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II.

CONCEPT AND ATTRIBUTES OF A CORPORATION As operator of the international airport, MIAA administers the land,
improvements and equipment within the NAIA Complex. The MIAA
G.R. No. 155650 July 20, 2006 Charter transferred to MIAA approximately 600 hectares of land,3
including the runways and buildings ("Airport Lands and Buildings")
then under the Bureau of Air Transportation.4 The MIAA Charter further
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,
provides that no portion of the land transferred to MIAA shall be
vs. COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR
disposed of through sale or any other mode unless specifically
OF PARAÑAQUE, SANGGUNIANG PANGLUNGSOD NG
PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and CITY approved by the President of the Philippines.5
TREASURER OF PARAÑAQUE, respondents.
On 21 March 1997, the Office of the Government Corporate Counsel
(OGCC) issued Opinion No. 061. The OGCC opined that the Local
CARPIO, J.:
Government Code of 1991 withdrew the exemption from real estate tax
granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
The Antecedents negotiated with respondent City of Parañaque to pay the real estate tax
imposed by the City. MIAA then paid some of the real estate tax
Petitioner Manila International Airport Authority (MIAA) operates the already due.
Ninoy Aquino International Airport (NAIA) Complex in Parañaque City
under Executive Order No. 903, otherwise known as the Revised On 28 June 2001, MIAA received Final Notices of Real Estate Tax
Charter of the Manila International Airport Authority ("MIAA Charter"). Delinquency from the City of Parañaque for the taxable years 1992 to
Executive Order No. 903 was issued on 21 July 1983 by then President 2001. MIAA's real estate tax delinquency is broken down as follows:
Ferdinand E. Marcos. Subsequently, Executive Order Nos. 9091 and
2982 amended the MIAA Charter.
TAX DECLARATION TAXABLE YEAR TAX DUE PENALTY TOTAL

E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20

E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49

E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00

E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00

E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24

E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99

E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00

E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00

*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50

*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00

*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00

GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for public auction the Airport Lands and Buildings should MIAA fail to pay
P4,207,028.75 the real estate tax delinquency. MIAA thus sought a clarification of
OGCC Opinion No. 061.
#9476101 for P28,676,480.00
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC
#9476103 for P49,115.006 Opinion No. 061. The OGCC pointed out that Section 206 of the Local
Government Code requires persons exempt from real estate tax to
show proof of exemption. The OGCC opined that Section 21 of the
On 17 July 2001, the City of Parañaque, through its City Treasurer,
issued notices of levy and warrants of levy on the Airport Lands and MIAA Charter is the proof that MIAA is exempt from real estate tax.
Buildings. The Mayor of the City of Parañaque threatened to sell at
On 1 October 2001, MIAA filed with the Court of Appeals an original
petition for prohibition and injunction, with prayer for preliminary for tax exemption of public property is that its taxation would not inure
injunction or temporary restraining order. The petition sought to restrain to any public advantage, since in such a case the tax debtor is also the
the City of Parañaque from imposing real estate tax on, levying against, tax creditor.
and auctioning for public sale the Airport Lands and Buildings. The
petition was docketed as CA-G.R. SP No. 66878. Respondents invoke Section 193 of the Local Government Code, which
expressly withdrew the tax exemption privileges of "government-
On 5 October 2001, the Court of Appeals dismissed the petition owned and-controlled corporations" upon the effectivity of the Local
because MIAA filed it beyond the 60-day reglementary period. The Government Code. Respondents also argue that a basic rule of
Court of Appeals also denied on 27 September 2002 MIAA's motion for statutory construction is that the express mention of one person, thing,
reconsideration and supplemental motion for reconsideration. Hence, or act excludes all others. An international airport is not among the
MIAA filed on 5 December 2002 the present petition for review.7 exceptions mentioned in Section 193 of the Local Government Code.
Thus, respondents assert that MIAA cannot claim that the Airport Lands
Meanwhile, in January 2003, the City of Parañaque posted notices of and Buildings are exempt from real estate tax.
auction sale at the Barangay Halls of Barangays Vitalez, Sto. Niño, and
Tambo, Parañaque City; in the public market of Barangay La Huerta; Respondents also cite the ruling of this Court in Mactan International
and in the main lobby of the Parañaque City Hall. The City of Airport v. Marcos8 where we held that the Local Government Code
Parañaque published the notices in the 3 and 10 January 2003 issues has withdrawn the exemption from real estate tax granted to
of the Philippine Daily Inquirer, a newspaper of general circulation in international airports. Respondents further argue that since MIAA has
the Philippines. The notices announced the public auction sale of the already paid some of the real estate tax assessments, it is now
Airport Lands and Buildings to the highest bidder on 7 February 2003, estopped from claiming that the Airport Lands and Buildings are
10:00 a.m., at the Legislative Session Hall Building of Parañaque City. exempt from real estate tax.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., The Issue
MIAA filed before this Court an Urgent Ex-Parte and Reiteratory Motion
for the Issuance of a Temporary Restraining Order. The motion sought This petition raises the threshold issue of whether the Airport Lands
to restrain respondents — the City of Parañaque, City Mayor of and Buildings of MIAA are exempt from real estate tax under existing
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer laws. If so exempt, then the real estate tax assessments issued by the
of Parañaque, and the City Assessor of Parañaque ("respondents") — City of Parañaque, and all proceedings taken pursuant to such
from auctioning the Airport Lands and Buildings. assessments, are void. In such event, the other issues raised in this
petition become moot.
On 7 February 2003, this Court issued a temporary restraining order
(TRO) effective immediately. The Court ordered respondents to cease The Court's Ruling
and desist from selling at public auction the Airport Lands and
Buildings. Respondents received the TRO on the same day that the
We rule that MIAA's Airport Lands and Buildings are exempt from real
Court issued it. However, respondents received the TRO only at 1:25
estate tax imposed by local governments.
p.m. or three hours after the conclusion of the public auction.
First, MIAA is not a government-owned or controlled corporation but an
On 10 February 2003, this Court issued a Resolution confirming nunc
instrumentality of the National Government and thus exempt from
pro tunc the TRO. local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.
On 29 March 2005, the Court heard the parties in oral arguments. In
compliance with the directive issued during the hearing, MIAA,
1. MIAA is Not a Government-Owned or Controlled Corporation
respondent City of Parañaque, and the Solicitor General subsequently
submitted their respective Memoranda.
Respondents argue that MIAA, being a government-owned or
controlled corporation, is not exempt from real estate tax. Respondents
MIAA admits that the MIAA Charter has placed the title to the Airport
claim that the deletion of the phrase "any government-owned or
Lands and Buildings in the name of MIAA. However, MIAA points out
controlled so exempt by its charter" in Section 234(e) of the Local
that it cannot claim ownership over these properties since the real
Government Code withdrew the real estate tax exemption of
owner of the Airport Lands and Buildings is the Republic of the
government-owned or controlled corporations. The deleted phrase
Philippines. The MIAA Charter mandates MIAA to devote the Airport
appeared in Section 40(a) of the 1974 Real Property Tax Code
Lands and Buildings for the benefit of the general public. Since the
enumerating the entities exempt from real estate tax.
Airport Lands and Buildings are devoted to public use and public
service, the ownership of these properties remains with the State. The
Airport Lands and Buildings are thus inalienable and are not subject to There is no dispute that a government-owned or controlled corporation
real estate tax by local governments. is not exempt from real estate tax. However, MIAA is not a government-
owned or controlled corporation. Section 2(13) of the Introductory
Provisions of the Administrative Code of 1987 defines a government-
MIAA also points out that Section 21 of the MIAA Charter specifically
owned or controlled corporation as follows:
exempts MIAA from the payment of real estate tax. MIAA insists that it
is also exempt from real estate tax under Section 234 of the Local
Government Code because the Airport Lands and Buildings are owned SEC. 2. General Terms Defined. – x x x x
by the Republic. To justify the exemption, MIAA invokes the principle
that the government cannot tax itself. MIAA points out that the reason (13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with like chambers." MIAA is not organized for any of these purposes.
functions relating to public needs whether governmental or proprietary MIAA, a public utility, is organized to operate an international and
in nature, and owned by the Government directly or through its domestic airport for public use.
instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one (51) percent of its Since MIAA is neither a stock nor a non-stock corporation, MIAA does
capital stock: x x x. (Emphasis supplied) not qualify as a government-owned or controlled corporation. What
then is the legal status of MIAA within the National Government?
A government-owned or controlled corporation must be "organized as
a stock or non-stock corporation." MIAA is not organized as a stock MIAA is a government instrumentality vested with corporate powers
or non-stock corporation. MIAA is not a stock corporation because it to perform efficiently its governmental functions. MIAA is like any other
has no capital stock divided into shares. MIAA has no stockholders government instrumentality, the only difference is that MIAA is vested
or voting shares. Section 10 of the MIAA Charter9 provides: with corporate powers. Section 2(10) of the Introductory Provisions of
the Administrative Code defines a government "instrumentality" as
SECTION 10. Capital. — The capital of the Authority to be contributed follows:
by the National Government shall be increased from Two and One-half
Billion (P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) SEC. 2. General Terms Defined. –– x x x x
Pesos to consist of:
(10) Instrumentality refers to any agency of the National Government,
(a) The value of fixed assets including airport facilities, runways and not integrated within the department framework, vested with special
equipment and such other properties, movable and immovable[,] which functions or jurisdiction by law, endowed with some if not all
may be contributed by the National Government or transferred by it corporate powers, administering special funds, and enjoying
from any of its agencies, the valuation of which shall be determined operational autonomy, usually through a charter. x x x (Emphasis
jointly with the Department of Budget and Management and the supplied)
Commission on Audit on the date of such contribution or transfer after
making due allowances for depreciation and other deductions taking
When the law vests in a government instrumentality corporate powers,
into account the loans and other liabilities of the Authority at the time of
the instrumentality does not become a corporation. Unless the
the takeover of the assets and other properties; government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
(b) That the amount of P605 million as of December 31, 1986 governmental but also corporate powers. Thus, MIAA exercises the
representing about seventy percentum (70%) of the unremitted share of governmental powers of eminent domain,12 police authority13 and the
the National Government from 1983 to 1986 to be remitted to the levying of fees and charges.14 At the same time, MIAA exercises "all
National Treasury as provided for in Section 11 of E. O. No. 903 as the powers of a corporation under the Corporation Law, insofar as
amended, shall be converted into the equity of the National these powers are not inconsistent with the provisions of this Executive
Government in the Authority. Thereafter, the Government contribution Order."15
to the capital of the Authority shall be provided in the General
Appropriations Act. Likewise, when the law makes a government instrumentality
operationally autonomous, the instrumentality remains part of the
Clearly, under its Charter, MIAA does not have capital stock that is National Government machinery although not integrated with the
divided into shares. department framework. The MIAA Charter expressly states that
transforming MIAA into a "separate and autonomous body"16 will make
Section 3 of the Corporation Code10 defines a stock corporation as one its operation more "financially viable."17
whose "capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x." MIAA has Many government instrumentalities are vested with corporate powers
capital but it is not divided into shares of stock. MIAA has no but they do not become stock or non-stock corporations, which is a
stockholders or voting shares. Hence, MIAA is not a stock corporation. necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan
MIAA is also not a non-stock corporation because it has no members. International Airport Authority, the Philippine Ports Authority, the
Section 87 of the Corporation Code defines a non-stock corporation as University of the Philippines and Bangko Sentral ng Pilipinas. All these
"one where no part of its income is distributable as dividends to its government instrumentalities exercise corporate powers but they are
members, trustees or officers." A non-stock corporation must have not organized as stock or non-stock corporations as required by
members. Even if we assume that the Government is considered as the Section 2(13) of the Introductory Provisions of the Administrative Code.
sole member of MIAA, this will not make MIAA a non-stock corporation. These government instrumentalities are sometimes loosely called
Non-stock corporations cannot distribute any part of their income to government corporate entities. However, they are not government-
their members. Section 11 of the MIAA Charter mandates MIAA to owned or controlled corporations in the strict sense as understood
remit 20% of its annual gross operating income to the National under the Administrative Code, which is the governing law defining the
Treasury.11 This prevents MIAA from qualifying as a non-stock legal relationship and status of government entities.
corporation.
A government instrumentality like MIAA falls under Section 133(o) of
Section 88 of the Corporation Code provides that non-stock the Local Government Code, which states:
corporations are "organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific, social, SEC. 133. Common Limitations on the Taxing Powers of Local
civil service, or similar purposes, like trade, industry, agriculture and Government Units. – Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities, federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed.
and barangays shall not extend to the levy of the following: 579)

xxxx This doctrine emanates from the "supremacy" of the National


Government over local governments.
(o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities and local "Justice Holmes, speaking for the Supreme Court, made reference to
government units.(Emphasis and underscoring supplied) the entire absence of power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of the United States
Section 133(o) recognizes the basic principle that local governments (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
cannot tax the national government, which historically merely delegated political subdivision can regulate a federal instrumentality in such a way
to local governments the power to tax. While the 1987 Constitution now as to prevent it from consummating its federal responsibilities, or even
includes taxation as one of the powers of local governments, local to seriously burden it in the accomplishment of them." (Antieau, Modern
governments may only exercise such power "subject to such guidelines Constitutional Law, Vol. 2, p. 140, emphasis supplied)
and limitations as the Congress may provide."18
Otherwise, mere creatures of the State can defeat National policies thru
When local governments invoke the power to tax on national extermination of what local authorities may perceive to be undesirable
government instrumentalities, such power is construed strictly against activities or enterprise using the power to tax as "a tool for regulation"
local governments. The rule is that a tax is never presumed and there (U.S. v. Sanchez, 340 US 42).
must be clear language in the law imposing the tax. Any doubt whether
a person, article or activity is taxable is resolved against taxation. This The power to tax which was called by Justice Marshall as the "power to
rule applies with greater force when local governments seek to tax destroy" (Mc Culloch v. Maryland, supra) cannot be allowed to defeat
national government instrumentalities. an instrumentality or creation of the very entity which has the inherent
power to wield it. 20
Another rule is that a tax exemption is strictly construed against the
taxpayer claiming the exemption. However, when Congress grants an 2. Airport Lands and Buildings of MIAA are Owned by the
exemption to a national government instrumentality from local taxation, Republic
such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. a. Airport Lands and Buildings are of Public Dominion
Macaraig, Jr.:
The Airport Lands and Buildings of MIAA are property of public
The reason for the rule does not apply in the case of exemptions dominion and therefore owned by the State or the Republic of the
running to the benefit of the government itself or its agencies. In such Philippines. The Civil Code provides:
case the practical effect of an exemption is merely to reduce the
amount of money that has to be handled by government in the course
ARTICLE 419. Property is either of public dominion or of private
of its operations. For these reasons, provisions granting exemptions to
ownership.
government agencies may be construed liberally, in favor of non tax-
liability of such agencies.19
ARTICLE 420. The following things are property of public
dominion:
There is, moreover, no point in national and local governments taxing
each other, unless a sound and compelling policy requires such
transfer of public funds from one government pocket to another. (1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks,
shores, roadsteads, and others of similar character;
There is also no reason for local governments to tax national
government instrumentalities for rendering essential public services to
inhabitants of local governments. The only exception is when the (2) Those which belong to the State, without being for public use, and
legislature clearly intended to tax government instrumentalities are intended for some public service or for the development of the
for the delivery of essential public services for sound and national wealth. (Emphasis supplied)
compelling policy considerations. There must be express language
in the law empowering local governments to tax national government ARTICLE 421. All other property of the State, which is not of the
instrumentalities. Any doubt whether such power exists is resolved character stated in the preceding article, is patrimonial property.
against local governments.
ARTICLE 422. Property of public dominion, when no longer intended
Thus, Section 133 of the Local Government Code states that "unless for public use or for public service, shall form part of the patrimonial
otherwise provided" in the Code, local governments cannot tax property of the State.
national government instrumentalities. As this Court held in Basco v.
Philippine Amusements and Gaming Corporation: No one can dispute that properties of public dominion mentioned in
Article 420 of the Civil Code, like "roads, canals, rivers, torrents,
The states have no power by taxation or otherwise, to retard, impede, ports and bridges constructed by the State," are owned by the
burden or in any manner control the operation of constitutional laws State. The term "ports" includes seaports and airports. The MIAA
enacted by Congress to carry into execution the powers vested in the Airport Lands and Buildings constitute a "port" constructed by the
State. Under Article 420 of the Civil Code, the MIAA Airport Lands and defendant Hilaria Rojas. In leasing a portion of said plaza or public
Buildings are properties of public dominion and thus owned by the place to the defendant for private use the plaintiff municipality
State or the Republic of the Philippines. exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered
The Airport Lands and Buildings are devoted to public use because so to do.
they are used by the public for international and domestic travel
and transportation. The fact that the MIAA collects terminal fees and The Civil Code, article 1271, prescribes that everything which is not
other charges from the public does not remove the character of the outside the commerce of man may be the object of a contract, and
Airport Lands and Buildings as properties for public use. The operation plazas and streets are outside of this commerce, as was decided by
by the government of a tollway does not change the character of the the supreme court of Spain in its decision of February 12, 1895, which
road as one for public use. Someone must pay for the maintenance of says: "Communal things that cannot be sold because they are by
the road, either the public indirectly through the taxes they pay the their very nature outside of commerce are those for public use,
government, or only those among the public who actually use the road such as the plazas, streets, common lands, rivers, fountains, etc."
through the toll fees they pay upon using the road. The tollway system (Emphasis supplied) 23
is even a more efficient and equitable manner of taxing the public for
the maintenance of public roads. Again in Espiritu v. Municipal Council, the Court declared that
properties of public dominion are outside the commerce of man:
The charging of fees to the public does not determine the character of
the property whether it is of public dominion or not. Article 420 of the xxx Town plazas are properties of public dominion, to be devoted to
Civil Code defines property of public dominion as one "intended for public use and to be made available to the public in general. They are
public use." Even if the government collects toll fees, the road is still outside the commerce of man and cannot be disposed of or even
"intended for public use" if anyone can use the road under the same leased by the municipality to private parties. While in case of war or
terms and conditions as the rest of the public. The charging of fees, the during an emergency, town plazas may be occupied temporarily by
limitation on the kind of vehicles that can use the road, the speed private individuals, as was done and as was tolerated by the
restrictions and other conditions for the use of the road do not affect the Municipality of Pozorrubio, when the emergency has ceased, said
public character of the road. temporary occupation or use must also cease, and the town officials
should see to it that the town plazas should ever be kept open to the
The terminal fees MIAA charges to passengers, as well as the landing public and free from encumbrances or illegal private constructions.24
fees MIAA charges to airlines, constitute the bulk of the income that (Emphasis supplied)
maintains the operations of MIAA. The collection of such fees does not
change the character of MIAA as an airport for public use. Such fees The Court has also ruled that property of public dominion, being outside
are often termed user's tax. This means taxing those among the public the commerce of man, cannot be the subject of an auction sale.25
who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user's tax
Properties of public dominion, being for public use, are not subject to
is more equitable — a principle of taxation mandated in the 1987
levy, encumbrance or disposition through public or private sale. Any
Constitution.21 encumbrance, levy on execution or auction sale of any property of
public dominion is void for being contrary to public policy. Essential
The Airport Lands and Buildings of MIAA, which its Charter calls the public services will stop if properties of public dominion are subject to
"principal airport of the Philippines for both international and domestic encumbrances, foreclosures and auction sale. This will happen if the
air traffic,"22 are properties of public dominion because they are City of Parañaque can foreclose and compel the auction sale of the
intended for public use. As properties of public dominion, they 600-hectare runway of the MIAA for non-payment of real estate tax.
indisputably belong to the State or the Republic of the Philippines.
Before MIAA can encumber26 the Airport Lands and Buildings, the
b. Airport Lands and Buildings are Outside the Commerce of Man President must first withdraw from public use the Airport Lands and
Buildings. Sections 83 and 88 of the Public Land Law or
The Airport Lands and Buildings of MIAA are devoted to public use and Commonwealth Act No. 141, which "remains to this day the existing
thus are properties of public dominion. As properties of public general law governing the classification and disposition of lands of the
dominion, the Airport Lands and Buildings are outside the public domain other than timber and mineral lands,"27 provide:
commerce of man. The Court has ruled repeatedly that properties of
public dominion are outside the commerce of man. As early as 1915, SECTION 83. Upon the recommendation of the Secretary of Agriculture
this Court already ruled in Municipality of Cavite v. Rojas that and Natural Resources, the President may designate by proclamation
properties devoted to public use are outside the commerce of man, any tract or tracts of land of the public domain as reservations for the
thus: use of the Republic of the Philippines or of any of its branches, or of the
inhabitants thereof, in accordance with regulations prescribed for this
According to article 344 of the Civil Code: "Property for public use in purposes, or for quasi-public uses or purposes when the public interest
provinces and in towns comprises the provincial and town roads, the requires it, including reservations for highways, rights of way for
squares, streets, fountains, and public waters, the promenades, and railroads, hydraulic power sites, irrigation systems, communal pastures
public works of general service supported by said towns or provinces." or lequas communales, public parks, public quarries, public fishponds,
working men's village and other improvements for the public benefit.
The said Plaza Soledad being a promenade for public use, the
municipal council of Cavite could not in 1907 withdraw or exclude from SECTION 88. The tract or tracts of land reserved under the
public use a portion thereof in order to lease it for the sole benefit of the provisions of Section eighty-three shall be non-alienable and shall
not be subject to occupation, entry, sale, lease, or other The MIAA Charter, which is a law, transferred to MIAA the title to the
disposition until again declared alienable under the provisions of Airport Lands and Buildings from the Bureau of Air Transportation of
this Act or by proclamation of the President. (Emphasis and the Department of Transportation and Communications. The MIAA
underscoring supplied) Charter provides:

