that the
corporations involved therein did not initiate any complaint after the lapse of the three-
year period. In fact, as stated above, the actions were already pending at the time that
they lost their corporate existence.

In the present case, petitioner filed its complaint not only after its corporate existence
was terminated but also beyond the three-year period allowed by Section 122 of the
Corporation Code. Thus, it is clear that at the time of the filing of the subject complaint
Page 8 of 38
petitioner lacks the capacity to sue as a corporation. To allow petitioner to initiate the
subject complaint and pursue it until final judgment, on the ground that such complaint
was filed for the sole purpose of liquidating its assets, would be to circumvent the
provisions of Section 122 of the Corporation Code.

FOREIGN CORPORATIONS

Section 123. Definition and rights of foreign corporations. – For the purposes of
this Code, a foreign corporation is one formed, organized or existing under any
laws other than those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or state. It shall have the
right to transact business in the Philippines after it shall have obtained a license
to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency. (n)

Section 124. Application to existing foreign corporations. – Every foreign

corporation which on the date of the effectivity of this Code is authorized to do
business in the Philippines under a license therefore issued to it, shall continue
to have such authority under the terms and condition of its license, subject to
the provisions of this Code and other special laws. (n)

Section 125. Application for a license. – A foreign corporation applying for a

license to transact business in the Philippines shall submit to the Securities and
Exchange Commission a copy of its articles of incorporation and by-laws,
certified in accordance with law, and their translation to an official language of
the Philippines, if necessary. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically set forth the
following:

1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a
local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in
the transaction of its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;

Page 9 of 38
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of
shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10.Such additional information as may be necessary or appropriate in order to
enable the Securities and Exchange Commission to determine whether such
corporation is entitled to a license to transact business in the Philippines,
and to determine and assess the fees payable.

Attached to the application for license shall be a duly executed certificate under
oath by the authorized official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and that the applicant
is an existing corporation in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the translator shall be
attached thereto.

The application for a license to transact business in the Philippines shall

likewise be accompanied by a statement under oath of the president or any other
person authorized by the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other governmental agency in the
proper cases that the applicant is solvent and in sound financial condition, and
setting forth the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the application.

Foreign banking, financial and insurance corporations shall, in addition to the

above requirements, comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate
government agency, whenever required by law. (68a)

Section 126. Issuance of a license. – If the Securities and Exchange Commission

is satisfied that the applicant has complied with all the requirements of this Code
and other special laws, rules and regulations, the Commission shall issue a
license to the applicant to transact business in the Philippines for the purpose
or purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the Philippines and
continue to do so for as long as it retains its authority to act as a corporation
under the laws of the country or state of its incorporation, unless such license
is sooner surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.

Page 10 of 38
Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered enterprises"
as this term is defined in Republic Act No. 5186, shares of stock in domestic
corporations registered in the stock exchange, or shares of stock in domestic
insurance companies and banks, or any combination of these kinds of
securities, with an actual market value of at least one hundred thousand
(P100,000.) pesos; Provided, however, That within six (6) months after each
fiscal year of the licensee, the Securities and Exchange Commission shall
require the licensee to deposit additional securities equivalent in actual market
value to two (2%) percent of the amount by which the licensee’s gross income
for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require deposit of additional securities if
the actual market value of the securities on deposit has decreased by at least
ten (10%) percent of their actual market value at the time they were deposited.
The Securities and Exchange Commission may at its discretion release part of
the additional securities deposited with it if the gross income of the licensee has
decreased, or if the actual market value of the total securities on deposit has
increased, by more than ten (10%) percent of the actual market value of the
securities at the time they were deposited. The Securities and Exchange
Commission may, from time to time, allow the licensee to substitute other
securities for those already on deposit as long as the licensee is solvent. Such
licensee shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee’s
application therefor and upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines. (n)

Section 127. Who may be a resident agent. – A resident agent may be either an
individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an
individual, he must be of good moral character and of sound financial standing.

Section 128. Resident agent; service of process. – The Securities and Exchange
Commission shall require as a condition precedent to the issuance of the
license to transact business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange Commission a written
power of attorney designating some person who must be a resident of the
Philippines, on whom any summons and other legal processes may be served
in all actions or other legal proceedings against such corporation, and
Page 11 of 38
consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at
its home office. Any such foreign corporation shall likewise execute and file with
the Securities and Exchange Commission an agreement or stipulation, executed
by the proper authorities of said corporation, in form and substance as follows:

"The (name of foreign corporation) does hereby stipulate and agree, in

consideration of its being granted by the Securities and Exchange Commission
a license to transact business in the Philippines, that if at any time said
corporation shall cease to transact business in the Philippines, or shall be
without any resident agent in the Philippines on whom any summons or other
legal processes may be served, then in any action or proceeding arising out of
any business or transaction which occurred in the Philippines, service of any
summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and
effect as if made upon the duly-authorized officers of the corporation at its home
office."

Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal process
to the corporation at its home or principal office. The sending of such copy by
the Commission shall be necessary part of and shall complete such service. All
expenses incurred by the Commission for such service shall be paid in advance
by the party at whose instance the service is made.

In case of a change of address of the resident agent, it shall be his or its duty to
immediately notify in writing the Securities and Exchange Commission of the
new address. (72a; and n)

A.M. No. 01-2-04-SC. March 13, 2001

Re: PROPOSED INTERIM RULES OF PROCEDURE GOVERNING INTRA-
CORPORATE CONTROVERSIES UNDER R. A. NO. 8799

SEC. 5. Summons. – The summons and the complaint shall be served together not
later than five (5) days from the date of filing of the complaint. xxx

Service upon foreign private juridical entity. – When the defendant is a

foreign private juridical entity which is transacting or has transacted
business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if there be no such
agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines.

