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232 SCRA 110 – Business Organization – Corporation Law – PCSO’s Charter

In 1993, the Philippine Charity Sweepstakes Office decided to put up an on-line lottery
system which will establish a national network system that will in turn expand PCSO’s
source of income.
A bidding was made. Philippine Gaming Management Corporation (PGMC) won it. A
contract of lease was awarded in favor of PGMC.
Kilosbayan opposed the said agreement between PCSO and PGMC as it alleged that:

1. PGMC does not meet the nationality requirement because it is 75% foreign owned (owned
by a Malaysian firm Berjaya Group Berhad);
2. PCSO, under Section 1 of its charter (RA 1169), is prohibited from holding and conducting
lotteries “in collaboration, association or joint venture with any person, association,
company or entity”;
3. The network system sought to be built by PGMC for PCSO is a telecommunications
network. Under the law (Act No. 3846), a franchise is needed to be granted by the
Congress before any person may be allowed to set up such;
4. PGMC’s articles of incorporation, as well as the Foreign Investments Act (R.A. No. 7042)
does not allow it to install, establish and operate the on-line lotto and telecommunications
systems.

PGMC and PCSO, through Teofisto Guingona, Jr. and Renato Corona, Executive Secretary
and Asst. Executive Secretary respectively, alleged that PGMC is not a collaborator but
merely a contractor for a piece of work, i.e., the building of the network; that PGMC is a
mere lessor of the network it will build as evidenced by the nature of the contract agreed
upon, i.e., Contract of Lease.
ISSUE: Whether or not Kilosbayan is correct.
HELD: Yes, but only on issues 2, 3, and 4.

1. On the issue of nationality, it seems that PGMC’s foreign ownership was reduced to 40%
though.
2. On issues 2, 3, and 4, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, prohibits
the PCSO from holding and conducting lotteries “in collaboration, association or joint
venture with any person, association, company or entity, whether domestic or foreign.”
There is undoubtedly a collaboration between PCSO and PGMC and not merely a contract
of lease. The relations between PCSO and PGMC cannot be defined simply by the
designation they used, i.e., a contract of lease. Pursuant to the wordings of their agreement,
PGMC at its own expense shall build, operate, and manage the network
system including its facilities needed to operate a nationwide online lottery system. PCSO
bears no risk and all it does is to provide its franchise – in violation of its charter.
Necessarily, the use of such franchise by PGMC is a violation of Act No. 3846.