Thus, unless the President issues a proclamation withdrawing the SECTION 3. Creation of the Manila International Airport Authority. — x
Airport Lands and Buildings from public use, these properties remain xxx
properties of public dominion and are inalienable. Since the Airport
Lands and Buildings are inalienable in their present status as properties The land where the Airport is presently located as well as the
of public dominion, they are not subject to levy on execution or surrounding land area of approximately six hundred hectares, are
foreclosure sale. As long as the Airport Lands and Buildings are hereby transferred, conveyed and assigned to the ownership and
reserved for public use, their ownership remains with the State or the administration of the Authority, subject to existing rights, if any.
Republic of the Philippines. The Bureau of Lands and other appropriate government agencies shall
undertake an actual survey of the area transferred within one year from
The authority of the President to reserve lands of the public domain for the promulgation of this Executive Order and the corresponding title to
public use, and to withdraw such public use, is reiterated in Section 14, be issued in the name of the Authority. Any portion thereof shall not
Chapter 4, Title I, Book III of the Administrative Code of 1987, which be disposed through sale or through any other mode unless
states: specifically approved by the President of the Philippines.
(Emphasis supplied)
SEC. 14. Power to Reserve Lands of the Public and Private Domain of
the Government. — (1) The President shall have the power to SECTION 22. Transfer of Existing Facilities and Intangible Assets. —
reserve for settlement or public use, and for specific public All existing public airport facilities, runways, lands, buildings and
purposes, any of the lands of the public domain, the use of which other property, movable or immovable, belonging to the Airport, and
is not otherwise directed by law. The reserved land shall thereafter all assets, powers, rights, interests and privileges belonging to the
remain subject to the specific public purpose indicated until Bureau of Air Transportation relating to airport works or air
otherwise provided by law or proclamation; operations, including all equipment which are necessary for the
operation of crash fire and rescue facilities, are hereby transferred to
x x x x. (Emphasis supplied) the Authority. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and SECTION 25. Abolition of the Manila International Airport as a Division
Buildings are withdrawn by law or presidential proclamation from public in the Bureau of Air Transportation and Transitory Provisions. — The
use, they are properties of public dominion, owned by the Republic and Manila International Airport including the Manila Domestic Airport as a
outside the commerce of man. division under the Bureau of Air Transportation is hereby abolished.

c. MIAA is a Mere Trustee of the Republic x x x x.

MIAA is merely holding title to the Airport Lands and Buildings in trust The MIAA Charter transferred the Airport Lands and Buildings to MIAA
for the Republic. Section 48, Chapter 12, Book I of the Administrative without the Republic receiving cash, promissory notes or even stock
Code allows instrumentalities like MIAA to hold title to real since MIAA is not a stock corporation.
properties owned by the Republic, thus:
The whereas clauses of the MIAA Charter explain the rationale for the
SEC. 48. Official Authorized to Convey Real Property. — Whenever transfer of the Airport Lands and Buildings to MIAA, thus:
real property of the Government is authorized by law to be conveyed,
the deed of conveyance shall be executed in behalf of the government WHEREAS, the Manila International Airport as the principal airport of
by the following: the Philippines for both international and domestic air traffic, is required
to provide standards of airport accommodation and service comparable
(1) For property belonging to and titled in the name of the Republic of with the best airports in the world;
the Philippines, by the President, unless the authority therefor is
expressly vested by law in another officer. WHEREAS, domestic and other terminals, general aviation and other
facilities, have to be upgraded to meet the current and future air traffic
(2) For property belonging to the Republic of the Philippines but and other demands of aviation in Metro Manila;
titled in the name of any political subdivision or of any corporate
agency or instrumentality, by the executive head of the agency or WHEREAS, a management and organization study has indicated that
instrumentality. (Emphasis supplied) the objectives of providing high standards of accommodation and
service within the context of a financially viable operation, will
In MIAA's case, its status as a mere trustee of the Airport Lands and best be achieved by a separate and autonomous body; and
Buildings is clearer because even its executive head cannot sign the
deed of conveyance on behalf of the Republic. Only the President of WHEREAS, under Presidential Decree No. 1416, as amended by
the Republic can sign such deed of conveyance.28 Presidential Decree No. 1772, the President of the Philippines is given
continuing authority to reorganize the National Government, which
d. Transfer to MIAA was Meant to Implement a Reorganization authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied) "beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person." MIAA, as a government
The transfer of the Airport Lands and Buildings from the Bureau of Air instrumentality, is not a taxable person under Section 133(o) of the
Transportation to MIAA was not meant to transfer beneficial ownership Local Government Code. Thus, even if we assume that the Republic
of these assets from the Republic to MIAA. The purpose was merely to has granted to MIAA the beneficial use of the Airport Lands and
reorganize a division in the Bureau of Air Transportation into a Buildings, such fact does not make these real properties subject to real
separate and autonomous body. The Republic remains the beneficial estate tax.
owner of the Airport Lands and Buildings. MIAA itself is owned solely
by the Republic. No party claims any ownership rights over MIAA's However, portions of the Airport Lands and Buildings that MIAA leases
assets adverse to the Republic. to private entities are not exempt from real estate tax. For example, the
land area occupied by hangars that MIAA leases to private corporations
The MIAA Charter expressly provides that the Airport Lands and is subject to real estate tax. In such a case, MIAA has granted the
Buildings "shall not be disposed through sale or through any other beneficial use of such land area for a consideration to a taxable
mode unless specifically approved by the President of the person and therefore such land area is subject to real estate tax. In
Philippines." This only means that the Republic retained the beneficial Lung Center of the Philippines v. Quezon City, the Court ruled:
ownership of the Airport Lands and Buildings because under Article
428 of the Civil Code, only the "owner has the right to x x x dispose of a Accordingly, we hold that the portions of the land leased to private
thing." Since MIAA cannot dispose of the Airport Lands and Buildings, entities as well as those parts of the hospital leased to private
MIAA does not own the Airport Lands and Buildings. individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the
At any time, the President can transfer back to the Republic title to the hospital used for its patients, whether paying or non-paying, are exempt
Airport Lands and Buildings without the Republic paying MIAA any from real property taxes.29
consideration. Under Section 3 of the MIAA Charter, the President is
the only one who can authorize the sale or disposition of the Airport 3. Refutation of Arguments of Minority
Lands and Buildings. This only confirms that the Airport Lands and
Buildings belong to the Republic. The minority asserts that the MIAA is not exempt from real estate tax
because Section 193 of the Local Government Code of 1991 withdrew
e. Real Property Owned by the Republic is Not Taxable the tax exemption of "all persons, whether natural or juridical" upon
the effectivity of the Code. Section 193 provides:
Section 234(a) of the Local Government Code exempts from real estate
tax any "[r]eal property owned by the Republic of the Philippines." SEC. 193. Withdrawal of Tax Exemption Privileges – Unless
Section 234(a) provides: otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
SEC. 234. Exemptions from Real Property Tax. — The following are juridical, including government-owned or controlled corporations,
exempted from payment of the real property tax: except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions
are hereby withdrawn upon effectivity of this Code. (Emphasis
(a) Real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof supplied)
has been granted, for consideration or otherwise, to a taxable
person; The minority states that MIAA is indisputably a juridical person. The
minority argues that since the Local Government Code withdrew the tax
exemption of all juridical persons, then MIAA is not exempt from real
x x x. (Emphasis supplied)
estate tax. Thus, the minority declares:
This exemption should be read in relation with Section 133(o) of the
It is evident from the quoted provisions of the Local Government
same Code, which prohibits local governments from imposing "[t]axes,
Code that the withdrawn exemptions from realty tax cover not just
fees or charges of any kind on the National Government, its agencies
GOCCs, but all persons. To repeat, the provisions lay down the
and instrumentalities x x x." The real properties owned by the
explicit proposition that the withdrawal of realty tax exemption applies
Republic are titled either in the name of the Republic itself or in the
to all persons. The reference to or the inclusion of GOCCs is only
name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be clarificatory or illustrative of the explicit provision.
titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and The term "All persons" encompasses the two classes of persons
continue to be exempt from real estate tax. recognized under our laws, natural and juridical persons.
Obviously, MIAA is not a natural person. Thus, the determinative
test is not just whether MIAA is a GOCC, but whether MIAA is a
The Republic may grant the beneficial use of its real property to an
agency or instrumentality of the national government. This happens juridical person at all. (Emphasis and underscoring in the original)
when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real The minority posits that the "determinative test" whether MIAA is
property. Such arrangement does not result in the loss of the tax exempt from local taxation is its status — whether MIAA is a juridical
exemption. Section 234(a) of the Local Government Code states that person or not. The minority also insists that "Sections 193 and 234 may
real property owned by the Republic loses its tax exemption only if the be examined in isolation from Section 133(o) to ascertain MIAA's claim
of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Code which expressly prohibits local governments from imposing any
Government Code expressly withdrew the tax exemption of all juridical kind of tax on national government instrumentalities. Section 133(o)
persons "[u]nless otherwise provided in this Code." Now, Section does not distinguish between national government instrumentalities
133(o) of the Local Government Code expressly provides otherwise, with or without juridical personalities. Where the law does not
specifically prohibiting local governments from imposing any kind of distinguish, courts should not distinguish. Thus, Section 133(o) applies
tax on national government instrumentalities. Section 133(o) states: to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from
SEC. 133. Common Limitations on the Taxing Powers of Local local taxation is not whether MIAA is a juridical person, but whether it is
Government Units. – Unless otherwise provided herein, the exercise of a national government instrumentality under Section 133(o) of the Local
the taxing powers of provinces, cities, municipalities, and barangays Government Code. Section 133(o) is the specific provision of law
shall not extend to the levy of the following: prohibiting local governments from imposing any kind of tax on the
national government, its agencies and instrumentalities.
xxxx
Section 133 of the Local Government Code starts with the saving
clause "[u]nless otherwise provided in this Code." This means that
(o) Taxes, fees or charges of any kinds on the National Government, its
unless the Local Government Code grants an express authorization,
agencies and instrumentalities, and local government units. (Emphasis
local governments have no power to tax the national government, its
and underscoring supplied)
agencies and instrumentalities. Clearly, the rule is local governments
have no power to tax the national government, its agencies and
By express mandate of the Local Government Code, local governments instrumentalities. As an exception to this rule, local governments may
cannot impose any kind of tax on national government instrumentalities tax the national government, its agencies and instrumentalities only if
like the MIAA. Local governments are devoid of power to tax the the Local Government Code expressly so provides.
national government, its agencies and instrumentalities. The taxing
powers of local governments do not extend to the national government,
The saving clause in Section 133 refers to the exception to the
its agencies and instrumentalities, "[u]nless otherwise provided in this
exemption in Section 234(a) of the Code, which makes the national
Code" as stated in the saving clause of Section 133. The saving clause
government subject to real estate tax when it gives the beneficial use of
refers to Section 234(a) on the exception to the exemption from real
its real properties to a taxable entity. Section 234(a) of the Local
estate tax of real property owned by the Republic.
Government Code provides:
The minority, however, theorizes that unless exempted in Section 193
SEC. 234. Exemptions from Real Property Tax – The following are
itself, all juridical persons are subject to tax by local governments. The
minority insists that the juridical persons exempt from local taxation are exempted from payment of the real property tax:
limited to the three classes of entities specifically enumerated as
exempt in Section 193. Thus, the minority states: (a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
x x x Under Section 193, the exemption is limited to (a) local water granted, for consideration or otherwise, to a taxable person.
districts; (b) cooperatives duly registered under Republic Act No. 6938;
and (c) non-stock and non-profit hospitals and educational institutions. x x x. (Emphasis supplied)
It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied) Under Section 234(a), real property owned by the Republic is exempt
from real estate tax. The exception to this exemption is when the
The minority's theory directly contradicts and completely negates government gives the beneficial use of the real property to a taxable
Section 133(o) of the Local Government Code. This theory will result in entity.
gross absurdities. It will make the national government, which itself is a
juridical person, subject to tax by local governments since the national The exception to the exemption in Section 234(a) is the only instance
government is not included in the enumeration of exempt entities in when the national government, its agencies and instrumentalities are
Section 193. Under this theory, local governments can impose any kind subject to any kind of tax by local governments. The exception to the
of local tax, and not only real estate tax, on the national government. exemption applies only to real estate tax and not to any other tax. The
justification for the exception to the exemption is that the real property,
Under the minority's theory, many national government although owned by the Republic, is not devoted to public use or public
instrumentalities with juridical personalities will also be subject to any service but devoted to the private gain of a taxable person.
kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities The minority also argues that since Section 133 precedes Section 193
are: Bangko Sentral ng Pilipinas,30 Philippine Rice Research Institute,31 and 234 of the Local Government Code, the later provisions prevail
Laguna Lake over Section 133. Thus, the minority asserts:

Development Authority,32 Fisheries Development Authority,33 Bases x x x Moreover, sequentially Section 133 antecedes Section 193 and
Conversion Development Authority,34 Philippine Ports Authority,35 234. Following an accepted rule of construction, in case of conflict the
Cagayan de Oro Port Authority,36 San Fernando Port Authority,37 Cebu subsequent provisions should prevail. Therefore, MIAA, as a juridical
Port Authority,38 and Philippine National Railways.39 person, is subject to real property taxes, the general exemptions
attaching to instrumentalities under Section 133(o) of the Local
The minority's theory violates Section 133(o) of the Local Government Government Code being qualified by Sections 193 and 234 of the same
law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between The minority's argument is a non sequitur. True, Section 2 of the
Section 133 on one hand, and Sections 193 and 234 on the other. No Administrative Code recognizes that a statute may require a different
one has urged that there is such a conflict, much less has any one meaning than that defined in the Administrative Code. However, this
presenteda persuasive argument that there is such a conflict. The does not automatically mean that the definition in the Administrative
minority's assumption of an irreconcilable conflict in the statutory Code does not apply to the Local Government Code. Section 2 of the
provisions is an egregious error for two reasons. Administrative Code clearly states that "unless the specific words x x x
of a particular statute shall require a different meaning," the definition in
First, there is no conflict whatsoever between Sections 133 and 193 Section 2 of the Administrative Code shall apply. Thus, unless there is
because Section 193 expressly admits its subordination to other specific language in the Local Government Code defining the phrase
provisions of the Code when Section 193 states "[u]nless otherwise "government-owned or controlled corporation" differently from the
provided in this Code." By its own words, Section 193 admits the definition in the Administrative Code, the definition in the Administrative
superiority of other provisions of the Local Government Code that limit Code prevails.
the exercise of the taxing power in Section 193. When a provision of
law grants a power but withholds such power on certain matters, there The minority does not point to any provision in the Local Government
is no conflict between the grant of power and the withholding of power. Code defining the phrase "government-owned or controlled
The grantee of the power simply cannot exercise the power on matters corporation" differently from the definition in the Administrative Code.
withheld from its power. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation."
Second, Section 133 is entitled "Common Limitations on the Taxing The Administrative Code, however, expressly defines the phrase
Powers of Local Government Units." Section 133 limits the grant to "government-owned or controlled corporation." The inescapable
local governments of the power to tax, and not merely the exercise of a conclusion is that the Administrative Code definition of the phrase
delegated power to tax. Section 133 states that the taxing powers of "government-owned or controlled corporation" applies to the Local
local governments "shall not extend to the levy" of any kind of tax on Government Code.
the national government, its agencies and instrumentalities. There is no
clearer limitation on the taxing power than this. The third whereas clause of the Administrative Code states that the
Code "incorporates in a unified document the major structural,
Since Section 133 prescribes the "common limitations" on the taxing functional and procedural principles and rules of governance." Thus,
powers of local governments, Section 133 logically prevails over the Administrative Code is the governing law defining the status and
Section 193 which grants local governments such taxing powers. By relationship of government departments, bureaus, offices, agencies
their very meaning and purpose, the "common limitations" on the taxing and instrumentalities. Unless a statute expressly provides for a different
power prevail over the grant or exercise of the taxing power. If the status and relationship for a specific government unit or entity, the
taxing power of local governments in Section 193 prevails over the provisions of the Administrative Code prevail.
limitations on such taxing power in Section 133, then local governments
can impose any kind of tax on the national government, its agencies The minority also contends that the phrase "government-owned or
and instrumentalities — a gross absurdity. controlled corporation" should apply only to corporations organized
under the Corporation Code, the general incorporation law, and not to
Local governments have no power to tax the national government, its corporations created by special charters. The minority sees no reason
agencies and instrumentalities, except as otherwise provided in the why government corporations with special charters should have a
Local Government Code pursuant to the saving clause in Section 133 capital stock. Thus, the minority declares:
stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate I submit that the definition of "government-owned or controlled
tax imposed by local governments — refers to Section 234(a) of the corporations" under the Administrative Code refer to those corporations
Code. The exception to the exemption in Section 234(a) subjects real owned by the government or its instrumentalities which are created not
property owned by the Republic, whether titled in the name of the by legislative enactment, but formed and organized under the
national government, its agencies or instrumentalities, to real estate tax Corporation Code through registration with the Securities and
if the beneficial use of such property is given to a taxable entity. Exchange Commission. In short, these are GOCCs without original
charters.
The minority also claims that the definition in the Administrative Code of
the phrase "government-owned or controlled corporation" is not xxxx
controlling. The minority points out that Section 2 of the Introductory
Provisions of the Administrative Code admits that its definitions are not It might as well be worth pointing out that there is no point in requiring a
controlling when it provides: capital structure for GOCCs whose full ownership is limited by its
charter to the State or Republic. Such GOCCs are not empowered to
SEC. 2. General Terms Defined. — Unless the specific words of the declare dividends or alienate their capital shares.
text, or the context as a whole, or a particular statute, shall require a
different meaning: The contention of the minority is seriously flawed. It is not in accord
with the Constitution and existing legislations. It will also result in gross
xxxx absurdities.

The minority then concludes that reliance on the Administrative Code First, the Administrative Code definition of the phrase "government-
definition is "flawed." owned or controlled corporation" does not distinguish between one
incorporated under the Corporation Code or under a special charter.
Where the law does not distinguish, courts should not distinguish. power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two
Second, Congress has created through special charters several conditions of common good and economic viability. The test of
government-owned corporations organized as stock corporations. economic viability applies only to government-owned or controlled
Prime examples are the Land Bank of the Philippines and the corporations that perform economic or commercial activities and need
Development Bank of the Philippines. The special charter40 of the Land to compete in the market place. Being essentially economic vehicles of
Bank of the Philippines provides: the State for the common good — meaning for economic development
purposes — these government-owned or controlled corporations with
special charters are usually organized as stock corporations just like
SECTION 81. Capital. — The authorized capital stock of the Bank shall
be nine billion pesos, divided into seven hundred and eighty million ordinary private corporations.
common shares with a par value of ten pesos each, which shall be fully
subscribed by the Government, and one hundred and twenty million In contrast, government instrumentalities vested with corporate powers
preferred shares with a par value of ten pesos each, which shall be and performing governmental or public functions need not meet the test
issued in accordance with the provisions of Sections seventy-seven of economic viability. These instrumentalities perform essential public
and eighty-three of this Code. (Emphasis supplied) services for the common good, services that every modern State must
provide its citizens. These instrumentalities need not be economically
viable since the government may even subsidize their entire
Likewise, the special charter41 of the Development Bank of the
operations. These instrumentalities are not the "government-owned or
Philippines provides:
controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
SECTION 7. Authorized Capital Stock – Par value. — The capital stock
of the Bank shall be Five Billion Pesos to be divided into Fifty Million
Thus, the Constitution imposes no limitation when the legislature
common shares with par value of P100 per share. These shares are
creates government instrumentalities vested with corporate powers but
available for subscription by the National Government. Upon the
performing essential governmental or public functions. Congress has
effectivity of this Charter, the National Government shall subscribe to
plenary authority to create government instrumentalities vested with
Twenty-Five Million common shares of stock worth Two Billion Five
corporate powers provided these instrumentalities perform essential
Hundred Million which shall be deemed paid for by the Government
government functions or public services. However, when the legislature
with the net asset values of the Bank remaining after the transfer of
creates through special charters corporations that perform economic or
assets and liabilities as provided in Section 30 hereof. (Emphasis
commercial activities, such entities — known as "government-owned or
supplied)
controlled corporations" — must meet the test of economic viability
because they compete in the market place.
Other government-owned corporations organized as stock corporations
under their special charters are the Philippine Crop Insurance
This is the situation of the Land Bank of the Philippines and the
Corporation,42 Philippine International Trading Corporation,43 and the
Development Bank of the Philippines and similar government-owned or
Philippine National Bank44 before it was reorganized as a stock
controlled corporations, which derive their income to meet operating
corporation under the Corporation Code. All these government-owned
expenses solely from commercial transactions in competition with the
corporations organized under special charters as stock corporations
private sector. The intent of the Constitution is to prevent the creation of
are subject to real estate tax on real properties owned by them. To rule
government-owned or controlled corporations that cannot survive on
that they are not government-owned or controlled corporations because
they are not registered with the Securities and Exchange Commission their own in the market place and thus merely drain the public coffers.
would remove them from the reach of Section 234 of the Local
Government Code, thus exempting them from real estate tax. Commissioner Blas F. Ople, proponent of the test of economic viability,
explained to the Constitutional Commission the purpose of this test, as
Third, the government-owned or controlled corporations created follows:
through special charters are those that meet the two conditions
prescribed in Section 16, Article XII of the Constitution. The first MR. OPLE: Madam President, the reason for this concern is really that
condition is that the government-owned or controlled corporation must when the government creates a corporation, there is a sense in which
be established for the common good. The second condition is that the this corporation becomes exempt from the test of economic
government-owned or controlled corporation must meet the test of performance. We know what happened in the past. If a government
economic viability. Section 16, Article XII of the 1987 Constitution corporation loses, then it makes its claim upon the taxpayers' money
provides: through new equity infusions from the government and what is always
invoked is the common good. That is the reason why this year, out of a
budget of P115 billion for the entire government, about P28 billion of
SEC. 16. The Congress shall not, except by general law, provide for
this will go into equity infusions to support a few government financial
the formation, organization, or regulation of private corporations.
institutions. And this is all taxpayers' money which could have been
Government-owned or controlled corporations may be created or
relocated to agrarian reform, to social services like health and
established by special charters in the interest of the common good and
education, to augment the salaries of grossly underpaid public
subject to the test of economic viability. (Emphasis and underscoring
employees. And yet this is all going down the drain.
supplied)

Therefore, when we insert the phrase "ECONOMIC VIABILITY"


The Constitution expressly authorizes the legislature to create
together with the "common good," this becomes a restraint on future
"government-owned or controlled corporations" through special
enthusiasts for state capitalism to excuse themselves from the
charters only if these entities are required to meet the twin conditions of
responsibility of meeting the market test so that they become viable.
common good and economic viability. In other words, Congress has no
And so, Madam President, I reiterate, for the committee's consideration prevent the entry of terrorists and the escape of criminals, as well as to
and I am glad that I am joined in this proposal by Commissioner Foz, secure the airport premises from terrorist attack or seizure;
the insertion of the standard of "ECONOMIC VIABILITY OR THE
ECONOMIC TEST," together with the common good.45 6. The Air Traffic Office of the Department of Transportation and
Communications, to authorize aircraft to enter or leave Philippine
Father Joaquin G. Bernas, a leading member of the Constitutional airspace, as well as to land on, or take off from, the airport; and
Commission, explains in his textbook The 1987 Constitution of the
Republic of the Philippines: A Commentary: 7. The MIAA, to provide the proper premises — such as runway and
buildings — for the government personnel, passengers, and airlines,
The second sentence was added by the 1986 Constitutional and to manage the airport operations.
Commission. The significant addition, however, is the phrase "in the
interest of the common good and subject to the test of economic All these agencies of government perform government functions
viability." The addition includes the ideas that they must show capacity essential to the operation of an international airport.
to function efficiently in business and that they should not go into
activities which the private sector can do better. Moreover, economic
MIAA performs an essential public service that every modern State
viability is more than financial viability but also includes capability to
must provide its citizens. MIAA derives its revenues principally from the
make profit and generate benefits not quantifiable in financial terms.46
mandatory fees and charges MIAA imposes on passengers and
(Emphasis supplied) airlines. The terminal fees that MIAA charges every passenger are
regulatory or administrative fees47 and not income from commercial
Clearly, the test of economic viability does not apply to government transactions.
entities vested with corporate powers and performing essential public
services. The State is obligated to render essential public services
MIAA falls under the definition of a government instrumentality under
regardless of the economic viability of providing such service. The non-
Section 2(10) of the Introductory Provisions of the Administrative Code,
economic viability of rendering such essential public service does not
which provides:
excuse the State from withholding such essential services from the
public.
SEC. 2. General Terms Defined. – x x x x
However, government-owned or controlled corporations with special
charters, organized essentially for economic or commercial objectives, (10) Instrumentality refers to any agency of the National Government,
must meet the test of economic viability. These are the government- not integrated within the department framework, vested with special
owned or controlled corporations that are usually organized under their functions or jurisdiction by law, endowed with some if not all corporate
special charters as stock corporations, like the Land Bank of the powers, administering special funds, and enjoying operational
Philippines and the Development Bank of the Philippines. These are autonomy, usually through a charter. x x x (Emphasis supplied)
the government-owned or controlled corporations, along with
government-owned or controlled corporations organized under the The fact alone that MIAA is endowed with corporate powers does not
Corporation Code, that fall under the definition of "government-owned make MIAA a government-owned or controlled corporation. Without a
or controlled corporations" in Section 2(10) of the Administrative Code. change in its capital structure, MIAA remains a government
instrumentality under Section 2(10) of the Introductory Provisions of the
The MIAA need not meet the test of economic viability because the Administrative Code. More importantly, as long as MIAA renders
legislature did not create MIAA to compete in the market place. MIAA essential public services, it need not comply with the test of economic
does not compete in the market place because there is no competing viability. Thus, MIAA is outside the scope of the phrase "government-
international airport operated by the private sector. MIAA performs an owned or controlled corporations" under Section 16, Article XII of the
essential public service as the primary domestic and international 1987 Constitution.
airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government The minority belittles the use in the Local Government Code of the
agencies: phrase "government-owned or controlled corporation" as merely
"clarificatory or illustrative." This is fatal. The 1987 Constitution
1. The Bureau of Immigration and Deportation, to document the arrival prescribes explicit conditions for the creation of "government-owned or
and departure of passengers, screening out those without visas or controlled corporations." The Administrative Code defines what
travel documents, or those with hold departure orders; constitutes a "government-owned or controlled corporation." To belittle
this phrase as "clarificatory or illustrative" is grave error.
2. The Bureau of Customs, to collect import duties or enforce the ban
on prohibited importations; To summarize, MIAA is not a government-owned or controlled
corporation under Section 2(13) of the Introductory Provisions of the
Administrative Code because it is not organized as a stock or non-stock
3. The quarantine office of the Department of Health, to enforce health
corporation. Neither is MIAA a government-owned or controlled
measures against the spread of infectious diseases into the country; corporation under Section 16, Article XII of the 1987 Constitution
because MIAA is not required to meet the test of economic viability.
4. The Department of Agriculture, to enforce measures against the MIAA is a government instrumentality vested with corporate powers
spread of plant and animal diseases into the country; and performing essential public services pursuant to Section 2(10) of
the Introductory Provisions of the Administrative Code. As a
5. The Aviation Security Command of the Philippine National Police, to government instrumentality, MIAA is not subject to any kind of tax by
local governments under Section 133(o) of the Local Government Lands and Buildings of the Manila International Airport Authority
Code. The exception to the exemption in Section 234(a) does not apply EXEMPT from the real estate tax imposed by the City of Parañaque.
to MIAA because MIAA is not a taxable entity under the Local We declare VOID all the real estate tax assessments, including the final
Government Code. Such exception applies only if the beneficial use of notices of real estate tax delinquencies, issued by the City of
real property owned by the Republic is given to a taxable entity. Parañaque on the Airport Lands and Buildings of the Manila
International Airport Authority, except for the portions that the Manila
Finally, the Airport Lands and Buildings of MIAA are properties devoted International Airport Authority has leased to private parties. We also
to public use and thus are properties of public dominion. Properties of declare VOID the assailed auction sale, and all its effects, of the Airport
public dominion are owned by the State or the Republic. Article 420 of Lands and Buildings of the Manila International Airport Authority.
the Civil Code provides:
No costs.
Art. 420. The following things are property of public dominion:
SO ORDERED.
(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores, G.R. No. 75885 May 27, 1987
roadsteads, and others of similar character;
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO),
(2) Those which belong to the State, without being for public use, and petitioner, vs. PRESIDENTIAL COMMISSION ON GOOD
are intended for some public service or for the development of the GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONER
national wealth. (Emphasis supplied) MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,
COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
The term "ports x x x constructed by the State" includes airports and DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.
seaports. The Airport Lands and Buildings of MIAA are intended for
public use, and at the very least intended for public service. Whether NARVASA, J.:
intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public Challenged in this special civil action of certiorari and prohibition by a
dominion, the Airport Lands and Buildings are owned by the Republic private corporation known as the Bataan Shipyard and Engineering
and thus exempt from real estate tax under Section 234(a) of the Local Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by
Government Code. President Corazon C. Aquino on February 28, 1986 and March 12,
1986, respectively, and (2) the sequestration, takeover, and other
4. Conclusion orders issued, and acts done, in accordance with said executive orders
by the Presidential Commission on Good Government and/or its
Under Section 2(10) and (13) of the Introductory Provisions of the Commissioners and agents, affecting said corporation.
Administrative Code, which governs the legal relation and status of
government units, agencies and offices within the entire government 1. The Sequestration, Takeover, and Other Orders Complained of
machinery, MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of a. The Basic Sequestration Order
the Local Government Code, MIAA as a government instrumentality is
not a taxable person because it is not subject to "[t]axes, fees or The sequestration order which, in the view of the petitioner corporation,
charges of any kind" by local governments. The only exception is when initiated all its misery was issued on April 14, 1986 by Commissioner
MIAA leases its real property to a "taxable person" as provided in Mary Concepcion Bautista. It was addressed to three of the agents of
Section 234(a) of the Local Government Code, in which case the the Commission, hereafter simply referred to as PCGG. It reads as
specific real property leased becomes subject to real estate tax. Thus, follows:
only portions of the Airport Lands and Buildings leased to taxable
persons like private parties are subject to real estate tax by the City of
RE: SEQUESTRATION ORDER
Parañaque.
By virtue of the powers vested in the Presidential Commission on Good
Under Article 420 of the Civil Code, the Airport Lands and Buildings of
Government, by authority of the President of the Philippines, you are
MIAA, being devoted to public use, are properties of public dominion
hereby directed to sequester the following companies.
and thus owned by the State or the Republic of the Philippines. Article
420 specifically mentions "ports x x x constructed by the State," which
includes public airports and seaports, as properties of public dominion 1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island
and owned by the Republic. As properties of public dominion owned by Shipyard and Mariveles Shipyard)
the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 2. Baseco Quarry
234(a) of the Local Government Code. This Court has also repeatedly
ruled that properties of public dominion are not subject to execution or 3. Philippine Jai-Alai Corporation
foreclosure sale.
4. Fidelity Management Co., Inc.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed
Resolutions of the Court of Appeals of 5 October 2001 and 27 5. Romson Realty, Inc.
September 2002 in CA-G.R. SP No. 66878. We DECLARE the Airport
6. Trident Management Co. 7. Inventory listings of assets up dated up to March 31, 1986.