Page 12 of 38
Section 129. Law applicable. – Any foreign corporation lawfully doing business
in the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which
fix the relations, liabilities, responsibilities, or duties of stockholders, members,
or officers of corporations to each other or to the corporation. (73a)

Section 130. Amendments to articles of incorporation or by-laws of foreign

corporations. – Whenever the articles of incorporation or by-laws of a foreign
corporation authorized to transact business in the Philippines are amended,
such foreign corporation shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and Exchange Commission, and in
the proper cases with the appropriate government agency, a duly authenticated
copy of the articles of incorporation or by-laws, as amended, indicating clearly
in capital letters or by underscoring the change or changes made, duly certified
by the authorized official or officials of the country or state of incorporation. The
filing thereof shall not of itself enlarge or alter the purpose or purposes for which
such corporation is authorized to transact business in the Philippines. (n)

Section 131. Amended license. – A foreign corporation authorized to transact

business in the Philippines shall obtain an amended license in the event it
changes its corporate name, or desires to pursue in the Philippines other or
additional purposes, by submitting an application therefor to the Securities and
Exchange Commission, favorably endorsed by the appropriate government
agency in the proper cases. (n)

Section 132. Merger or consolidation involving a foreign corporation licensed in

the Philippines. – One or more foreign corporations authorized to transact
business in the Philippines may merge or consolidate with any domestic
corporation or corporations if such is permitted under Philippine laws and by
the law of its incorporation: Provided, That the requirements on merger or
consolidation as provided in this Code are followed.

Whenever a foreign corporation authorized to transact business in the

Philippines shall be a party to a merger or consolidation in its home country or
state as permitted by the law of its incorporation, such foreign corporation shall,
within sixty (60) days after such merger or consolidation becomes effective, file
with the Securities and Exchange Commission, and in proper cases with the
appropriate government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or officials of the country
or state under the laws of which merger or consolidation was effected: Provided,
however, That if the absorbed corporation is the foreign corporation doing
business in the Philippines, the latter shall at the same time file a petition for
withdrawal of its license in accordance with this Title. (n)

Page 13 of 38
Section 133. Doing business without a license. – No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws. (69a)

Republic Act No. 7042 as amended by RA 8179

Foreign Investments Act, Sec. 3, d.:

The phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred
eighty (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate 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, commercial gain or of the purpose and object of the
business organization: Provided, however, That the phrase "doing business"
shall not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own
name and for its own account;

Section 134. Revocation of license. – Without prejudice to other grounds

provided by special laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended by the Securities and
Exchange Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required
by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-laws
or of any articles of merger or consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter in any application, report, affidavit
or other document submitted by such corporation pursuant to this Title;
Page 14 of 38
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf
of any foreign corporation or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines. (n)

Section 135. Issuance of certificate of revocation. – Upon the revocation of any

such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation. (n)

Section 136. Withdrawal of foreign corporations. – Subject to existing laws and

regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the following requirements are
met;

1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.

MISCELLANEOUS PROVISIONS

Section 137. Outstanding capital stock defined. – The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares. (n)

Section 138. Designation of governing boards. – The provisions of specific

provisions of this Code to the contrary notwithstanding, non-stock or special
Page 15 of 38
corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
(n)

Section 139. Incorporation and other fees. – The Securities and Exchange
Commission is hereby authorized to collect and receive fees as authorized by
law or by rules and regulations promulgated by the Commission.1âwphi1 (n)

Section 140. Stock ownership in certain corporations. – Pursuant to the duties

specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by business
or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in

corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals
related to each other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national
economic policies declared in laws, rules and regulations designed to promote
the general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, businesses or

industries to be declared vested with a public interest and in formulating
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and
promotion of business and industry.

Section 141. Annual report or corporations. – Every corporation, domestic or

foreign, lawfully doing business in the Philippines shall submit to the Securities
and Exchange Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any independent
certified public accountant in appropriate cases, covering the preceding fiscal
year and such other requirements as the Securities and Exchange Commission
may require. Such report shall be submitted within such period as may be
prescribed by the Securities and Exchange Commission. (n)

Section 142. Confidential nature of examination results. – All interrogatories

propounded by the Securities and Exchange Commission and the answers
thereto, as well as the results of any examination made by the Commission or
Page 16 of 38
by any other official authorized by law to make an examination of the operations,
books and records of any corporation, shall be kept strictly confidential, except
insofar as the law may require the same to be made public or where such
interrogatories, answers or results are necessary to be presented as evidence
before any court. (n)

Section 143. Rule-making power of the Securities and Exchange Commission. –

The Securities and Exchange Commission shall have the power and authority
to implement the provisions of this Code, and to promulgate rules and
regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (n)

Section 144. Violations of the Code. – Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (P1,000.00) pesos but not more
than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty
(30) days but not more than five (5) years, or both, in the discretion of the court.
If the violation is committed by a corporation, the same may, after notice and
hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this
section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 1/2 a)

Lent v. Tullett Prebon (Philippines), Inc.,

G.R. Nos. 189158 & 189530, January 11, 2017

As Section 144 speaks, among others, of the imposition of criminal penalties, the
Court is guided by the elementary rules of statutory construction of penal provisions.
First, in all criminal prosecutions, the existence of criminal liability for which the
accused is made answerable must be clear and certain. We have consistently held
that "penal statutes are construed strictly against the State and liberally in favor of the
accused. When there is doubt on the interpretation of criminal laws, all must be
resolved in favor of the accused. Since penal laws should not be applied mechanically,
the Court must determine whether their application is consistent with the purpose and
reason of the law."

Intimately related to the in dubio pro reo principle is the rule of lenity. The rule
applies when the court is faced with two possible interpretations of a penal statute,
one that is prejudicial to the accused and another that is favorable to him. The rule
calls for the adoption of an interpretation which is more lenient to the accused.

In American jurisprudence, there are two schools of thought regarding the

application of the rule of lenity. Justice David Souter, writing for the majority in United
Page 17 of 38
States v. R.L.C., refused to resort to the rule and held that lenity is reserved "for
those situations in which a reasonable doubt persists about a statute's intended
scope even after resort to 'the language and structure, legislative history, and
motivating policies' of the statute." Justice Antonin Scalia, although concurring in part
and concurring in the judgment, argued that "it is not consistent with the rule of lenity
to construe a textually ambiguous penal statute against a criminal defendant on the
basis of legislative history. . . The rule of lenity, in my view, prescribes the result
when a criminal statute is ambiguous: The more lenient interpretation must
prevail." In other words, for Justice Scalia, textual ambiguity in a penal statute
suffices for the rule of lenity to be applied. Although foreign case law is merely
persuasive authority and this Court is not bound by either legal perspective
expounded in United States v. R.L.C., said case provides a useful framework in our
own examination of the scope and application of Section 144.

After a meticulous consideration of the arguments presented by both sides, the Court
comes to the conclusion that there is textual ambiguity in Section 144; moreover,
such ambiguity remains even after an examination of its legislative history and the
use of other aids to statutory construction, necessitating the application of the rule of
lenity in the case at bar. Xxxx

Under the circumstances of this case, we are convinced to adopt a similar view. For
this reason, we take into account the avowed legislative policy in the enactment of
the Corporation Code as outlined in the Sponsorship Speech of Minister Mendoza:
xxx

The Corporation Code was intended as a regulatory measure, not primarily as a

penal statute. Sections 31 to 34 in particular were intended to impose exacting
standards of fidelity on corporate officers and directors but without unduly impeding
them in the discharge of their work with concerns of litigation. Considering the object
and policy of the Corporation Code to encourage the use of the corporate entity as
a vehicle for economic growth, we cannot espouse a strict construction of Sections
31 and 34 as penal offenses in relation to Section 144 in the absence of
unambiguous statutory language and legislative intent to that effect.

Ang-Abaya v. Ang,
G.R. No. 178511, December 4, 2008

In order therefore for the penal provision under Section 144 of the Corporation Code to
apply in a case of violation of a stockholder or member's right to inspect the corporate
books/records as provided for under Section 74 of the Corporation Code, the following
elements must be present:

First. A director, trustee, stockholder or member has made a prior

demand in writing for a copy of excerpts from the corporation's records
or minutes;

Page 18 of 38
 Second. Any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the corporation
to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the

board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such
refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense
that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information
secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or
for a legitimate purpose in making his demand, the contrary must be
shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the
defense of improper use or motive is in the nature of a justifying circumstance that
would exonerate those who raise and are able to prove the same. Accordingly, where
the corporation denies inspection on the ground of improper motive or purpose, the
burden of proof is taken from the shareholder and placed on the corporation.

Section 145. Amendment or repeal. – No right or remedy in favor of or against

any corporation, its stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (n)

Section 146. Repealing clause. – Except as expressly provided by this Code, all
laws or parts thereof inconsistent with any provision of this Code shall be
deemed repealed. (n)

Section 147. Separability of provisions. – Should any provision of this Code or

any part thereof be declared invalid or unconstitutional, the other provisions, so
far as they are separable, shall remain in force. (n)

Section 148. Applicability to existing corporations. – All corporations lawfully

existing and doing business in the Philippines on the date of the effectivity of
this Code and heretofore authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the provisions hereof:
Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a
Page 19 of 38
period of not more than two (2) years from the effectivity of this Code within
which to comply with the same. (n)

Section 149. Effectivity. – This Code shall take effect immediately upon its
approval.

Approved, May 1, 1980

DERIVATIVE SUIT CONCEPT & APPLICATION

Bangko Sentral ng Pilipinas v. Campa, Jr.,

G.R. No. 185979, March 16, 2016

Bankwise applied for a Special Liquidity Facility (SLF) loan from BSP sometime in
2000. BSP advised Bankwise to submit mortgages of properties owned by third parties
to secure its outstanding obligation to BSP. In compliance with the requirement,
Bankwise mortgaged some real properties belonging to third-party mortgagors, among
them, properties of herein respondents.

When Bankwise failed to pay its obligations to BSP, the latter applied for extra-judicial
foreclosure of the third-party mortgages. All mortgaged properties were sold at public
auction to BSP being the highest bidder and corresponding certificates of sale were
registered.

On 18 April 2006, Eduardo Aliño (Aliño) filed a Complaint against BSP and Bankwise.
Aliño alleged that he is a stockholder of VR Holdings, owning 10% of the outstanding
shares of stock therein. Aliño averred that he allowed his properties to be used by
Bankwise as collateral for the SLF loan because Bankwise and VR Holdings assured
him that the properties will be returned to him and that he will not be exposed to the
risk of foreclosure. According to Aliño, BSP reassured him that it would allow Bankwise
to settle its outstanding obligation by way of dacion en pago.

On 3 January 2007, respondents Vicente Jose Campa, Jr., Miriam M. Campa, Maria
Antonia C. Ortigas, Maria Teresa C. Arevalo, Maria Nieves C. Alvarez, Marian M.
Campa and Balbino Jose Campa filed a Motion for Leave to Intervene and Admit their
Complaint-in-Intervention. Respondents asserted that they have a legal interest in the
matter of litigation being the registered owners of certain real properties subject of the
mortgage and in accommodation of the request of Bankwise who assured them that
there is no risk of foreclosure. They allowed their properties to be used as security for
Bankwise's SLF with BSP. Respondents repleaded the causes of action submitted by
Aliño in his Complaint.

Page 20 of 38
BSP opposed the motion. But on 24 April 2007, 10 the RTC through Judge Emma S.
Young granted the motion and admitted the Complaint-in-Intervention filed by
respondents.

On 15 July 2008, 12 the Court of Appeals ruled in favor of respondents and found no
grave abuse of discretion on the part of the trial court in allowing the motion for leave
to intervene and admission of a Complaint-in-Intervention.

BSP insists that since Commercial Case No. 06-114866 is a derivative suit filed by
Aliño as a stockholder of VR Holdings, respondents cannot have an actual legal
interest in the matter of litigation because they are not stockholders in VR Holdings.
BSP maintains that respondents' intervention was being sought to delay consolidation
of title in the name of BSP and BSP's taking possession of the subject properties which
are necessary consequences of foreclosure. BSP urges this Court to apply the trial
court's denial of a similar intervention in this case sought by Haru Gen.

Ruling:

While the primary issue relates to the propriety of an intervention, BSP's opposition is
anchored on the nature of a derivative suit which, according to it, effectively disallows
intervention by a non-stockholder.

A derivative action is a suit by a shareholder to enforce a corporate

cause of action. Under the Corporation Code, where a corporation is
an injured party, its power to sue is lodged with its board of directors
or trustees. But an individual stockholder may be permitted to
institute a derivative suit on behalf of the corporation in order to
protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control
of the corporation. In such actions, the corporation is the real party-
in-interest while the suing stockholder, on behalf of the corporation,
is only a nominal party.