7. New Trident Management 8. Updated schedule of Accounts Receivable and Accounts Payable.

8. Bay Transport 9. Complete list of depository banks for all funds with the authorized
signatories for withdrawals thereof.
9. And all affiliate companies of Alfredo "Bejo" Romualdez
10. Schedule of company investments and placements. 2
You are hereby ordered:
The letter closed with the warning that if the documents were not
1. To implement this sequestration order with a minimum disruption of submitted within five days, the officers would be cited for "contempt in
these companies' business activities. pursuance with Presidential Executive Order Nos. 1 and 2."

2. To ensure the continuity of these companies as going concerns, the c. Orders Re Engineer Island
care and maintenance of these assets until such time that the Office of
the President through the Commission on Good Government should (1) Termination of Contract for Security Services
decide otherwise.
A third order assailed by petitioner corporation, hereafter referred to
3. To report to the Commission on Good Government periodically. simply as BASECO, is that issued on April 21, 1986 by a Capt.
Flordelino B. Zabala, a member of the task force assigned to carry out
Further, you are authorized to request for Military/Security Support from the basic sequestration order. He sent a letter to BASECO's Vice-
the Military/Police authorities, and such other acts essential to the President for Finance, 3 terminating the contract for security services
achievement of this sequestration order. 1 within the Engineer Island compound between BASECO and "Anchor
and FAIRWAYS" and "other civilian security agencies," CAPCOM
military personnel having already been assigned to the area,
b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, (2) Change of Mode of Payment of Entry Charges
acting for the PCGG, addressed a letter dated April 18, 1986 to the
President and other officers of petitioner firm, reiterating an earlier On July 15, 1986, the same Capt. Zabala issued a Memorandum
request for the production of certain documents, to wit: addressed to "Truck Owners and Contractors," particularly a "Mr.
Buddy Ondivilla National Marine Corporation," advising of the
amendment in part of their contracts with BASECO in the sense that
1. Stock Transfer Book
the stipulated charges for use of the BASECO road network were made
payable "upon entry and not anymore subject to monthly billing as was
2. Legal documents, such as: originally agreed upon." 4

2.1. Articles of Incorporation d. Aborted Contract for Improvement of Wharf at Engineer Island

2.2. By-Laws On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a
contract in behalf of BASECO with Deltamarine Integrated Port
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986 Services, Inc., in virtue of which the latter undertook to introduce
improvements costing approximately P210,000.00 on the BASECO
2.4. Minutes of the Regular and Special Meetings of the Board of wharf at Engineer Island, allegedly then in poor condition, avowedly to
Directors from 1973 to 1986 "optimize its utilization and in return maximize the revenue which would
flow into the government coffers," in consideration of Deltamarine's
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986 being granted "priority in using the improved portion of the wharf ahead
of anybody" and exemption "from the payment of any charges for the
use of wharf including the area where it may install its bagging
2.6. Existing contracts with suppliers/contractors/others.
equipments" "until the improvement remains in a condition suitable for
port operations." 5 It seems however that this contract was never
3. Yearly list of stockholders with their corresponding consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO
share/stockholdings from 1973 to 1986 duly certified by the Corporate Management Team," advised Deltamarine by letter dated July 30, 1986
Secretary. that "the new management is not in a position to honor the said
contract" and thus "whatever improvements * * (may be introduced)
4. Audited Financial Statements such as Balance Sheet, Profit & Loss shall be deemed unauthorized * * and shall be at * * (Deltamarine's)
and others from 1973 to December 31, 1985. own risk." 6

5. Monthly Financial Statements for the current year up to March 31, e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
1986.
By Order dated June 20, 1986, Commissioner Mary Bautista first
6. Consolidated Cash Position Reports from January to April 15, 1986. directed a PCGG agent, Mayor Melba O. Buenaventura, "to plan and
implement progress towards maximizing the continuous operation of members and agents which, to repeat, petitioner BASECO would have
the BASECO Sesiman Rock Quarry * * by conventional methods;" but this Court nullify. More particularly, BASECO prays that this Court-
afterwards, Commissioner Bautista, in representation of the PCGG,
authorized another party, A.T. Abesamis, to operate the quarry, located 1) declare unconstitutional and void Executive Orders Numbered 1 and
at Mariveles, Bataan, an agreement to this effect having been executed 2;
by them on September 17, 1986. 7
2) annul the sequestration order dated April- 14, 1986, and all other
f. Order to Dispose of Scrap, etc. orders subsequently issued and acts done on the basis thereof,
inclusive of the takeover order of July 14, 1986 and the termination of
By another Order of Commissioner Bautista, this time dated June 26, the services of the BASECO executives. 11
1986, Mayor Buenaventura was also "authorized to clean and beautify
the Company's compound," and in this connection, to dispose of or sell a. Re Executive Orders No. 1 and 2, and the Sequestration and
"metal scraps" and other materials, equipment and machineries no Takeover Orders
longer usable, subject to specified guidelines and safeguards including
audit and verification. 8 While BASECO concedes that "sequestration without resorting to
judicial action, might be made within the context of Executive Orders
g. The TAKEOVER Order Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution
was promulgated, under the principle that the law promulgated by the
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed ruler under a revolutionary regime is the law of the land, it ceased to be
the provisional takeover by the PCGG of BASECO, "the Philippine acceptable when the same ruler opted to promulgate the Freedom
Dockyard Corporation and all their affiliated companies." 9 Diaz invoked Constitution on March 25, 1986 wherein under Section I of the same,
the provisions of Section 3 (c) of Executive Order No. 1, empowering Article IV (Bill of Rights) of the 1973 Constitution was adopted
the Commission — providing, among others, that "No person shall be deprived of life,
liberty and property without due process of law." (Const., Art. I V, Sec.
* * To provisionally takeover in the public interest or to prevent its 1)." 12
disposal or dissipation, business enterprises and properties taken over
by the government of the Marcos Administration or by entities or It declares that its objection to the constitutionality of the Executive
persons close to former President Marcos, until the transactions Orders "as well as the Sequestration Order * * and Takeover Order * *
leading to such acquisition by the latter can be disposed of by the issued purportedly under the authority of said Executive Orders, rests
appropriate authorities. on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over;
A management team was designated to implement the order, headed Second, the PCGG is not a court, but a purely investigative agency and
by Capt. Siacunco, and was given the following powers: therefore not competent to act as prosecutor and judge in the same
cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously
1. Conducts all aspects of operation of the subject companies;
challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard
2. Installs key officers, hires and terminates personnel as necessary; of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13
3. Enters into contracts related to management and operation of the
companies; b. Re Order to Produce Documents

4. Ensures that the assets of the companies are not dissipated and It argues that the order to produce corporate records from 1973 to
used effectively and efficiently; revenues are duly accounted for; and 1986, which it has apparently already complied with, was issued
disburses funds only as may be necessary; without court authority and infringed its constitutional right against self-
incrimination, and unreasonable search and seizure. 14
5. Does actions including among others, seeking of military support as
may be necessary, that will ensure compliance to this order; c. Re PCGG's Exercise of Right of Ownership and Management

6. Holds itself fully accountable to the Presidential Commission on BASECO further contends that the PCGG had unduly interfered with its
Good Government on all aspects related to this take-over order. right of dominion and management of its business affairs by —

h. Termination of Services of BASECO Officers 1) terminating its contract for security services with Fairways & Anchor,
without the consent and against the will of the contracting parties; and
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. amending the mode of payment of entry fees stipulated in its Lease
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Contract with National Stevedoring & Lighterage Corporation, these
Cuesta I, advising of the termination of their services by the PCGG. 10 acts being in violation of the non-impairment clause of the constitution;
15
2. Petitioner's Plea and Postulates
2) allowing PCGG Agent Silverio Berenguer to enter into an
It is the foregoing specific orders and acts of the PCGG and its "anomalous contract" with Deltamarine Integrated Port Services, Inc.,
giving the latter free use of BASECO premises; 16 the President in regard to (certain specified) matters," among which
was precisely-
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage
and operate its rock quarry at Sesiman, Mariveles; 17 * * The recovery of all in-gotten wealth accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives,
4) authorizing the same mayor to sell or dispose of its metal scrap, subordinates and close associates, whether located in the Philippines
equipment, machinery and other materials; 18 or abroad, including the takeover or sequestration of all business
enterprises and entities owned or controlled by them, during his
administration, directly or through nominees, by taking undue
5) authorizing the takeover of BASECO, Philippine Dockyard
advantage of their public office and/or using their powers, authority,
Corporation, and all their affiliated companies;
influence, connections or relationship. 27
6) terminating the services of BASECO executives: President Hilario M.
In relation to the takeover or sequestration that it was authorized to
Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr.
undertake in the fulfillment of its mission, the PCGG was granted
Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
"power and authority" to do the following particular acts, to wit:
7) planning to elect its own Board of Directors; 20
1. To sequester or place or cause to be placed under its control or
possession any building or office wherein any ill-gotten wealth or
8) allowing willingly or unwillingly its personnel to take, steal, carry properties may be found, and any records pertaining thereto, in order to
away from petitioner's premises at Mariveles * * rolls of cable wires, prevent their destruction, concealment or disappearance which would
worth P600,000.00 on May 11, 1986; 21 frustrate or hamper the investigation or otherwise prevent the
Commission from accomplishing its task.
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold
bars supposed to have been buried therein. 22 2. To provisionally take over in the public interest or to prevent the
disposal or dissipation, business enterprises and properties taken over
3. Doubts, Misconceptions regarding Sequestration, Freeze and by the government of the Marcos Administration or by entities or
Takeover Orders persons close to former President Marcos, until the transactions
leading to such acquisition by the latter can be disposed of by the
Many misconceptions and much doubt about the matter of appropriate authorities.
sequestration, takeover and freeze orders have been engendered by
misapprehension, or incomplete comprehension if not indeed downright 3. To enjoin or restrain any actual or threatened commission of acts by
ignorance of the law governing these remedies. It is needful that these any person or entity that may render moot and academic, or frustrate or
misconceptions and doubts be dispelled so that uninformed and otherwise make ineffectual the efforts of the Commission to carry out its
useless debates about them may be avoided, and arguments tainted b task under this order. 28
sophistry or intellectual dishonesty be quickly exposed and discarded.
Towards this end, this opinion will essay an exposition of the law on the So that it might ascertain the facts germane to its objectives, it was
matter. In the process many of the objections raised by BASECO will granted power to conduct investigations; require submission of
be dealt with. evidence by subpoenae ad testificandum and duces tecum; administer
oaths; punish for contempt. 29 It was given power also to promulgate
4. The Governing Law such rules and regulations as may be necessary to carry out the
purposes of * * (its creation). 30
a. Proclamation No. 3
c. Executive Order No. 2
The impugned executive orders are avowedly meant to carry out the
explicit command of the Provisional Constitution, ordained by Executive Order No. 2 gives additional and more specific data and
Proclamation No. 3, 23 that the President-in the exercise of legislative directions respecting "the recovery of ill-gotten properties amassed by
power which she was authorized to continue to wield "(until a the leaders and supporters of the previous regime." It declares that:
legislature is elected and convened under a new Constitution" — "shall
give priority to measures to achieve the mandate of the people," among 1) * * the Government of the Philippines is in possession of evidence
others to (r)ecover ill-gotten properties amassed by the leaders and showing that there are assets and properties purportedly pertaining to
supporters of the previous regime and protect the interest of the people former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
through orders of sequestration or freezing of assets or accounts." 24 Marcos, their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were acquired by
b. Executive Order No. 1 them directly or indirectly, through or as a result of the improper or
illegal use of funds or properties owned by the government of the
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten Philippines or any of its branches, instrumentalities, enterprises, banks
wealth," and postulates that "vast resources of the government have or financial institutions, or by taking undue advantage of their office,
been amassed by former President Ferdinand E. Marcos, his authority, influence, connections or relationship, resulting in their unjust
immediate family, relatives, and close associates both here and enrichment and causing grave damage and prejudice to the Filipino
abroad." 25 Upon these premises, the Presidential Commission on people and the Republic of the Philippines:" and
Good Government was created, 26 "charged with the task of assisting
2) * * said assets and properties are in the form of bank accounts, 1) that "(i)ll-gotten properties (were) amassed by the leaders and
deposits, trust accounts, shares of stocks, buildings, shopping centers, supporters of the previous regime"; 37
condominiums, mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in various countries of a) more particularly, that ill-gotten wealth (was) accumulated by former
the world." 31 President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, * * located in the Philippines or
Upon these premises, the President- abroad, * * (and) business enterprises and entities (came to be) owned
or controlled by them, during * * (the Marcos) administration, directly or
1) froze "all assets and properties in the Philippines in which former through nominees, by taking undue advantage of their public office
President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their and/or using their powers, authority, influence, Connections or
close relatives, subordinates, business associates, dummies, agents, relationship; 38
or nominees have any interest or participation;
b) otherwise stated, that "there are assets and properties purportedly
2) prohibited former President Ferdinand Marcos and/or his wife * *, pertaining to former President Ferdinand E. Marcos, and/or his wife
their close relatives, subordinates, business associates, duties, agents, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates,
or nominees from transferring, conveying, encumbering, concealing or business associates, dummies, agents or nominees which had been or
dissipating said assets or properties in the Philippines and abroad, were acquired by them directly or indirectly, through or as a result of
pending the outcome of appropriate proceedings in the Philippines to the improper or illegal use of funds or properties owned by the
determine whether any such assets or properties were acquired by Government of the Philippines or any of its branches, instrumentalities,
them through or as a result of improper or illegal use of or the enterprises, banks or financial institutions, or by taking undue
conversion of funds belonging to the Government of the Philippines or advantage of their office, authority, influence, connections or
any of its branches, instrumentalities, enterprises, banks or financial relationship, resulting in their unjust enrichment and causing grave
institutions, or by taking undue advantage of their official position, damage and prejudice to the Filipino people and the Republic of the
authority, relationship, connection or influence to unjustly enrich Philippines"; 39
themselves at the expense and to the grave damage and prejudice of
the Filipino people and the Republic of the Philippines; c) that "said assets and properties are in the form of bank accounts.
deposits, trust. accounts, shares of stocks, buildings, shopping centers,
3) prohibited "any person from transferring, conveying, encumbering or condominiums, mansions, residences, estates, and other kinds of real
otherwise depleting or concealing such assets and properties or from and personal properties in the Philippines and in various countries of
assisting or taking part in their transfer, encumbrance, concealment or the world;" 40 and
dissipation under pain of such penalties as are prescribed by law;" and
2) that certain "business enterprises and properties (were) taken over
4) required "all persons in the Philippines holding such assets or by the government of the Marcos Administration or by entities or
properties, whether located in the Philippines or abroad, in their names persons close to former President Marcos. 41
as nominees, agents or trustees, to make full disclosure of the same to
the Commission on Good Government within thirty (30) days from 6. Government's Right and Duty to Recover All Ill-gotten Wealth
publication of * (the) Executive Order, * *. 32
There can be no debate about the validity and eminent propriety of the
d. Executive Order No. 14 Government's plan "to recover all ill-gotten wealth."