A stockholder's right to institute a derivative suit is not based on any express provision
of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties.

Prior to the promulgation of the Interim Rules of Procedure Governing Intra-Corporate

Controversies, the requirements for derivative suits were encapsulated in San Miguel
Corporation v. Kahn, to wit:

Page 21 of 38
 1. 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;

2. 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; and

3. 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. 17

These jurisprudential requirements were incorporated in Section 1, Rule 8 of A.M. No.

01-2-04-SC, otherwise known as the Interim Rules of Procedure Governing Intra-
Corporate Controversies under Republic Act No. 8799. Section 1 reads:

(1) The person filing the suit must be a stockholder or member at the time the
acts or transactions subject of the action occurred and the time the action was
filed;

(2) He must have exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit.

It is a condition sine qua non that the corporation be impleaded as party in a derivative
suit. The Court explained in Asset Privatization Trust v. Court of Appeals the rationale:

Not only is the corporation an indispensible party, but it is also the present rule
that it must be served with process. The reason given is that the judgment must
be made binding upon the corporation in order that the corporation may get the
benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must
be joined as party because it is its cause of action that is being litigated and
because judgment must be a res judicata against it.

Page 22 of 38
At the outset, the rule on derivative suits presupposes that the corporation is the
injured party and the individual stockholder may file a derivative suit on behalf of the
corporation to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control of the corporation.

The damage in this case does not really devolve on the corporation. The harm or injury
that Aliño sought to be prevented pertains to properties registered under Aliño and
other third-party mortgagors.

The following quoted portions of the Complaint show that the allegations pertain to
injury caused to Aliño alone and not to the corporation xxx xxx xxx

The suit clearly is not for the benefit of the corporation for a judgment in favor of the
complainant would mean recovery of his personal property. There is no actual or
threatened injury alleged to have been done to the corporation due to the foreclosure
of the properties belonging to third-party mortgagors.

A reading of the Interim Rules further demonstrates that the complaint could not be
considered a derivative suit.

First, Aliño failed to exhaust all remedies available to him as a stockholder of VR

Holdings. xxxxx

Second, the unavailability of appraisal right as a requirement for derivative suits does
not apply in this case. A stockholder who dissents from certain corporate actions has
the right to demand payment of the fair value of his or her shares. This right, known
as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code
xxxxx

The appraisal right does not obtain in this case because the subject of the act
complained of is the private properties of a stockholder and not that of the corporation.

Third, the instant case is a harassment suit. In determining whether a complaint is

considered a harassment suit, the following guidelines are provided in Section 1 (b),
Rule I of the Interim Rules of Procedure for Intra-Corporate Controversies, thus:

(b) Prohibition against nuisance and harassment suits. — Nuisance and

harassment suits are prohibited. In determining whether a suit is a nuisance or
harassment suit, the court shall consider, among others, the following:

(1) The extent of the shareholding or interest of the initiating stockholder

or member;

(2) Subject matter of the suit;

(3) Legal and factual basis of the complaint;

Page 23 of 38
 (4) Availability of appraisal rights for the act or acts complained of; and

(5) Prejudice or damage to the corporation, partnership, or association

in relation to the relief sought.

The guidelines basically summed up the three previous requisites of a derivative suit
and more importantly, it is highlighted that the damage must be caused to the
corporation.

When Republic Act No. 8799 took effect, the Securities and Exchange Commission's
(SEC) exclusive and original jurisdiction over cases enumerated in Section 5 of
Presidential Decree No. 902-A 27 was transferred to the RTC designated as a special
commercial court. As long as the nature of the controversy is intra-corporate, the
designated RTCs have the authority to exercise jurisdiction over such cases. The
Court reproduced the above jurisdiction in Rule I of the Interim Rules of Procedure
Governing Intra-corporate Controversies under Republic Act No. 8799:

SECTION 1. (a) Cases Covered. — These Rules shall govern the procedure
to be observed in civil cases involving the following:

(1) Devices or schemes employed by, or any act of, the board of
directors, business associates, officers or partners, amounting to fraud
or misrepresentation which may be detrimental to the interest of the
public and/or of the stockholders, partners, or members of any
corporation, partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or

association relations, between and among stockholders, members, or
associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or
associates, respectively;

(3) Controversies in the election or appointment of directors, trustees,

officers, or managers of corporations, partnerships, or associations;

(4) Derivative suits; and

(5) Inspection of corporate books.

Considering that the Aliño complaint is not a derivative suit, it would have been proper
to dismiss it the case for lack of jurisdiction. xxxxx

It can be gleaned from the aforementioned cases that a ruling that a complaint is not
a derivative suit results in the dismissal of the complaint. This doctrine is deemed
abandoned by the recent case of Gonzales v. GJH Land which now disallows
Page 24 of 38
the dismissal of the case. In said case, a complaint for injunction was filed by
petitioners against GJH Land before the RTC of Muntinlupa. The case involved an
intra-corporate dispute. The case was raffled to Branch 276, which is not a commercial
court. Branch 276 dismissed the case for lack of jurisdiction. We reversed and ordered
the re-raffling of the case to all the RTCs of the place where the complaint was filed.
We explained the principle behind the new rule:

[T]he re-raffling of an ordinary civil case in this instance to all courts is

permissible due to the fact that a particular branch which has been
designated as a Special Commercial Court does not shed the RTC's
general jurisdiction over ordinary civil cases under the imprimatur of
statutory law, i.e., Batas Pambansa Bilang (BP) 129. To restate, the
designation of Special Commercial Courts was merely intended as a
procedural tool to expedite the resolution of commercial cases in line
with the court's exercise of jurisdiction. This designation was not made
by statute but only by an internal Supreme Court rule under its authority
to promulgate rules governing matters of procedure and its constitutional
mandate to supervise the administration of all courts and the personnel
thereof. Certainly, an internal rule promulgated by the Court cannot go
beyond the commanding statute. But as a more fundamental reason, the
designation of Special Commercial Courts is, to stress, merely an
incident related to the court's exercise of jurisdiction, which, as first
discussed, is distinct from the concept of jurisdiction over the subject
matter. The RTC's general jurisdiction over ordinary civil cases is
therefore not abdicated by an internal rule streamlining court procedure.

Following Gonzales, the instant case, which we find to be an ordinary

civil case and the jurisdiction of which pertains to the RTC, should be re-
raffled to all the RTCs of the place where the complaint was filed.
Dismissal of the action is no longer the proper recourse.

x--------------------------------------------x

Florete, Jr. v. Florete,

G.R. No. 174909 & 177275, January 20, 2016

A stockholder may suffer from a wrong done to or involving a corporation, but

this does not vest in the aggrieved stockholder a sweeping license to sue in his
or her own capacity. The determination of the stockholder's appropriate remedy
— whether it is an individual suit, a class suit, or a derivative suit — hinges on
the object of the wrong done. When the object of the wrong done is the
corporation itself or "the whole body of its stock and property without any
severance or distribution among individual holders," it is a derivative suit, not
an individual suit or class/representative suit, that a stockholder must resort to.

Page 25 of 38
Facts:

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had
four (4) children: Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma.
Elena), Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita),
now deceased.

People's Broadcasting Service, Inc. (People's Broadcasting) is a private

corporation authorized to operate, own, maintain, install, and construct radio
and television stations in the Philippines. In its incorporation on March 8,
1966, it had an authorized capital stock of P250,000.00 divided into 2,500
shares at P100.00 par value per share. Twenty-five percent (25%) of the
corporation's authorized capital stock were then subscribed to as follows:

Stockholder Number of Shares

Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares

Salome Florete (Salome) 100 shares
Ricardo Berlin (Berlin) 50 shares
Pacifico Sudario (Sudario) 50 shares
Atty. Santiago Divinagracia (Divinagracia), 50 shares
now deceased

On November 17, 1967, Berlin and Sudario resigned from their positions as
General Manager and Station Supervisor, respectively. Berlin and Sudario
each transferred 20 shares to Raul Muyco and Estrella Mirasol.

Salome died on November 22, 1980. Marcelino, Sr. suffered a stroke on July
12, 1982, which left him paralyzed and bedridden until his death on October 3,
1990. After Marcelino, Sr.'s stroke, their son, Rogelio, Sr. started managing the
affairs of People's Broadcasting.
SDHTEC

In October 1993, People's Broadcasting sought the services of the accounting

and auditing firm Sycip Gorres Velayo and Co. in order to determine the
ownership of equity in the corporation. On November 2, 1994, Sycip Gorres
Velayo and Co. submitted a report detailing the movements of the corporation's
shares from November 23, 1967 to December 8, 1989. Xxxxxxx

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co.
declined to give a categorical statement on equity ownership as People's
Broadcasting's corporate records were incomplete. The report contained the
following disclaimer on the findings regarding the corporation's capital structure:

Page 26 of 38
 Because the procedures included certain assumptions as
represented by the corporate secretaries mentioned in Attachment I
and we have not verified the documents supporting some of the
transactions, we do not express an opinion on the capital stock
accounts of the respective companies [including People's
Broadcasting] as at October 31, 1993.

On February 1, 1997, the Board of Directors of People's Broadcasting approved

Sycip Gorres Velayo and Co.'s report.

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the

members of his immediate family, namely: Imelda Florete, Rogelio Florete, Jr.,
and Margaret Ruth Florete, as well as to Diamel Corporation, a corporation
owned by Rogelio, Sr.'s family.

As of April 27, 2002, the stockholders of record of People's Broadcasting were

the following:

Stockholder No. of Shares

1. Diamel Corporation 30,000.00

2. Rogelio Florete [Sr.] 153,881.53
3. Marcelino Florete, Jr. 18,240.99
4. Ma. Elena Muyco 18,227.23
5. Santiago Divinagracia 30,289.25
6. Imelda Florete 1,000.00
7. Rogelio Florete, Jr. 100.00
8. Margaret Ruth Florete 100.00
9. Raul Muyco 10.00
10. Manuel Villa, Jr. 10.00
11. Gregorio Rubias 1.00
12. Cyril Regaldao 1.00
13. Jose Mari Treñas 1.00
14. Enrico Jacomille 1.00
15. Joseph Vincent Go 1.00
16. Jerry Treñas 1.00
17. Efrain Treñas 10.00

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr.
Group) filed before the Regional Trial Court a Complaint for Declaration of
Nullity of Issuances, Transfers and Sale of Shares in People's Broadcasting
Service, Inc. and All Posterior Subscriptions and Increases thereto with
Damages against Diamel Corporation, Rogelio, Sr., Imelda Florete, Margaret
Florete, and Rogelio Florete, Jr. (Rogelio, Sr. Group).

Page 27 of 38
The Regional Trial Court issued a Decision (which it called a "Placitum")
dismissing the Marcelino, Jr. Group's Complaint. It ruled that the Marcelino, Jr.
Group did not have a cause of action against the Rogelio, Sr. Group and that
the former is estopped from questioning the assailed movement of shares of
People's Broadcasting. It also ruled that indispensible parties were not joined
in their Complaint.

On August 15, 2005, Rogelio, Sr. filed a Motion for the immediate execution of
the award of moral and exemplary damages pursuant to Rule I, Section 4 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies with
the RTC.

Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of
action against those whom they have impleaded as defendants. It also noted
that the principal obligors in or perpetrators of the assailed transactions were
persons other than those in the Rogelio, Sr. Group who have not been
impleaded as parties. Thus, the Court of Appeals emphasized that the following
parties were indispensable to the case: People's Broadcasting; Marcelino, Sr.;
Consolidated Broadcasting System, Inc.; Salome; Divinagracia; Teresita; and
"other stockholders of [People's Broadcasting] to whom the shares were
transferred or the nominees of the stockholders."

Ruling:
I
The sufficiency of the Marcelino, Jr. Group's plea for relief, through their
Complaint for Declaration of Nullity of Issuances, Transfers and Sale of Shares
in People's Broadcasting Service, Inc. and All Posterior Subscriptions and
Increases thereto with Damages, 81 hinges on a characterization of the suit or
action they initiated. This characterization requires a determination of the cause
of action through which the Marcelino, Jr. Group came to court for relief. It will,
thus, clarify the parties who must be included in their action and the procedural
and substantive requirements they must satisfy if their action is to prosper.