A third executive order is relevant: Executive Order No. 14, 33 by which Neither can there be any debate about the proposition that assuming
the PCGG is empowered, "with the assistance of the Office of the the above described factual premises of the Executive Orders and
Solicitor General and other government agencies, * * to file and Proclamation No. 3 to be true, to be demonstrable by competent
prosecute all cases investigated by it * * as may be warranted by its evidence, the recovery from Marcos, his family and his dominions of
findings." 34 All such cases, whether civil or criminal, are to be filed the assets and properties involved, is not only a right but a duty on the
"with the Sandiganbayan which shall have exclusive and original part of Government.
jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides
that civil suits for restitution, reparation of damages, or indemnification But however plain and valid that right and duty may be, still a balance
for consequential damages, forfeiture proceedings provided for under must be sought with the equally compelling necessity that a proper
Republic Act No. 1379, or any other civil actions under the Civil Code respect be accorded and adequate protection assured, the fundamental
or other existing laws, in connection with * * (said Executive Orders rights of private property and free enterprise which are deemed pillars
Numbered 1 and 2) may be filed separately from and proceed of a free society such as ours, and to which all members of that society
independently of any criminal proceedings and may be proved by a may without exception lay claim.
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to* * (said)civil
* * Democracy, as a way of life enshrined in the Constitution, embraces
cases." 36 as its necessary components freedom of conscience, freedom of
expression, and freedom in the pursuit of happiness. Along with these
5. Contemplated Situations freedoms are included economic freedom and freedom of enterprise
within reasonable bounds and under proper control. * * Evincing much
The situations envisaged and sought to be governed are self-evident, concern for the protection of property, the Constitution distinctly
these being: recognizes the preferred position which real estate has occupied in law
for ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The position, authority relationship, connection or influence, resulting in
Constitution realizes the indispensable role which property, owned in unjust enrichment of the ostensible owner and grave damage and
reasonable quantities and used legitimately, plays in the stimulation to prejudice to the State. 44 And this, too, is the sense in which the term is
economic effort and the formation and growth of a solid social middle commonly understood in other jurisdictions. 45
class that is said to be the bulwark of democracy and the backbone of
every progressive and happy country. 42 b. "Freeze Order"

a. Need of Evidentiary Substantiation in Proper Suit A "freeze order" prohibits the person having possession or control of
property alleged to constitute "ill-gotten wealth" "from transferring,
Consequently, the factual premises of the Executive Orders cannot conveying, encumbering or otherwise depleting or concealing such
simply be assumed. They will have to be duly established by adequate property, or from assisting or taking part in its transfer, encumbrance,
proof in each case, in a proper judicial proceeding, so that the recovery concealment, or dissipation." 46 In other words, it commands the
of the ill-gotten wealth may be validly and properly adjudged and possessor to hold the property and conserve it subject to the orders
consummated; although there are some who maintain that the fact-that and disposition of the authority decreeing such freezing. In this sense, it
an immense fortune, and "vast resources of the government have been is akin to a garnishment by which the possessor or ostensible owner of
amassed by former President Ferdinand E. Marcos, his immediate property is enjoined not to deliver, transfer, or otherwise dispose of any
family, relatives, and close associates both here and abroad," and they effects or credits in his possession or control, and thus becomes in a
have resorted to all sorts of clever schemes and manipulations to sense an involuntary depositary thereof. 47
disguise and hide their illicit acquisitions-is within the realm of judicial
notice, being of so extensive notoriety as to dispense with proof c. Provisional Takeover
thereof, Be this as it may, the requirement of evidentiary substantiation
has been expressly acknowledged, and the procedure to be followed
In providing for the remedy of "provisional takeover," the law
explicitly laid down, in Executive Order No. 14. acknowledges the apparent distinction between "ill gotten" "business
enterprises and entities" (going concerns, businesses in actual
b. Need of Provisional Measures to Collect and Conserve Assets operation), generally, as to which the remedy of sequestration applies,
Pending Suits it being necessarily inferred that the remedy entails no interference, or
the least possible interference with the actual management and
Nor may it be gainsaid that pending the institution of the suits for the operations thereof; and "business enterprises which were taken over by
recovery of such "ill-gotten wealth" as the evidence at hand may reveal, the government government of the Marcos Administration or by entities
there is an obvious and imperative need for preliminary, provisional or persons close to him," in particular, as to which a "provisional
measures to prevent the concealment, disappearance, destruction, takeover" is authorized, "in the public interest or to prevent disposal or
dissipation, or loss of the assets and properties subject of the suits, or dissipation of the enterprises." 48 Such a "provisional takeover" imports
to restrain or foil acts that may render moot and academic, or something more than sequestration or freezing, more than the placing
effectively hamper, delay, or negate efforts to recover the same. of the business under physical possession and control, albeit without or
with the least possible interference with the management and carrying
7. Provisional Remedies Prescribed by Law on of the business itself. In a "provisional takeover," what is taken into
custody is not only the physical assets of the business enterprise or
entity, but the business operation as well. It is in fine the assumption of
To answer this need, the law has prescribed three (3) provisional
control not only over things, but over operations or on- going activities.
remedies. These are: (1) sequestration; (2) freeze orders; and (3)
But, to repeat, such a "provisional takeover" is allowed only as regards
provisional takeover.
"business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President
Sequestration and freezing are remedies applicable generally to Marcos."
unearthed instances of "ill-gotten wealth." The remedy of "provisional
takeover" is peculiar to cases where "business enterprises and
properties (were) taken over by the government of the Marcos d. No Divestment of Title Over Property Seized
Administration or by entities or persons close to former President
Marcos." 43 It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law
plainly qualifies the remedy of take-over by the adjective, "provisional."
a. Sequestration
These remedies may be resorted to only for a particular exigency: to
prevent in the public interest the disappearance or dissipation of
By the clear terms of the law, the power of the PCGG to sequester property or business, and conserve it pending adjudgment in
property claimed to be "ill-gotten" means to place or cause to be placed appropriate proceedings of the primary issue of whether or not the
under its possession or control said property, or any building or office acquisition of title or other right thereto by the apparent owner was
wherein any such property and any records pertaining thereto may be attended by some vitiating anomaly. None of the remedies is meant to
found, including "business enterprises and entities,"-for the purpose of deprive the owner or possessor of his title or any right to the property
preventing the destruction, concealment or dissipation of, and sequestered, frozen or taken over and vest it in the sequestering
otherwise conserving and preserving, the same-until it can be agency, the Government or other person. This can be done only for the
determined, through appropriate judicial proceedings, whether the causes and by the processes laid down by law.
property was in truth will- gotten," i.e., acquired through or as a result of
improper or illegal use of or the conversion of funds belonging to the
That this is the sense in which the power to sequester, freeze or
Government or any of its branches, instrumentalities, enterprises,
provisionally take over is to be understood and exercised, the language
banks or financial institutions, or by taking undue advantage of official
of the executive orders in question leaves no doubt. Executive Order permanency or finality, and always subject to the control of the issuing
No. 1 declares that the sequestration of property the acquisition of court or agency.
which is suspect shall last "until the transactions leading to such
acquisition * * can be disposed of by the appropriate authorities." 49 g. Remedies, Non-Judicial
Executive Order No. 2 declares that the assets or properties therein
mentioned shall remain frozen "pending the outcome of appropriate
Parenthetically, that writs of sequestration or freeze or takeover orders
proceedings in the Philippines to determine whether any such assets or
are not issued by a court is of no moment. The Solicitor General draws
properties were acquired" by illegal means. Executive Order No. 14
attention to the writ of distraint and levy which since 1936 the
makes clear that judicial proceedings are essential for the resolution of
Commissioner of Internal Revenue has been by law authorized to issue
the basic issue of whether or not particular assets are "ill-gotten," and
against property of a delinquent taxpayer. 56 BASECO itself declares
resultant recovery thereof by the Government is warranted. that it has not manifested "a rigid insistence on sequestration as a
purely judicial remedy * * (as it feels) that the law should not be ossified
e. State of Seizure Not To Be Indefinitely Maintained; The to a point that makes it insensitive to change." What it insists on, what it
Constitutional Command pronounces to be its "unyielding position, is that any change in
procedure, or the institution of a new one, should conform to due
There is thus no cause for the apprehension voiced by BASECO 50 that process and the other prescriptions of the Bill of Rights of the
sequestration, freezing or provisional takeover is designed to be an end Constitution." 57 It is, to be sure, a proposition on which there can be no
in itself, that it is the device through which persons may be deprived of disagreement.
their property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this h. Orders May Issue Ex Parte
is not so is quite explicitly declared by the governing rules.
Like the remedy of preliminary attachment and receivership, as well as
Be this as it may, the 1987 Constitution should allay any lingering fears delivery of personal property in replevin suits, sequestration and
about the duration of these provisional remedies. Section 26 of its provisional takeover writs may issue ex parte. 58 And as in preliminary
Transitory Provisions, 51 lays down the relevant rule in plain terms, attachment, receivership, and delivery of personality, no objection of
apart from extending ratification or confirmation (although not really any significance may be raised to the ex parte issuance of an order of
necessary) to the institution by presidential fiat of the remedy of sequestration, freezing or takeover, given its fundamental character of
sequestration and freeze orders: temporariness or conditionality; and taking account specially of the
constitutionally expressed "mandate of the people to recover ill-gotten
SEC. 26. The authority to issue sequestration or freeze orders under properties amassed by the leaders and supporters of the previous
Proclamation No. 3 dated March 25, 1986 in relation to the recovery of regime and protect the interest of the people;" 59 as well as the obvious
ill-gotten wealth shag remain operative for not more than eighteen need to avoid alerting suspected possessors of "ill-gotten wealth" and
months after the ratification of this Constitution. However, in the thereby cause that disappearance or loss of property precisely sought
national interest, as certified by the President, the Congress may to be prevented, and the fact, just as self-evident, that "any transfer,
extend said period. disposition, concealment or disappearance of said assets and
properties would frustrate, obstruct or hamper the efforts of the
A sequestration or freeze order shall be issued only upon showing of a Government" at the just recovery thereof. 60
prima facie case. The order and the list of the sequestered or frozen
properties shall forthwith be registered with the proper court. For orders 8. Requisites for Validity
issued before the ratification of this Constitution, the corresponding
judicial action or proceeding shall be filed within six months from its What is indispensable is that, again as in the case of attachment and
ratification. For those issued after such ratification, the judicial action or receivership, there exist a prima facie factual foundation, at least, for
proceeding shall be commenced within six months from the issuance the sequestration, freeze or takeover order, and adequate and fair
thereof. opportunity to contest it and endeavor to cause its negation or
nullification. 61
The sequestration or freeze order is deemed automatically lifted if no
judicial action or proceeding is commenced as herein provided. 52 Both are assured under the executive orders in question and the rules
and regulations promulgated by the PCGG.
f. Kinship to Attachment Receivership
a. Prima Facie Evidence as Basis for Orders
As thus described, sequestration, freezing and provisional takeover are
akin to the provisional remedy of preliminary attachment, or Executive Order No. 14 enjoins that there be "due regard to the
receivership. 53 By attachment, a sheriff seizes property of a defendant requirements of fairness and due process." 62 Executive Order No. 2
in a civil suit so that it may stand as security for the satisfaction of any declares that with respect to claims on allegedly "ill-gotten" assets and
judgment that may be obtained, and not disposed of, or dissipated, or properties, "it is the position of the new democratic government that
lost intentionally or otherwise, pending the action. 54 By receivership, President Marcos * * (and other parties affected) be afforded fair
property, real or personal, which is subject of litigation, is placed in the opportunity to contest these claims before appropriate Philippine
possession and control of a receiver appointed by the Court, who shall authorities." 63 Section 7 of the Commission's Rules and Regulations
conserve it pending final determination of the title or right of possession provides that sequestration or freeze (and takeover) orders issue upon
over it. 55 All these remedies — sequestration, freezing, provisional, the authority of at least two commissioners, based on the affirmation or
takeover, attachment and receivership — are provisional, temporary, complaint of an interested party, or motu proprio when the Commission
designed for-particular exigencies, attended by no character of has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. been said that the PCGG is not, and was never intended to act as, a
XVIII of the 1987 Constitution, which requires that a "sequestration or judge. Its general function is to conduct investigations in order to collect
freeze order shall be issued only upon showing of a prima facie case." evidence establishing instances of "ill-gotten wealth;" issue
65 sequestration, and such orders as may be warranted by the evidence
thus collected and as may be necessary to preserve and conserve the
b. Opportunity to Contest assets of which it takes custody and control and prevent their
disappearance, loss or dissipation; and eventually file and prosecute in
the proper court of competent jurisdiction all cases investigated by it as
And Sections 5 and 6 of the same Rules and Regulations lay down the
may be warranted by its findings. It does not try and decide, or hear
procedure by which a party may seek to set aside a writ of
and determine, or adjudicate with any character of finality or
sequestration or freeze order, viz:
compulsion, cases involving the essential issue of whether or not
property should be forfeited and transferred to the State because "ill-
SECTION 5. Who may contend.-The person against whom a writ of gotten" within the meaning of the Constitution and the executive orders.
sequestration or freeze or hold order is directed may request the lifting This function is reserved to the designated court, in this case, the
thereof in writing, either personally or through counsel within five (5) Sandiganbayan. 71 There can therefore be no serious regard accorded
days from receipt of the writ or order, or in the case of a hold order, to the accusation, leveled by BASECO, 72 that the PCGG plays the
from date of knowledge thereof. perfidious role of prosecutor and judge at the same time.

SECTION 6. Procedure for review of writ or order.-After due hearing or 11. Facts Preclude Grant of Relief to Petitioner
motu proprio for good cause shown, the Commission may lift the writ or
order unconditionally or subject to such conditions as it may deem
Upon these premises and reasoned conclusions, and upon the facts
necessary, taking into consideration the evidence and the circumstance
disclosed by the record, hereafter to be discussed, the petition cannot
of the case. The resolution of the commission may be appealed by the
succeed. The writs of certiorari and prohibition prayed for will not be
party concerned to the Office of the President of the Philippines within
issued.
fifteen (15) days from receipt thereof.

The facts show that the corporation known as BASECO was owned or
Parenthetically, even if the requirement for a prima facie showing of "ill-
controlled by President Marcos "during his administration, through
gotten wealth" were not expressly imposed by some rule or regulation
nominees, by taking undue advantage of his public office and/or using
as a condition to warrant the sequestration or freezing of property
his powers, authority, or influence, " and that it was by and through the
contemplated in the executive orders in question, it would nevertheless
same means, that BASECO had taken over the business and/or assets
be exigible in this jurisdiction in which the Rule of Law prevails and
of the National Shipyard and Engineering Co., Inc., and other
official acts which are devoid of rational basis in fact or law, or are
government-owned or controlled entities.
whimsical and capricious, are condemned and struck down. 66

12. Organization and Stock Distribution of BASECO


9. Constitutional Sanction of Remedies

BASECO describes itself in its petition as "a shiprepair and shipbuilding


If any doubt should still persist in the face of the foregoing
company * * incorporated as a domestic private corporation * * (on Aug.
considerations as to the validity and propriety of sequestration, freeze
30, 1972) by a consortium of Filipino shipowners and shipping
and takeover orders, it should be dispelled by the fact that these
executives. Its main office is at Engineer Island, Port Area, Manila,
particular remedies and the authority of the PCGG to issue them have
where its Engineer Island Shipyard is housed, and its main shipyard is
received constitutional approbation and sanction. As already
located at Mariveles Bataan." 73 Its Articles of Incorporation disclose
mentioned, the Provisional or "Freedom" Constitution recognizes the
that its authorized capital stock is P60,000,000.00 divided into 60,000
power and duty of the President to enact "measures to achieve the
shares, of which 12,000 shares with a value of P12,000,000.00 have
mandate of the people to * * * (recover ill- gotten properties amassed
been subscribed, and on said subscription, the aggregate sum of
by the leaders and supporters of the previous regime and protect the
P3,035,000.00 has been paid by the incorporators. 74 The same articles
interest of the people through orders of sequestration or freezing of
Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A.
assets or accounts." And as also already adverted to, Section 26,
Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P.
Article XVIII of the 1987 Constitution 67 treats of, and ratifies the
Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M.
"authority to issue sequestration or freeze orders under Proclamation
Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose
No. 3 dated March 25, 1986."
Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
The institution of these provisional remedies is also premised upon the
State's inherent police power, regarded, as t lie power of promoting the
By 1986, however, of these fifteen (15) incorporators, six (6) had
public welfare by restraining and regulating the use of liberty and
ceased to be stockholders, namely: (1) Generoso Tanseco, (2) Antonio
property," 68 and as "the most essential, insistent and illimitable of
Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
powers * * in the promotion of general welfare and the public interest,"
69 and said to be co-extensive with self-protection and * * not inaptly Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty
(20) stockholders listed in BASECO's Stock and Transfer Book. 75 Their
termed (also) the'law of overruling necessity." " 70
names and the number of shares respectively held by them are as
follows:
10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far
1. Jose A. Rojas 1,248 shares at seven percent (7%) per annum, compounded semi-annually, was
stipulated to be paid in equal semi-annual installments over a term of
2. Severino G. de la Cruz 1,248 shares nine (9) years, payment to commence after a grace period of two (2)
years from date of turnover of the shipyard to BASECO. 76
3. Emilio T. Yap 2,508 shares
14. Subsequent Reduction of Price; Intervention of Marcos
4. Jose Fernandez 1,248 shares
Unaccountably, the price of P52,000,000.00 was reduced by more than
one-half, to P24,311,550.00, about eight (8) months later. A document
5. Jose Francisco 128 shares
to this effect was executed on October 9, 1973, entitled "Memorandum
Agreement," and was signed for NASSCO by Arturo Pacificador, as
6. Manuel S. Mendoza 96 shares Presiding Officer of the Board of Directors, and David R. Ines, as
General Manager. 77 This agreement bore, at the top right corner of the
7. Anthony P. Lee 1,248 shares first page, the word "APPROVED" in the handwriting of President
Marcos, followed by his usual full signature. The document recited that
8. Hilario M. Ruiz 32 shares a down payment of P5,862,310.00 had been made by BASECO, and
the balance of P19,449,240.00 was payable in equal semi-annual
9. Constante L. Fariñas 8 shares installments over nine (9) years after a grace period of two (2) years,
with interest at 7% per annum.
10. Fidelity Management, Inc. 65,882 shares
15. Acquisition of 300 Hectares from Export Processing Zone Authority
11. Trident Management 7,412 shares
On October 1, 1974, BASECO acquired three hundred (300) hectares
of land in Mariveles from the Export Processing Zone Authority for the
12. United Phil. Lines 1,240 shares
price of P10,047,940.00 of which, as set out in the document of sale,
P2,000.000.00 was paid upon its execution, and the balance stipulated
13. Renato M. Tanseco 8 shares to be payable in installments. 78