A stockholder suing on account of wrongful or fraudulent corporate actions

(undertaken through directors, associates, officers, or other persons) may sue
in any of three (3) capacities: as an individual; as part of a group or specific
class of stockholders; or as a representative of the corporation.
Villamor v. Umale distinguished individual suits from class or representative
suits:

Page 28 of 38
 Individual suits are filed when the cause of action belongs to the
individual stockholder personally, and not to the stockholders as a
group or to the corporation, e.g., denial of right to inspection and denial
of dividends to a stockholder. If the cause of action belongs to a group
of stockholders, such as when the rights violated belong to preferred
stockholders, a class or representative suit may be filed to protect the
stockholders in the group.

Villamor further explained that a derivative suit "is an action filed by

stockholders to enforce a corporate action." A derivative suit, therefore,
concerns "a wrong to the corporation itself." The real party in interest is the
corporation, not the stockholders filing the suit. The stockholders are technically
nominal parties but are nonetheless the active persons who pursue the action
for and on behalf of the corporation.

Remedies through derivative suits are not expressly provided for in our statutes
— more specifically, in the Corporation Code and the Securities Regulation
Code — but they are "impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties." They are intended to afford
reliefs to stockholders in instances where those responsible for running the
affairs of a corporation would not otherwise act:

However, in cases of mismanagement where the wrongful acts are

committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are
vested by law with the right to decide whether or not the corporation
should sue, and they will never be willing to sue themselves. The
corporation would thus be helpless to seek remedy. Because of the
frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation
in what eventually became known as a "derivative suit." It has been
proven to be an effective remedy of the minority against the abuses of
management. Thus, an individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded
as the nominal party, with the corporation as the party in interest.
DHAES

The distinction between individual and class/representative suits on one hand

and derivative suits on the other is crucial. These are not discretionary
alternatives. The fact that stockholders suffer from a wrong done to or involving
a corporation does not vest in them a sweeping license to sue in their own

Page 29 of 38
capacity. The recognition of derivative suits as a vehicle for redress distinct from
individual and representative suits is an acknowledgment that certain wrongs
may be addressed only through acts brought for the corporation:

Although in most every case of wrong to the corporation, each

stockholder is necessarily affected because the value of his interest
therein would be impaired, this fact of itself is not sufficient to give him
an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer.

In Asset Privatization Trust v. Court of Appeals, the reasons for disallowing a

direct individual suit were further explained:

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a

corporation has no title legal or equitable to the corporate property; that
both of these are in the corporation itself for the benefit of the
stockholders." In other words, to allow shareholders to sue separately
would conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus,
our Supreme Court held in the case of Evangelista v. Santos, that 'the
stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of Section 16 of the Corporation
Law. . .";

(3) the filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial

recovery by an individual on the damages recoverable by the
corporation for the same act.

The avenues for relief are, thus, mutually exclusive. The determination of the
appropriate remedy hinges on the object of the wrong done. When the object is
a specific stockholder or a definite class of stockholders, an individual suit or
class/representative suit must be resorted to. When the object of the wrong
done is the corporation itself or "the whole body of its stock and property without

Page 30 of 38
any severance or distribution among individual holders," it is a derivative suit
that a stockholder must resort to. In Cua, Jr. v. Tan:

Indeed, the Court notes American jurisprudence to the effect that a

derivative suit, on one hand, and individual and class suits, on the
other, are mutually exclusive, viz.:

As the Supreme Court has explained: "A shareholder's

derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when
injury is caused to the corporation that may not otherwise
be redressed because of failure of the corporation to
act. Thus, 'the action is derivative, i.e., in the corporate
right, if the gravamen of the complaint is injury to the
corporation, or to the whole body of its stock and property
without any severance or distribution among individual
holders, or it seeks to recover assets for the corporation
or to prevent the dissipation of its assets.'" In contrast, "a
direct action [is one] filed by the shareholder individually
(or on behalf of a class of shareholders to which he or
she belongs) for injury to his or her interest as a
shareholder. . . . [T]he two actions are mutually
exclusive: i.e., the right of action and recovery belongs to
either the shareholders (direct action) or the corporation
(derivative action)."

Thus, in Nelson v. Anderson, the minority shareholder

alleged that the other shareholder of the corporation
negligently managed the business, resulting in its total
failure. The appellate court concluded that the plaintiff
could not maintain the suit as a direct action: "Because
the gravamen of the complaint is injury to the whole body
of its stockholders, it was for the corporation to institute
and maintain a remedial action. A derivative action would
have been appropriate if its responsible officials had
refused or failed to act." The court went on to note that
the damages shown at trial were the loss of corporate
profits. Since "[s]hareholders own neither the property
nor the earnings of the corporation," any damages that
the plaintiff alleged that resulted from such loss of
corporate profits "were incidental to the injury to the
corporation." (Emphasis supplied, citations omitted)

Villamor recalls the requisites for filing derivative suits:

Page 31 of 38
 Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate
Controversies (Interim Rules) provides the five (5) requisites for filing
derivative suits:

SECTION 1. Derivative action. — A stockholder or member

may bring an action in the name of a corporation or
association, as the case may be,provided, that:

(1) He was a stockholder or member at the time the acts or

transactions subject of the action occurred and at the time
the action was filed;
(2) He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws
or rules governing the corporation or partnership to obtain
the relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and ASEcHI

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall

forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is
implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action
brought by the stockholder or member must be "in the name of [the] corporation or
association. . . ." This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that
"[a]mong the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on
behalf of the corporation and all other shareholders similarly situated who wish to join
[him].". . .

Moreover, it is important that the corporation be made a party to the case. (Citations
omitted)

II

The greater number of cases that sustained stockholders' recourse to

derivative suits involved corporate acts amounting to mismanagement by either
the corporation's directors or officers in relations to third persons. Several cases
serve as examples.

Page 32 of 38
Hi-Yield Realty v. Court of Appeals affirmed the Regional Trial Court's and
Court of Appeals' characterization of a Petition for Annulment of Real Estate
Mortgage and Foreclosure Sale as a derivative suit. The Petition was initiated
by private respondent Roberto H. Torres, a stockholder, on behalf of the
corporation Honorio Torres & Sons, Inc. Petitioner Hi-Yield Realty, Inc. was
among the defendants to the Petition, along with the related parties, Leonora,
Ma. Theresa, Glenn, and Stephanie, all surnamed Torres, as well as the
Registers of Deeds of Marikina and of Quezon City. Against Hi-Yield Realty,
Inc.'s claims, this court sustained the respondent's position that the Petition was
"primarily a derivative suit to redress the alleged unauthorized acts of its
corporate officers and major stockholders in connection with the lands."

Cua, Jr. considered two corporate acts to be valid objects of a derivative suit.
The first was a resolution of the Board of Directors of the corporation Philippine
Racing Club, Inc. to acquire up to 100% of the common shares of another
corporation, JTH Davies Holdings, Inc., as well as to appoint Santiago Cua, Jr.
"to act as attorney-in-fact and proxy who could vote all the shares of [Philippine
Racing Club, Inc.] in [JTH Davies Holdings, Inc.], as well as nominate, appoint,
and vote into office directors and/or officers during regular and special
stockholders meetings of [JTH Davies Holdings, Inc.]." The second was
another resolution of Philippine Racing Club, Inc.'s Board of Directors
"approving the property-for-shares exchange between P[hilippine] R[acing]
C[lub], I[nc]. and [JTH Davies Holdings, Inc.]."

In Cua, Jr., the derivative suit grounded on the first was dismissed by this court
for being moot and academic. The suit grounded on the second was similarly
dismissed for failure to comply with one of the requisites for instituting a
derivative suit. The plaintiffs "made no mention at all of appraisal rights, which
could or could not have been available to them[,]" thereby violating Rule 8,
Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies.

As with Hi-Yield Realty and Cua, Go v. Distinction Properties Development and

Construction, Inc. concerned a corporate action taken in relation to a third
person.

Petitioners Philip L. Go, Pacifico Q. Lim and Andrew Q. Lim filed before the
Housing and Land Use Regulatory Board a Complaint, which they claimed was
one for specific performance intended to compel the developer of Phoenix
Heights Condominium, Distinction Properties Development and Construction,
Inc. (Distinction Properties), to fulfill its contractual obligations. The Complaint
was filed in the wake of an agreement entered into by Distinction Properties
with the condominium corporation Phoenix Heights Condominium Corporation

Page 33 of 38
(PHCC). PHCC "approved a settlement offer from [Distinction Properties] for
the set-off of the latter's association dues arrears with the assignment [from
Distinction Properties] of title over [two saleable commercial units/spaces
originally held by Distinction Properties] and their conversion into common
areas."

This court clarified that the true purpose of the petitioners' action was not to
compel Distinction Properties to fulfill its contractual obligations. Instead,
"petitioners [we]re actually seeking to nullify and invalidate the duly constituted
acts of PHCC — the April 29, 2005 Agreement entered into by PHCC with
DPDCI and its Board Resolution which authorized the acceptance of the
proposed offsetting/settlement of DPDCI's indebtedness and approval of the
conversion of certain units from saleable to common areas." This court thereby
concluded that "the cause of action rightfully pertains to PHCC [and that]
[p]etitioners cannot exercise the same except through a derivative suit."

The prevalence of derivative suits arising from corporate actions taken in

relation to third persons is to be expected. After all, it is easier to perceive the
wrong done to a corporation when third persons unduly gain an advantage.
However, this does not mean that derivative suits cannot arise with respect to
conflicts among a corporation's directors, officers, and stockholders.

Ching and Wellington v. Subic Bay Golf and Country Club sustained the
Regional Trial Court's and Court of Appeals' characterization of the Complaint
filed by stockholders against officers of the corporation as a derivative suit.
Nestor Ching and Andrew Wellington filed a Complaint in their own names and
in their right as individual stockholders assailing an amendment introduced into
Subic Bay Golf and Country Club's articles of incorporation, which supposedly
"takes away the right of the shareholders to participate in the pro-
rata distribution of the assets of the corporation after its dissolution." They
anchored their action on Section 5 (a) of Presidential Decree No. 902-A. They
claimed that this statutory provision "allows any stockholder to file a complaint
against the Board of Directors for employing devices or schemes amounting to
fraud and misrepresentation which is detrimental to the interest of the public
and/or the stockholders."

This court did not sustain Nestor Ching's and Andrew Wellington's claim of a
right to sue in their own capacity. Concluding that the petitioners' action was a
derivative suit, this court explained:

The reliefs sought in the Complaint, namely that of enjoining

defendants from acting as officers and Board of Directors of the

Page 34 of 38
 corporation, the appointment of a receiver, and the prayer for
damages in the amount of the decrease in the value of the shares of
stock, clearly show that the Complaint was filed to curb the alleged
mismanagement of [Subic Bay Gold and Country Club]. The causes
of action pleaded by petitioners do not accrue to a single shareholder
or a class of shareholders but to the corporation itself. (Emphasis
supplied)

We are mindful that in 1979, in Gamboa v. Victoriano, this court characterized

an action to nullify the sale of 823 unissued shares on the ground of violating
the plaintiffs' pre-emptive rights and in violation of the voting requirement for
the Board of Directors as not a derivative suit. This court characterized the
action as one in which "the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation."

This pronouncement cannot be considered as a binding precedent for holding

actions of the sort filed by the plaintiffs therein to not be derivative suit. This
point in Gamboa was mere obiter dictum. The main issue in Gamboa was the
validity of the trial court's denial of the Motion to Dismiss filed by four of the
seven defendants after the plaintiffs entered into a compromise agreement with
the three other defendants. The resolution of this issue was contingent on the
determination of whether the compromise amounted to the plaintiff's waiver and
estoppel for having conceded the validity of the sale. Besides, this court itself
acknowledged that the statement it made characterizing the action brought by
the plaintiffs was premature. Immediately after saying that "the plaintiffs are
alleging and vindicating their own individual interests or prejudice, and not that
of the corporation[,]" this court stated: "At any rate, it is yet too early in the
proceedings since the issues have not been joined."