14. Fidel Ventura 8 shares 16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

15. Metro Bay Drydock 136,370 shares Some nine months afterwards, or on July 15, 1975, to be precise,
BASECO, again with the intervention of President Marcos, acquired
16. Manuel Jacela 1 share ownership of the rest of the assets of NASSCO which had not been
included in the first two (2) purchase documents. This was
17. Jonathan G. Lu 1 share accomplished by a deed entitled "Contract of Purchase and Sale," 79
which, like the Memorandum of Agreement dated October 9, 1973
supra also bore at the upper right-hand corner of its first page, the
18. Jose J. Tanchanco 1 share
handwritten notation of President Marcos reading, "APPROVED, July
29, 1973," and underneath it, his usual full signature. Transferred to
19. Dioscoro Papa 128 shares BASECO were NASSCO's "ownership and all its titles, rights and
interests over all equipment and facilities including structures, buildings,
20. Edward T. Marcelo 4 shares shops, quarters, houses, plants and expendable or semi-expendable
assets, located at the Engineer Island, known as the Engineer Island
TOTAL 218,819 shares. Shops, including all the equipment of the Bataan National Shipyards
(BNS) which were excluded from the sale of NBS to BASECO but
retained by BASECO and all other selected equipment and
machineries of NASSCO at J. Panganiban Smelting Plant." In the same
deed, NASSCO committed itself to cooperate with BASECO for the
13 Acquisition of NASSCO by BASECO
acquisition from the National Government or other appropriate
Government entity of Engineer Island. Consideration for the sale was
Barely six months after its incorporation, BASECO acquired from set at P5,000,000.00; a down payment of P1,000,000.00 appears to
National Shipyard & Steel Corporation, or NASSCO, a government- have been made, and the balance was stipulated to be paid at 7%
owned or controlled corporation, the latter's shipyard at Mariveles, interest per annum in equal semi annual installments over a term of
Bataan, known as the Bataan National Shipyard (BNS), and — except nine (9) years, to commence after a grace period of two (2) years. Mr.
for NASSCO's Engineer Island Shops and certain equipment of the Arturo Pacificador again signed for NASSCO, together with the general
BNS, consigned for future negotiation — all its structures, buildings, manager, Mr. David R. Ines.
shops, quarters, houses, plants, equipment and facilities, in stock or in
transit. This it did in virtue of a "Contract of Purchase and Sale with
17. Loans Obtained
Chattel Mortgage" executed on February 13, 1973. The price was
P52,000,000.00. As partial payment thereof, BASECO delivered to
NASSCO a cash bond of P11,400,000.00, convertible into cash within It further appears that on May 27, 1975 BASECO obtained a loan from
twenty-four (24) hours from completion of the inventory undertaken the NDC, taken from "the last available Japanese war damage fund of
pursuant to the contract. The balance of P41,600,000.00, with interest $19,000,000.00," to pay for "Japanese made heavy equipment (brand
new)." 80 On September 3, 1975, it got another loan also from the NDC * * (that) their replacements (be effected) so we can register their
in the amount of P30,000,000.00 (id.). And on January 28, 1976, it got names in the stock book prior to the implementation of your instructions
still another loan, this time from the GSIS, in the sum of to pass a board resolution to legalize the transfers under SEC
P12,400,000.00. 81 The claim has been made that not a single centavo regulations;
has been paid on these loans. 82
2. By getting their replacements, the families cannot question us later
18. Reports to President Marcos on; and

In September, 1977, two (2) reports were submitted to President 3. We will owe no further favors from them. 87
Marcos regarding BASECO. The first was contained in a letter dated
September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The He also transmitted to Marcos, together with the report, the following
second was embodied in a confidential memorandum dated September documents: 88
16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine
hand of Marcos in the affairs of BASECO, and that of a Romualdez, a
1. Stock certificates indorsed and assigned in blank with assignments
relative by affinity.
and waivers; 89

a. BASECO President's Report 2. The articles of incorporation, the amended articles, and the by-laws
of BASECO;
In his letter of September 5, 1977, BASECO President Ruiz reported to
Marcos that there had been "no orders or demands for ship
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels
construction" for some time and expressed the fear that if that state of
of land in "Engineer Island", Port Area, Manila;
affairs persisted, BASECO would not be able to pay its debts to the
Government, which at the time stood at the not inconsiderable amount
of P165,854,000.00. 85 He suggested that, to "save the situation," there 4. Transfer Certificate of Title No. 124822 in the name of BASECO,
be a "spin-off (of their) shipbuilding activities which shall be handled covering "Engineer Island";
exclusively by an entirely new corporation to be created;" and towards
this end, he informed Marcos that BASECO was — 5. Contract dated October 9, 1973, between NASSCO and BASECO
re-structure and equipment at Mariveles, Bataan;
* * inviting NDC and LUSTEVECO to participate by converting the NDC
shipbuilding loan to BASECO amounting to P341.165M and assuming 6. Contract dated July 16, 1975, between NASSCO and BASECO re-
and converting a portion of BASECO's shipbuilding loans from structure and equipment at Engineer Island, Port Area Manila;
REPACOM amounting to P52.2M or a total of P83.365M as NDC's
equity contribution in the new corporation. LUSTEVECO will participate 7. Contract dated October 1, 1974, between EPZA and BASECO re
by absorbing and converting a portion of the REPACOM loan of Bay 300 hectares of land at Mariveles, Bataan;
Shipyard and Drydock, Inc., amounting to P32.538M. 86
8. List of BASECO's fixed assets;
b. Romualdez' Report
9. Loan Agreement dated September 3, 1975, BASECO's loan from
Capt. A.T. Romualdez' report to the President was submitted eleven NDC of P30,000,000.00;
(11) days later. It opened with the following caption:
10. BASECO-REPACOM Agreement dated May 27, 1975;
MEMORANDUM:
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00
FOR : The President for the housing facilities for BASECO's rank-and-file employees. 90

SUBJECT: An Evaluation and Re-assessment of a Performance of a Capt. Romualdez also recommended that BASECO's loans be
Mission restructured "until such period when BASECO will have enough orders
for ships in order for the company to meet loan obligations," and that —
FROM: Capt. A.T. Romualdez.
An LOI may be issued to government agencies using floating
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in equipment, that a linkage scheme be applied to a certain percent of
meeting its loan obligations due chiefly to the fact that "orders to build BASECO's net profit as part of BASECO's amortization payments to
ships as expected * * did not materialize." make it justifiable for you, Sir. 91

He advised that five stockholders had "waived and/or assigned their It is noteworthy that Capt. A.T. Romualdez does not appear to be a
holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de la stockholder or officer of BASECO, yet he has presented a report on
Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. BASECO to President Marcos, and his report demonstrates intimate
Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose familiarity with the firm's affairs and problems.
A. Rojas had a major heart attack," he made the following quite
revealing, and it may be added, quite cynical and indurate 19. Marcos' Response to Reports
recommendation, to wit:
President Marcos lost no time in acting on his subordinates' partnership with the private sector.
recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments." xxx xxx xxx

a. Instructions re "Spin-Off" And so, through a simple letter of instruction and memorandum,
BASECO's loan obligation to NDC and REPACOM * * in the total
Under date of September 28, 1977, he addressed a Memorandum to amount of P83.365M and BSD's REPACOM loan of P32.438M were
Secretary Geronimo Velasco of the Philippine National Oil Company wiped out and converted into non-voting preferred shares. 95
and Chairman Constante Fariñas of the National Development
Company, directing them "to participate in the formation of a new 20. Evidence of Marcos'
corporation resulting from the spin-off of the shipbuilding component of
BASECO along the following guidelines:
Ownership of BASECO

a. Equity participation of government shall be through LUSTEVECO


It cannot therefore be gainsaid that, in the context of the proceedings at
and NDC in the amount of P115,903,000 consisting of the following
bar, the actuality of the control by President Marcos of BASECO has
obligations of BASECO which are hereby authorized to be converted to
been sufficiently shown.
equity of the said new corporation, to wit:
Other evidence submitted to the Court by the Solicitor General proves
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation) that President Marcos not only exercised control over BASECO, but
also that he actually owns well nigh one hundred percent of its
2. LUSTEVECO P32,538,000 (Reparation) outstanding stock.

b. Equity participation of government shall be in the form of non- voting It will be recalled that according to petitioner- itself, as of April 23, 1986,
shares. there were 218,819 shares of stock outstanding, ostensibly owned by
twenty (20) stockholders. 96 Four of these twenty are juridical persons:
For immediate compliance. 92 (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2)
Fidelity Management, Inc., 65,882 shares; (3) Trident Management,
Mr. Marcos' guidelines were promptly complied with by his 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three
subordinates. Twenty-two (22) days after receiving their president's corporations, among themselves, own an aggregate of 209,664 shares
memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and of BASECO stock, or 95.82% of the outstanding stock.
Geronimo Z. Velasco, in representation of their respective corporations,
executed a PRE-INCORPORATION AGREEMENT dated October 20, Now, the Solicitor General has drawn the Court's attention to the
1977. 93 In it, they undertook to form a shipbuilding corporation to be intriguing circumstance that found in Malacanang shortly after the
known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to sudden flight of President Marcos, were certificates corresponding to
realization their president's instructions. It would seem that the new more than ninety-five percent (95%) of all the outstanding shares of
corporation ultimately formed was actually named "Philippine Dockyard stock of BASECO, endorsed in blank, together with deeds of
Corporation (PDC)." 94 assignment of practically all the outstanding shares of stock of the three
(3) corporations above mentioned (which hold 95.82% of all BASECO
b. Letter of Instructions No. 670 stock), signed by the owners thereof although not notarized. 97