III
In this case, the Marcelino, Jr. Group anchored their Complaint on
violations of and liabilities arising from the Corporation Code, specifically:
Section 23 (on corporate decision-making being vested in the board of
directors), Section 25 (quorum requirement for the transaction of corporate
business), Sections 39 and 102 (both on stockholders' pre-emptive rights),
Section 62 (stipulating the consideration for which stocks must be issued),
Section 63 (stipulating that notransfer of shares "shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation"), and Section 65 (on liabilities of directors and officers "to the
corporation and its creditors" for the issuance of watered stocks) in relation to
provisions in People's Broadcasting's Articles of Incorporation and By-Laws as
regards conditions for issuances of and subscription to shares. The Marcelino,

Page 35 of 38
Jr. Group ultimately prays that People's Broadcasting's entire capital structure
be reconfigured to reflect a status quo ante.

As with Ching and Wellington, the actions being assailed by the Marcelino, Jr.
Group pertain to parties that are not extraneous to People's Broadcasting. They
assail and seek to nullify acts taken by various iterations of People's
Broadcasting's Board of Directors. All these acts and incidents concern the
capital structure of People's Broadcasting. These acts reconfigured, through
redistribution and enlargement, the structure of People's Broadcasting's equity
ownership. These acts also admitted into People's Broadcasting new equity
holders such as Consolidated Broadcasting System, Inc. and Newsounds
Broadcasting Network, Inc.

As Ching and Wellington exemplifies, the action should be a proper derivative

suit even if the assailed acts do not pertain to a corporation's transactions with
third persons. Cua, Jr. established that the pivotal consideration is whether the
wrong done as well as the cause of action arising from it accrues to the
corporation itself or to the whole body of its stockholders. Ching and
Wellington states that if "[t]he causes of action pleaded . . . do not accrue to a
single shareholder or a class of shareholders but to the corporation itself," the
action should be deemed a derivative suit. Also, in Go, an action "seeking to
nullify and invalidate the duly constituted acts [of a corporation]" entails a cause
of action that "rightfully pertains to [the corporation itself and which
stockholders] cannot exercise . . . except through a derivative suit."

These are the same conditions in this case. What the Marcelino, Jr. Group asks
is the complete reversal of a number of corporate acts undertaken by People'
Broadcasting's different boards of directors. These boards supposedly engaged
in outright fraud or, at the very least, acted in such a manner that amounts to
wanton mismanagement of People's Broadcasting's affairs. The ultimate effect
of the remedy they seek is the reconfiguration of People's Broadcasting's
capital structure.

The remedies that the Marcelino, Jr. Group seeks are for People's Broadcasting
itself to avail. Ordinarily, these reliefs may be unavailing because objecting
stockholders such as those in the Marcelino, Jr. Group do not hold the
controlling interest in People's Broadcasting. This is precisely the situation that
the rule permitting derivative suits contemplates: minority shareholders
having no other recourse "whenever the directors or officers of the corporation
refuse to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation."

Page 36 of 38
The Marcelino, Jr. Group points to violations of specific provisions of
the Corporation Code that supposedly attest to how their rights as stockholders
have been besmirched. However, this is not enough to sustain a claim that the
Marcelino, Jr. Group initiated a valid individual or class suit. To reiterate,
whether stockholders suffer from a wrong done to or involving a corporation
does not readily vest in them a sweeping license to sue in their own capacity.

The specific provisions adverted to by the Marcelino, Jr. Group signify alleged
wrongdoing committed against the corporation itself and not uniquely to those
stockholders who now comprise the Marcelino, Jr. Group. A violation of
Sections 23 and 25 of the Corporation Code — on how decision-making is
vested in the board of directors and on the board's quorum requirement —
implies that a decision was wrongly made for the entire corporation, not just
with respect to a handful of stockholders. Section 65 specifically mentions that
a director's or officer's liability for the issuance of watered stocks in violation of
Section 62 is solidary "to the corporation and its creditors," not to any specific
stockholder. Transfers of shares made in violation of the registration
requirement in Section 63 are invalid and, thus, enable the corporation to
impugn the transfer. Notably, those in the Marcelino, Jr. Group have not shown
any specific interest in, or unique entitlement or right to, the shares supposedly
transferred in violation of Section 63.

Also, the damage inflicted upon People's Broadcasting's individual

stockholders, if any, was indiscriminate. It was not unique to those in the
Marcelino, Jr. Group. It pertained to "the whole body of [People's
Broadcasting's] stock." Accordingly, it was upon People's Broadcasting itself
that the causes of action now claimed by the Marcelino, Jr. Group accrued.
While stockholders in the Marcelino, Jr. Group were permitted to seek relief,
they should have done so not in their unique capacity as individuals or as a
group of stockholders but in place of the corporation itself through a derivative
suit. As they, instead, sought relief in their individual capacity, they did so bereft
of a cause of action. Likewise, they did so without even the slightest averment
that the requisites for the filing of a derivative suit, as spelled out in Rule 8,
Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies,
have been satisfied. Since the Complaint lacked a cause of action and failed to
comply with the requirements of the Marcelino, Jr. Group's vehicle for relief, it
was only proper for the Complaint to have been dismissed.

IV
Erroneously pursuing a derivative suit as a class suit not only meant that the
Marcelino, Jr. Group lacked a cause of action; it also meant that they failed to
implead an indispensable party.

Page 37 of 38
In derivative suits, the corporation concerned must be impleaded as a party. As
explained in Asset Privatization Trust:

Not only is the corporation an indispensible party, but it is also the

present rule that it must be served with process. The reason given is
that the judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not
bring a subsequent suit against the same defendants for the same
cause of action. In other words the corporation must be joined as
party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata [sic] against it.

We have already discussed Go where this court concluded that an action

brought by three individual stockholders was, in truth, a derivative suit. There,
this court further explained that a case cannot prosper when the proper party is
not impleaded xxxxx
V
There are two consequences of a finding on appeal that indispensable parties
have not been joined. First, all subsequent actions of the lower courts are null
and void for lack of jurisdiction. Second, the case should be remanded to the
trial court for the inclusion of indispensable parties. It is only upon the plaintiff's
refusal to comply with an order to join indispensable parties that the case may
be dismissed.

All subsequent actions of lower courts are void as to both the absent and
present parties. To reiterate, the inclusion of an indispensable party is a
jurisdictional requirement: xxxxxxx

x---------------------------------------------x

Page 38 of 38