Mr. Marcos did not forget Capt. Romualdez' recommendation for a More specifically, found in Malacanang (and now in the custody of the
letter of instructions. On February 14, 1978, he issued Letter of PCGG) were:
Instructions No. 670 addressed to the Reparations Commission
REPACOM the Philippine National Oil Company (PNOC), the Luzon 1) the deeds of assignment of all 600 outstanding shares of Fidelity
Stevedoring Company (LUSTEVECO), and the National Development Management Inc. — which supposedly owns as aforesaid 65,882
Company (NDC). What is commanded therein is summarized by the shares of BASECO stock;
Solicitor General, with pithy and not inaccurate observations as to the
effects thereof (in italics), as follows: 2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding
shares of Metro Bay Drydock Corporation — which allegedly owns
* * 1) the shipbuilding equipment procured by BASECO through 136,370 shares of BASECO stock;
reparations be transferred to NDC subject to reimbursement by NDC to
BASECO (of) the amount of s allegedly representing the handling and 3) the deeds of assignment of 800 outstanding shares of Trident
incidental expenses incurred by BASECO in the installation of said Management Co., Inc. — which allegedly owns 7,412 shares of
equipment (so instead of NDC getting paid on its loan to BASECO, it BASECO stock, assigned in blank; 98 and
was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now
4) stock certificates corresponding to 207,725 out of the 218,819
in the possession of BASECO and BSDI (Bay Shipyard & Drydocking,
outstanding shares of BASECO stock; that is, all but 5 % — all
Inc.) be transferred to LUSTEVECO through PNOC; and 3) the
endorsed in blank. 99
shipbuilding equipment (thus) transferred be invested by LUSTEVECO,
acting through PNOC and NDC, as the government's equity
participation in a shipbuilding corporation to be established in While the petitioner's counsel was quick to dispute this asserted fact,
assuring this Court that the BASECO stockholders were still in In the light of the affirmative showing by the Government that, prima
possession of their respective stock certificates and had "never facie at least, the stockholders and directors of BASECO as of April,
endorsed * * them in blank or to anyone else," 100 that denial is 1986 109 were mere "dummies," nominees or alter egos of President
exposed by his own prior and subsequent recorded statements as a Marcos; at any rate, that they are no longer owners of any shares of
mere gesture of defiance rather than a verifiable factual declaration. stock in the corporation, the conclusion cannot be avoided that said
stockholders and directors have no basis and no standing whatever to
By resolution dated September 25, 1986, this Court granted BASECO's cause the filing and prosecution of the instant proceeding; and to grant
counsel a period of 10 days "to SUBMIT, as undertaken by him, * * the relief to BASECO, as prayed for in the petition, would in effect be to
certificates of stock issued to the stockholders of * * BASECO as of restore the assets, properties and business sequestered and taken
April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel over by the PCGG to persons who are "dummies," nominees or alter
thereafter moved for extension; and in his motion dated October 2, egos of the former president.
1986, he declared inter alia that "said certificates of stock are in the
possession of third parties, among whom being the respondents From the standpoint of the PCGG, the facts herein stated at some
themselves * * and petitioner is still endeavoring to secure copies length do indeed show that the private corporation known as BASECO
thereof from them." 102 On the same day he filed another motion was "owned or controlled by former President Ferdinand E. Marcos * *
praying that he be allowed "to secure copies of the Certificates of Stock during his administration, * * through nominees, by taking advantage of
in the name of Metro Bay Drydock, Inc., and of all other Certificates, of * * (his) public office and/or using * * (his) powers, authority, influence *
Stock of petitioner's stockholders in possession of respondents." 103 *," and that NASSCO and other property of the government had been
taken over by BASECO; and the situation justified the sequestration as
In a Manifestation dated October 10, 1986,, 104 the Solicitor General well as the provisional takeover of the corporation in the public interest,
not unreasonably argued that counsel's aforestated motion to secure in accordance with the terms of Executive Orders No. 1 and 2, pending
copies of the stock certificates "confirms the fact that stockholders of the filing of the requisite actions with the Sandiganbayan to cause
petitioner corporation are not in possession of * * (their) certificates of divestment of title thereto from Marcos, and its adjudication in favor of
stock," and the reason, according to him, was "that 95% of said shares the Republic pursuant to Executive Order No. 14.
* * have been endorsed in blank and found in Malacañang after the
former President and his family fled the country." To this manifestation As already earlier stated, this Court agrees that this assessment of the
BASECO's counsel replied on November 5, 1986, as already facts is correct; accordingly, it sustains the acts of sequestration and
mentioned, Stubbornly insisting that the firm's stockholders had not takeover by the PCGG as being in accord with the law, and, in view of
really assigned their stock. 105 what has thus far been set out in this opinion, pronounces to be without
merit the theory that said acts, and the executive orders pursuant to
In view of the parties' conflicting declarations, this Court resolved on which they were done, are fatally defective in not according to the
November 27, 1986 among other things "to require * * the petitioner * * parties affected prior notice and hearing, or an adequate remedy to
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the impugn, set aside or otherwise obtain relief therefrom, or that the
originals of the stock certificates alleged to be in its possession or PCGG had acted as prosecutor and judge at the same time.
accessible to it, mentioned and described in Annex 'P' of its petition,
(and other pleadings) * * within ten (10) days from notice." 106 In a 22. Executive Orders Not a Bill of Attainder
motion filed on December 5, 1986, 107 BASECO's counsel made the
statement, quite surprising in the premises, that "it will negotiate with Neither will this Court sustain the theory that the executive orders in
the owners (of the BASECO stock in question) to allow petitioner to question are a bill of attainder. 110 "A bill of attainder is a legislative act
borrow from them, if available, the certificates referred to" but that "it which inflicts punishment without judicial trial." 111 "Its essence is the
needs a more sufficient time therefor" (sic). BASECO's counsel substitution of a legislative for a judicial determination of guilt." 112
however eventually had to confess inability to produce the originals of
the stock certificates, putting up the feeble excuse that while he had
In the first place, nothing in the executive orders can be reasonably
"requested the stockholders to allow * * (him) to borrow said
construed as a determination or declaration of guilt. On the contrary,
certificates, * * some of * * (them) claimed that they had delivered the
the executive orders, inclusive of Executive Order No. 14, make it
certificates to third parties by way of pledge and/or to secure
perfectly clear that any judgment of guilt in the amassing or acquisition
performance of obligations, while others allegedly have entrusted them
of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this
to third parties in view of last national emergency." 108 He has
case, the Sandiganbayan, upon complaint filed and prosecuted by the
conveniently omitted, nor has he offered to give the details of the
PCGG. In the second place, no punishment is inflicted by the executive
transactions adverted to by him, or to explain why he had not
orders, as the merest glance at their provisions will immediately make
impressed on the supposed stockholders the primordial importance of
apparent. In no sense, therefore, may the executive orders be regarded
convincing this Court of their present custody of the originals of the
as a bill of attainder.
stock, or if he had done so, why the stockholders are unwilling to agree
to some sort of arrangement so that the originals of their certificates
might at the very least be exhibited to the Court. Under the 23. No Violation of Right against Self-Incrimination and Unreasonable
circumstances, the Court can only conclude that he could not get the Searches and Seizures
originals from the stockholders for the simple reason that, as the
Solicitor General maintains, said stockholders in truth no longer have BASECO also contends that its right against self incrimination and
them in their possession, these having already been assigned in blank unreasonable searches and seizures had been transgressed by the
to then President Marcos. Order of April 18, 1986 which required it "to produce corporate records
from 1973 to 1986 under pain of contempt of the Commission if it fails
21. Facts Justify Issuance of Sequestration and Takeover Orders to do so." The order was issued upon the authority of Section 3 (e) of
Executive Order No. 1, treating of the PCGG's power to "issue
subpoenas requiring * * the production of such books, papers, The witness may not refuse to comply with the order on the basis of his
contracts, records, statements of accounts and other documents as privilege against self-incrimination; but no testimony or other
may be material to the investigation conducted by the Commission, " information compelled under the order (or any information directly or
and paragraph (3), Executive Order No. 2 dealing with its power to indirectly derived from such testimony, or other information) may be
"require all persons in the Philippines holding * * (alleged "ill-gotten") used against the witness in any criminal case, except a prosecution for
assets or properties, whether located in the Philippines or abroad, in perjury, giving a false statement, or otherwise failing to comply with the
their names as nominees, agents or trustees, to make full disclosure of order.
the same * *." The contention lacks merit.
The constitutional safeguard against unreasonable searches and
It is elementary that the right against self-incrimination has no seizures finds no application to the case at bar either. There has been
application to juridical persons. no search undertaken by any agent or representative of the PCGG, and
of course no seizure on the occasion thereof.
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow 24. Scope and Extent of Powers of the PCGG
that a corporation, vested with special privileges and franchises, may
refuse to show its hand when charged with an abuse ofsuchprivileges * One other question remains to be disposed of, that respecting the
* 113 scope and extent of the powers that may be wielded by the PCGG with
regard to the properties or businesses placed under sequestration or
Relevant jurisprudence is also cited by the Solicitor General. 114 provisionally taken over. Obviously, it is not a question to which an
answer can be easily given, much less one which will suffice for every
* * corporations are not entitled to all of the constitutional protections conceivable situation.
which private individuals have. * * They are not at all within the privilege
against self-incrimination, although this court more than once has said a. PCGG May Not Exercise Acts of Ownership
that the privilege runs very closely with the 4th Amendment's Search
and Seizure provisions. It is also settled that an officer of the company One thing is certain, and should be stated at the outset: the PCGG
cannot refuse to produce its records in its possession upon the plea cannot exercise acts of dominion over property sequestered, frozen or
that they will either incriminate him or may incriminate it." (Oklahoma provisionally taken over. AS already earlier stressed with no little
Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor insistence, the act of sequestration; freezing or provisional takeover of
General's). property does not import or bring about a divestment of title over said
property; does not make the PCGG the owner thereof. In relation to the
* * The corporation is a creature of the state. It is presumed to be property sequestered, frozen or provisionally taken over, the PCGG is a
incorporated for the benefit of the public. It received certain special conservator, not an owner. Therefore, it can not perform acts of strict
privileges and franchises, and holds them subject to the laws of the ownership; and this is specially true in the situations contemplated by
state and the limitations of its charter. Its powers are limited by law. It the sequestration rules where, unlike cases of receivership, for
can make no contract not authorized by its charter. Its rights to act as a example, no court exercises effective supervision or can upon due
corporation are only preserved to it so long as it obeys the laws of its application and hearing, grant authority for the performance of acts of
creation. There is a reserve right in the legislature to investigate its dominion.
contracts and find out whether it has exceeded its powers. It would be a
strange anomaly to hold that a state, having chartered a corporation to Equally evident is that the resort to the provisional remedies in question
make use of certain franchises, could not, in the exercise of should entail the least possible interference with business operations or
sovereignty, inquire how these franchises had been employed, and activities so that, in the event that the accusation of the business
whether they had been abused, and demand the production of the enterprise being "ill gotten" be not proven, it may be returned to its
corporate books and papers for that purpose. The defense amounts to rightful owner as far as possible in the same condition as it was at the
this, that an officer of the corporation which is charged with a criminal time of sequestration.
violation of the statute may plead the criminality of such corporation as
a refusal to produce its books. To state this proposition is to answer it.
b. PCGG Has Only Powers of Administration
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises may The PCGG may thus exercise only powers of administration over the
refuse to show its hand when charged with an abuse of such privileges. property or business sequestered or provisionally taken over, much like
(Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor a court-appointed receiver, 115 such as to bring and defend actions in
General's]) its own name; receive rents; collect debts due; pay outstanding debts;
and generally do such other acts and things as may be necessary to
fulfill its mission as conservator and administrator. In this context, it
At any rate, Executive Order No. 14-A, amending Section 4 of
may in addition enjoin or restrain any actual or threatened commission
Executive Order No. 14 assures protection to individuals required to
of acts by any person or entity that may render moot and academic, or
produce evidence before the PCGG against any possible violation of
frustrate or otherwise make ineffectual its efforts to carry out its task;
his right against self-incrimination. It gives them immunity from
punish for direct or indirect contempt in accordance with the Rules of
prosecution on the basis of testimony or information he is compelled to
Court; and seek and secure the assistance of any office, agency or
present. As amended, said Section 4 now provides that — instrumentality of the government. 116 In the case of sequestered
businesses generally (i.e., going concerns, businesses in current
xxx xxx xxx operation), as in the case of sequestered objects, its essential role, as
already discussed, is that of conservator, caretaker, "watchdog" or
overseer. It is not that of manager, or innovator, much less an owner. reason or rhyme, should indeed be shunned if at an possible, and
undertaken only when essential to prevent disappearance or wastage
c. Powers over Business Enterprises Taken Over by Marcos or Entities of corporate property, and always under such circumstances as assure
or Persons Close to him; Limitations Thereon that the replacements are truly possessed of competence, experience
and probity.
Now, in the special instance of a business enterprise shown by
evidence to have been "taken over by the government of the Marcos In the case at bar, there was adequate justification to vote the
Administration or by entities or persons close to former President incumbent directors out of office and elect others in their stead because
Marcos," 117 the PCGG is given power and authority, as already the evidence showed prima facie that the former were just tools of
adverted to, to "provisionally take (it) over in the public interest or to President Marcos and were no longer owners of any stock in the firm, if
prevent * * (its) disposal or dissipation;" and since the term is obviously they ever were at all. This is why, in its Resolution of October 28, 1986;
employed in reference to going concerns, or business enterprises in 118 this Court declared that —
operation, something more than mere physical custody is connoted; the
PCGG may in this case exercise some measure of control in the Petitioner has failed to make out a case of grave abuse or excess of
operation, running, or management of the business itself. But even in jurisdiction in respondents' calling and holding of a stockholders'
this special situation, the intrusion into management should be meeting for the election of directors as authorized by the Memorandum
restricted to the minimum degree necessary to accomplish the of the President * * (to the PCGG) dated June 26, 1986, particularly,
legislative will, which is "to prevent the disposal or dissipation" of the where as in this case, the government can, through its designated
business enterprise. There should be no hasty, indiscriminate, directors, properly exercise control and management over what appear
unreasoned replacement or substitution of management officials or to be properties and assets owned and belonging to the government
change of policies, particularly in respect of viable establishments. In itself and over which the persons who appear in this case on behalf of
fact, such a replacement or substitution should be avoided if at all BASECO have failed to show any right or even any shareholding in
possible, and undertaken only when justified by demonstrably tenable said corporation.
grounds and in line with the stated objectives of the PCGG. And it goes
without saying that where replacement of management officers may be It must however be emphasized that the conduct of the PCGG
called for, the greatest prudence, circumspection, care and attention - nominees in the BASECO Board in the management of the company's
should accompany that undertaking to the end that truly competent, affairs should henceforth be guided and governed by the norms herein
experienced and honest managers may be recruited. There should be laid down. They should never for a moment allow themselves to forget
no role to be played in this area by rank amateurs, no matter how wen that they are conservators, not owners of the business; they are
meaning. The road to hell, it has been said, is paved with good fiduciaries, trustees, of whom the highest degree of diligence and
intentions. The business is not to be experimented or played around rectitude is, in the premises, required.
with, not run into the ground, not driven to bankruptcy, not fleeced, not
ruined. Sight should never be lost sight of the ultimate objective of the
25. No Sufficient Showing of Other Irregularities
whole exercise, which is to turn over the business to the Republic, once
judicially established to be "ill-gotten." Reason dictates that it is only
under these conditions and circumstances that the supervision, As to the other irregularities complained of by BASECO, i.e., the
administration and control of business enterprises provisionally taken cancellation or revision, and the execution of certain contracts,
over may legitimately be exercised. inclusive of the termination of the employment of some of its
executives, 119 this Court cannot, in the present state of the evidence
on record, pass upon them. It is not necessary to do so. The issues
d. Voting of Sequestered Stock; Conditions Therefor arising therefrom may and will be left for initial determination in the
appropriate action. But the Court will state that absent any showing of
So, too, it is within the parameters of these conditions and any important cause therefor, it will not normally substitute its judgment
circumstances that the PCGG may properly exercise the prerogative to for that of the PCGG in these individual transactions. It is clear
vote sequestered stock of corporations, granted to it by the President of however, that as things now stand, the petitioner cannot be said to
the Philippines through a Memorandum dated June 26, 1986. That have established the correctness of its submission that the acts of the
Memorandum authorizes the PCGG, "pending the outcome of PCGG in question were done without or in excess of its powers, or with
proceedings to determine the ownership of * * (sequestered) shares of grave abuse of discretion.
stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of
WHEREFORE, the petition is dismissed. The temporary restraining
directors, declaration of dividends, amendment of the Articles of
order issued on October 14, 1986 is lifted.
Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive
G.R. No. 125986 January 28, 1999
Orders earlier promulgated on the same matter. There should be no
exercise of the right to vote simply because the right exists, or because
the stocks sequestered constitute the controlling or a substantial part of LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners,
the corporate voting power. The stock is not to be voted to replace vs. HONORABLE COURT OF APPEALS, JAMES BUILDER
directors, or revise the articles or by-laws, or otherwise bring about CONSTRUCTION and/or JAIME T. BRAVO, respondents.
substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in
the context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the MARTINEZ, J.:
corporate assets. Directors are not to be voted out simply because the
power to do so exists. Substitution of directors is not to be done without
This petition for review assails the decision of the respondent Court of defendant to:
Appeals dated March 15, 1996, 1 which affirmed with modification the
judgment of default rendered by the Regional Trial Court of Muntinlupa, a) Comply with its obligation to deliver/finalize Management Contract of
Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for its land in Sucat, Muntinlupa, Metro Manila and to pay plaintiff its
in the complaint of private respondents James Builder Construction balance in the amount of P1,708,489.00:
and/or Jaime T. Bravo.
b) Pay plaintiff moral and exemplary damages in the amount of
As culled from the record, the facts are as follows: P500.000.00;

Petitioner Aida M. Posadas and her two (2) minor children co-owned a c) Pay plaintiff actual damages in the amount of P500.000.00
1.6 hectare property in Sucat, Muntinlupa, which was occupied by (Bunkhouse/warehouse- P300.000.00, Hollow-block factory-
squatters. Petitioner Posadas entered into negotiations with private P60.000.00, lumber, cement, etc., P120.000.00, guard-P20.000.00);
respondent Jaime T. Bravo regarding the development of the said
property into a residential subdivision. On May 3, 1989, she authorized
d) Pay plaintiff attorney's fee of P50.000 plus P700 per appearance in
private respondent to negotiate with the squatters to leave the said
court and 5% of that which may be awarded by the court to plaintiff re
property. With a written authorization, respondent Bravo buckled down
its monetary claims:
to work and started negotiations with the squatters.
e) Pay cost of this suit. 3
Meanwhile, some seven (7) months later, on December 11, 1989,
petitioner Posadas and her two (2) children, through a Deed of
Assignment, assigned the said property to petitioner Luxuria Homes, On September 27, 1993, the trial court declared petitioner Posadas in
Inc., purportedly for organizational and tax avoidance purposes. default and allowed the private respondents to present their evidence
Respondent Bravo signed as one of the witnesses to the execution of ex-parte. On March 8, 1994, it ordered petitioner Posadas, jointly and in
the Deed of Assignment and the Articles of Incorporation of petitioner solidum with petitioner Luxuria Homes, Inc., to pay private respondents
Luxuria Homes, Inc. as follows:

Then sometime in 1992, the harmonious and congenial relationship of 1. . . . the balance of the payment for the various services performed by
petitioner Posadas and respondent Bravo turned sour when the former Plaintiff with respect to the land covered by TCT NO. 167895 previously
supposedly could not accept the management contracts to develop the No. 158290 in the total amount of P1,708,489.00.
1.6 hectare property into a residential subdivision, the latter was
proposing. In retaliation, respondent Bravo demanded payment for 2. . . . actual damages incurred for the construction of the
services rendered in connection with the development of the land. In warehouse/bunks, and for the material used in the total sum of
his statement of account dated 21 August 1991 2 respondent P1,500.000.00.
demanded the payment of P1,708,489.00 for various services
rendered, i.e., relocation of squatters, preparation of the architectural 3. Moral and exemplary damages of P500.000.00.
design and site development plan, survey and fencing.
4. Attorney's fee of P50,000.00.
Petitioner Posadas refused to pay the amount demanded. Thus, in
September 1992, private respondents James Builder Construction and 5. And cost of this proceedings.
Jaime T. Bravo instituted a complaint for specific performance before
the trial court against petitioners Posadas and Luxuria Homes, Inc.
Defendant Aida Posadas as the Representative of the Corporation
Private respondents alleged therein that petitioner Posadas asked them
Luxuria Homes, Incorporated, is further directed to execute the
to clear the subject parcel of land of squatters for a fee of
management contract she committed to do, also in consideration of the
P1,100,000.00 for which they were partially paid the amount of
various undertakings that Plaintiff rendered for her. 4
P461,511.50, leaving a balance of P638,488.50. They were also
supposedly asked to prepare a site development plan and an
architectural design for a contract price of P450,000.00 for which they Aggrieved by the aforecited decision, petitioners appealed to
were partially paid the amount of P25,000.00, leaving a balance of respondent Court of Appeals, which, as aforestated, affirmed with
P425,000.00. And in anticipation of the signing of the land development modification the decision of the trial court. The appellate court deleted
contract, they had to construct a bunkhouse and warehouse on the the award of moral damages on the ground that respondent James
property which amounted to P300,000.00, and a hollow blocks factory Builder Construction is a corporation and hence could not experience
for P60,000.00. Private respondents also claimed that petitioner physical suffering and mental anguish. It also reduced the award of
Posadas agreed that private respondents will develop the land into a exemplary damages. The dispositive portion of the decision reads:
first class subdivision thru a management contract and that petitioner
Posadas is unjustly refusing to comply with her obligation to finalize the WHEREFORE, the decision appealed from is hereby AFFIRMED with
said management contract. the modification that the award of moral damages is ordered deleted
and the award of exemplary damages to the plaintiff's-appellee should
The prayer in the complaint of the private respondents before the trial only be in the amount of FIFTY THOUSAND (P50,000.00) PESOS. 5
court reads as follows:
Petitioners' motion for reconsideration was denied, prompting the filing
WHEREFORE, premises considered, it is respectfully prayed of this of this petition for review before this Court.
Honorable Court that after hearing/trial judgment be rendered ordering
On January 15, 1997, the Third Division of this Court denied due architectural design and site development plan, respondent is entitled
course to this petition for failing to show convincingly any reversible to the amount of P450,000.00 less partial payments made in the
error on the part of the Court of Appeals. This Court however deleted amount of P25,000.00. In Policarpio v. RTC of Quezon City, 9 it was
the grant of exemplary damages and attorney's fees. The Court also held that a court is bereft of jurisdiction to award, in a judgment by
reduced the trial court's award of actual damages from P1,500,000.00 default, a relief other than that specifically prayed for in the complaint.
to P500,000.00 reasoning that the grant should not exceed the amount
prayed for in the complaint. In the prayer in the complaint respondents As regards the contracts for the ejectment of squatters and fencing, we
asked for actual damages in the amount of P500,000.00 only. believe however that respondents failed to show proof that they actually
fulfilled their commitments therein. Aside from the bare testimony of
Still feeling aggrieved with the resolution of this Court, petitioners filed a respondent Bravo, no other evidence was presented to show that all
motion for reconsideration. On March 17, 1997, this Court found merit the squatters were ejected from the property. Respondent Bravo failed
in the petitioners' motion for reconsideration and reinstated this petition to show how many shanties or structures were actually occupying the
for review. property before he entered the same, to serve as basis for concluding
whether the task was finished or not. His testimony alone that he
From their petition for review and motion for reconsideration before this successfully negotiated for the ejectment of all the squatters from the
Court, we now synthesize the issues as follows: property will not suffice.

1. Were private respondents able to present ex-parte sufficient Likewise, in the case of fencing, there is no proof that it was
evidence to substantiate the allegations in their complaint and entitle accomplished as alleged. Respondent Bravo claims that he finished
them to their prayers? sixty percent (60%) of the fencing project but he failed to present
evidence showing the area sought to be fenced and the actual area
fenced by him. We therefore have no basis to determining the veracity
2. Can petitioner Luxuria Homes, Inc., be held liable to private
respondent's allegations. We cannot assume that the said services
respondents for the transactions supposedly entered into between
rendered for it will be unfair to require petitioner to pay the full amount
petitioner Posadas and private respondents?
claimed in case the respondents obligations were not completely
fulfilled.
3. Can petitioners be compelled to enter into a management contract
with private respondents?
For respondents' failure to show proof of accomplishment of the
aforesaid services, their claims cannot be granted. In P.T. Cerna Corp.
Petitioners who were declared in default assert that the private v. Court of Appeals, 10 we ruled that in civil cases, the burden of proof
respondents who presented their evidence ex-parte nonetheless utterly rests upon the party who, as determined by the pleadings or the nature
failed to substantiate the allegations in their complaint and as such of the case, asserts the affirmative of an issue. In this case the burden
cannot be entitled to the reliefs prayed for. lies on the complainant, who is duty bound to prove the allegations in
the complaint. As this Court has held, he who alleges a fact has the
A perusal of the record shows that petitioner Posadas contracted burden of proving it and A MERE ALLEGATION IS NOT EVIDENCE.
respondent Bravo to render various services for the initial development
of the property as shown by vouchers evidencing payments made by And the rules do not change even if the defendant is declared in
petitioner Posadas to respondent Bravo for squatter relocation, default. In the leading case of Lopez v. Mendezona, 11 this Court ruled
architectural design, survey and fencing. that after entry of judgment in default against a defendant who has
neither appeared nor answered, and before final judgment in favor of
Respondents prepared the architectural design, site development plan the plaintiff, the latter must establish by competent evidence all the
and survey in connection with petitioner Posadas' application with the material allegations of his complaint upon which he bases his prayer for
Housing and Land Use Regulatory Board (HLURB) for the issuance of relief. In De los Santos v. De la Cruz, 12 this Court declared that a
the Development Permit, Preliminary Approval and Locational judgement by default against a defendant does not imply a waiver of
Clearance. 6 Petitioner benefited from said services as the rights except that of being heard and of presenting evidence in his
Development Permit and the Locational Clearance were eventually favor. It does not imply admission by the defendant of the facts and
issued by the HLURB in her favor. Petitioner Posadas is therefore liable causes of action of the plaintiff, because the codal section requires the
to pay for these services rendered by respondents. The contract price latter to adduce his evidence in support of his allegations as an
for the survey of the land is P140,000.00. Petitioner made partial indispensable condition before final judgment could be given in his
payments totaling P130,000.00 leaving a payable balance of favor. Nor could it be interpreted as an admission by the defendant that
P10,000.00. the plaintiff's causes of action finds support in the law or that the latter
is entitled to the relief prayed for.
In his testimony, 7 he alleged that the agreed price for the preparation of
the site development plan is P500,000.00 and that the preparation of We explained the rule in judgments by default in Pascua v. Florendo, 13
the architectural designs is for P450,000, or a total of P950,000.00 for where we said that nowhere is it stated that the complainants are
the two contracts. In his complaint however, respondent Bravo alleged automatically entitled to the relief prayed for, once the defendants are
that he was asked "to prepare the site development plan and the declared in default. Favorable relief can be granted only after the court
architectural designs . . . for a contract price of P450,000.00 . . . " 8 The has ascertained that the evidence offered and the facts proven by the
discrepancy or inconsistency was never reconciled and clarified. presenting party warrant the grant of the same. Otherwise it would be
meaningless to require presentation of evidence if everytime the other
We reiterate that we cannot award an amount higher than what was party is declared in default, a decision would automatically be rendered
claimed in the complaint. Consequently for the preparation of both the in favor of the non-defaulting party and exactly according to the tenor of
his prayer. In Lim Tanhu v. Ramolete 14 we elaborated and said that a Besides petitioner Posadas is not the majority stockholder of petitioner
defaulted defendant is not actually thrown out of court. The rules see to Luxuria Homes, Inc., as erroneously stated by the lower court. The
it that any judgment against him must be in accordance with law. The Articles of Incorporation of petitioner Luxuria Homes, Inc., clearly show
evidence to support the plaintiff's cause is, of course, presented in his that petitioner Posadas owns approximately 33% only of the capital
absence, but the court is not supposed to admit that which is basically stock. Hence petitioner Posadas cannot be considered as an alter ego
incompetent. Although the defendant would not be in a position to of petitioner Luxuria Homes, Inc.
object, elementary justice requires that only legal evidence should be
considered against him. If the evidence presented should not be To disregard the separate juridical personality of a corporation, the
sufficient to justify a judgment for the plaintiff, the complaint must be wrongdoing must be clearly and convincingly established. It cannot be
dismissed. And if an unfavorable judgment should be justifiable, it presumed. This is elementary. Thus in Bayer-Roxas v. Court of
cannot exceed the amount or be different in kind from what is prayed Appeals, 17 we said that the separate personality of the corporation may
for in the complaint. be disregarded only when the corporation is used as a cloak or cover
for fraud or illegality, or to work injustice, or where necessary for the
The prayer for actual damages in the amount of P500,000.00, protection of the creditors. Accordingly in Del Roscrrio v. NLRC, 18
supposedly for the bunkhouse/warehouse, hollow-block factory, where the Philsa International Placement and Services Corp. was
lumber, cement, guard, etc., which the trial court granted and even organized and registered with the POEA in 1981, several years before
increased to P1,500,000.00, and which this Court would have rightly the complainant was filed a case in 1985, we held that this cannot imply
reduced to the amount prayed for in the complaint, was not established, fraud.
as shown upon further review of the record. No receipts or vouchers
were presented by private respondents to show that they actually spent Obviously in the instant case, private respondents failed to show proof
the amount. In Salas v. Court of Appeals, 15 we said that the burden of that petitioner Posadas acted in bad faith. Consequently since private
proof of the damages suffered is on the party claiming the same. It his respondents failed to show that petitioner Luxuria Homes, Inc., was a
duty to present evidence to support his claim for actual damages. If he party to any of the supposed transactions, not even to the agreement to
failed to do so, he has only himself to blame if no award for actual negotiate with and relocate the squatters, it cannot be held liable, nay
damages is handed down. jointly and in solidum, to pay private respondents. In this case since it
was petitioner Aida M. Posadas who contracted respondent Bravo to
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of render the subject services, only she is liable to pay the amounts
Appeals, 16 basic is the rule that to recover actual damages, the amount adjudged herein.
of loss must not only be capable of proof but must actually be proven
with reasonable degree of certainty, premised upon competent proof or We now resolve the third and final issue. Private respondents urge the
best evidence obtainable of the actual amount thereof. court to compel petitioners to execute a management contract with
them on the basis of the authorization letter dated May 3, 1989. The full
We go to the second issue of whether Luxuria Homes, Inc., was a party text of Exh. "D" reads:
to the transactions entered into by petitioner Posadas and private
respondents and thus could be held jointly and severally with petitioner I hereby certify that we have duly authorized the bearer, Engineer
Posadas. Private respondents contend that petitioner Posadas Bravo to negotiate, in our behalf, the ejectment of squatters from our
surreptitiously formed Luxuria Homes, Inc., and transferred the subject property of 1.6 hectares, more or less, in Sucat Muntinlupa. This
parcel of land to it to evade payment and defraud creditors, including authority is extended to him as the representative of the Managers;
private respondents. This allegation does not find support in the under our agreement for them to undertake the development of said
evidence on record. area and the construction of housing units intended to convert the land
into a first class subdivision.
On the contrary we hold that respondent Court of Appeals committed a
reversible error when it upheld the factual finding of the trial court that The aforecited document is nothing more than a "to-whom-it-may-
petitioners' liability was aggravated by the fact that Luxuria Homes, concern" authorization letter to negotiate with the squatters. Although it
Inc., was formed by petitioner Posadas after demand for payment had appears that there was an agreement for the development of the area,
been made, evidently for her to evade payment of her obligation, there is no showing that same was ever perfected and finalized. Private
thereby showing that the transfer of her property to Luxuria Homes, respondents presented in evidence only drafts of a proposed
Inc., was in fraud of creditors. management contract with petitioner's handwritten marginal notes but
the management contract was not put in its final form. The reason why
We easily glean from the record that private respondents sent demand there was no final uncorrected draft was because the parties could not
letters on 21 August 1991 and 14 September 1991, or more than a year agree on the stipulations of said contract, which even private
and a half after the execution of the Deed of Assignment on 11 respondents admitted as found by the trial court. 19 As a consequence
December 1989, and the issuance of the Articles of Incorporation of the management drafts submitted by the private respondents should at
petitioner Luxuria Homes on 26 January 1990. And, the transfer was best be considered as mere unaccepted offers. We find no cogent
made at the time the relationship between petitioner Posadas and reason, considering that the parties no longer are in a harmonious
private respondents was supposedly very pleasant. In fact the Deed of relationship, for the execution of a contract to develop a subdivision.
Assignment dated 11 December 1989 and the Articles of Incorporation
of Luxuria Homes, Inc., issued 26 January 1990 were both signed by It is fundamental that there can be no contract in the true sense in the
respondent Bravo himself as witness. It cannot be said then that the absence of the element of agreement, or of mutual assent of the
incorporation of petitioner Luxuria Homes and the eventual transfer of parties. To compel petitioner Posadas, whether as representative of
the subject property to it were in fraud of private respondents as such petitioner Luxuria Homes or in her personal capacity, to execute a
were done with the full knowledge of respondent Bravo himself. management contract under the terms and conditions of private
respondents would be to violate the principle of consensuality of office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in
contracts. In Philippine National Bank v. Court of Appeals, 20 we held the construction business. Private respondents were employed by said
that if the assent is wanting on the part of one who contracts, his act company as laborers, carpenters and riggers.
has no more efficacy than if it had been done under duress or by a
person of unsound mind. In ordering petitioner Posadas to execute a On November, 1981, private respondents were served individual
management contract with private respondents, the trial court in effect written notices of termination of employment by petitioner, effective on
is putting her under duress. November 30, 1981. It was stated in the individual notices that their
contracts of employment had expired and the project in which they
The parties are bound to fulfill the stipulations in a contract only upon were hired had been completed.
its perfection. At anytime prior to the perfection of a contract,
unaccepted offers and proposals remain as such and cannot be Public respondent found it to be, the fact, however, that at the time of
considered as binding commitments; hence not demandable. the termination of private respondent's employment, the project in
which they were hired had not yet been finished and completed.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Petitioner had to engage the services of sub-contractors whose
decision dated March 15, 1996, of respondent Honorable Court of workers performed the functions of private respondents.
Appeals and its Resolution dated August 12, 1996, are MODIFIED
ordering PETITIONER AIDA M. POSADAS to pay PRIVATE Aggrieved, private respondents filed a complaint for illegal dismissal,
RESPONDENTS the amount of P435,000.00 as balance for the unfair labor practice and non-payment of their legal holiday pay,
preparation of the architectural design, site development plan and overtime pay and thirteenth-month pay against petitioner.
survey. All other claims of respondents are hereby DENIED for lack of
merit.1âwphi1.nêt On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering
petitioner to reinstate private respondents and to pay them back wages
SO ORDERED. equivalent to one year or three hundred working days.

G.R. No. 108734 May 29, 1996 On November 27, 1985, the National Labor Relations Commission
(NLRC) dismissed the motion for reconsideration filed by petitioner on
CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR the ground that the said decision had already become final and
RELATIONS COMMISSION, (First Division); and Norberto Marabe; executory. 2
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio
Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut,
On October 16, 1986, the NLRC Research and Information Department
Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera,
made the finding that private respondents' back wages amounted to
Paquito Salut, Domingo Guarino, Romeo Galve, Dominador
P199,800.00. 3
Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares,
Ferdinand Torres, Felipe Basilan, and Ruben Robalos,
respondents. On October 29, 1986, the Labor Arbiter issued a writ of execution
directing the sheriff to execute the Decision, dated December 19, 1984.
The writ was partially satisfied through garnishment of sums from
petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over
HERMOSISIMA, JR., J.:p to the cashier of the NLRC.

The corporate mask may be lifted and the corporate veil may be On February 1, 1989, an Alias Writ of Execution was issued by the
pierced when a corporation is just but the alter ego of a person or of Labor Arbiter directing the sheriff to collect from herein petitioner the
another corporation. Where badges of fraud exist; where public sum of P117,414.76, representing the balance of the judgment award,
convenience is defeated; where a wrong is sought to be justified and to reinstate private respondents to their former positions.
thereby, the corporate fiction or the notion of legal entity should come
to naught. The law in these instances will regard the corporation as a
On July 13, 1989, the sheriff issued a report stating that he tried to
mere association of persons and, in case of two corporations, merge
serve the alias writ of execution on petitioner through the security guard
them into one. on duty but the service was refused on the ground that petitioner no
longer occupied the premises.
Thus, where a sister corporation is used as a shield to evade a
corporation's subsidiary liability for damages, the corporation may not
On September 26, 1986, upon motion of private respondents, the Labor
be heard to say that it has a personality separate and distinct from the
Arbiter issued a second alias writ of execution.
other corporation. The piercing of the corporate veil comes into play.
The said writ had not been enforced by the special sheriff because, as
This special civil action ostensibly raises the question of whether the
stated in his progress report, dated November 2, 1989:
National Labor Relations Commission committed grave abuse of
discretion when it issued a "break-open order" to the sheriff to be
enforced against personal property found in the premises of petitioner's 1. All the employees inside petitioner's premises at 355 Maysan Road,
sister company. Valenzuela, Metro Manila, claimed that they were employees of Hydro
Pipes Philippines, Inc. (HPPI) and not by respondent;
Petitioner Concept Builders, Inc., a domestic corporation, with principal
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from 3. Corporate Officers
removing the properties he had levied upon. 4
Antonio W. Lim President
The said special sheriff recommended that a "break-open order" be
issued to enable him to enter petitioner's premises so that he could Dennis S. Cuyegkeng Assistant to the President
proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.
Elisa O. Lim Treasurer

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party


Virgilio O. Casino Corporate Secretary
claim with the Labor Arbiter alleging that the properties sought to be
levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of
which he is the Vice-President. 4. Principal Office

On November 23, 1989, private respondents filed a "Motion for 355 Maysan Road
Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders. They Valenzuela, Metro Manila. 5
also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that On the other hand, the General Information Sheet of HPPI revealed the
private respondents were willing to post an indemnity bond to answer following:
for any damages which petitioner and HPPI may suffer because of the
issuance of the break-open order. 1. Breakdown of Subscribed Capital

In support of their claim against HPPI, private respondents presented Name of Stockholder Amount Subscribed
duly certified copies of the General Informations Sheet, dated May 15,
1987, submitted by petitioner to the Securities Exchange Commission
(SEC) and the General Information Sheet, dated May 25, 1987, Antonio W. Lim P 400,000.00
submitted by HPPI to the Securities and Exchange Commission.
Elisa C. Lim 57,700.00
The General Information Sheet submitted by the petitioner revealed the
following: AWL Trading 455,000.00

1. Breakdown of Subscribed Capital Dennis S. Cuyegkeng 40,100.00

Name of Stockholder Amount Subscribed Teodulo R. Dino 100.00

HPPI P 6,999,500.00 Virgilio O. Casino 100.00

Antonio W. Lim 2,900,000.00 2. Board of Directors

Dennis S. Cuyegkeng 300.00 Antonio W. Lim Chairman

Elisa C. Lim 100,000.00 Elisa C. Lim Member

Teodulo R. Dino 100.00 Dennis S. Cuyegkeng Member

Virgilio O. Casino 100.00 Virgilio O. Casino Member

2. Board of Directors Teodulo R. Dino Member

Antonio W. Lim Chairman 3. Corporate Officers

Dennis S. Cuyegkeng Member Antonio W. Lim President

Elisa C. Lim Member Dennis S. Cuyegkeng Assistant to the President

Teodulo R. Dino Member Elisa C. Lim Treasurer

Virgilio O. Casino Member Virgilio O. Casino Corporate Secretary


4. Principal Office 3. The manner of keeping corporate books and records.

355 Maysan Road, Valenzuela, Metro Manila. 6 4. Methods of conducting the business. 13

On February 1, 1990, HPPI filed an Opposition to private respondents' The SEC en banc explained the "instrumentality rule" which the courts
motion for issuance of a break-open order, contending that HPPI is a have applied in disregarding the separate juridical personality of
corporation which is separate and distinct from petitioner. HPPI also corporations as follows:
alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then Where one corporation is so organized and controlled and its affairs are
engaged in construction. conducted so that it is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the "instrumentality" may be
On March 2, 1990, the Labor Arbiter issued an Order which denied disregarded. The control necessary to invoke the rule is not majority or
private respondents' motion for break-open order. even complete stock control but such domination of instances, policies
and practices that the controlled corporation has, so to speak, no
Private respondents then appealed to the NLRC. On April 23, 1992, the separate mind, will or existence of its own, and is but a conduit for its
NLRC set aside the order of the Labor Arbiter, issued a break-open principal. It must be kept in mind that the control must be shown to
order and directed private respondents to file a bond. Thereafter, it have been exercised at the time the acts complained of took place.
directed the sheriff to proceed with the auction sale of the properties Moreover, the control and breach of duty must proximately cause the
already levied upon. It dismissed the third-party claim for lack of merit. injury or unjust loss for which the complaint is made.

Petitioner moved for reconsideration but the motion was denied by the The test in determining the applicability of the doctrine of piercing the
NLRC in a Resolution, dated December 3, 1992. veil of corporate fiction is as follows:

Hence, the resort to the present petition. 1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
Petitioner alleges that the NLRC committed grave abuse of discretion
transaction had at the time no separate mind, will or existence of its
when it ordered the execution of its decision despite a third-party claim
on the levied property. Petitioner further contends, that the doctrine of own;
piercing the corporate veil should not have been applied, in this case, in
the absence of any showing that it created HPPI in order to evade its 2. Such control must have been used by the defendant to commit fraud
liability to private respondents. It also contends that HPPI is engaged in or wrong, to perpetuate the violation of a statutory or other positive
the manufacture and sale of steel, concrete and iron pipes, a business legal duty or dishonest and unjust act in contravention of plaintiff's legal
which is distinct and separate from petitioner's construction business. rights; and
Hence, it is of no consequence that petitioner and HPPI shared the
same premises, the same President and the same set of officers and 3. The aforesaid control and breach of duty must proximately cause the
subscribers. 7 injury or unjust loss complained of.

We find petitioner's contention to be unmeritorious. The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
It is a fundamental principle of corporation law that a corporation is an the courts are concerned with reality and not form, with how the
entity separate and distinct from its stockholders and from other corporation operated and the individual defendant's relationship to that
corporations to which it may be connected. 8 But, this separate and operation. 14
distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. 9 So, when the notion of separate Thus the question of whether a corporation is a mere alter ego, a mere
juridical personality is used to defeat public convenience, justify wrong, sheet or paper corporation, a sham or a subterfuge is purely one of
protect fraud or defend crime, or is used as a device to defeat the labor fact. 15
laws, 10 this separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. 11 This is true likewise when the In this case, the NLRC noted that, while petitioner claimed that it
corporation is merely an adjunct, a business conduit or an alter ego of ceased its business operations on April 29, 1986, it filed an Information
another corporation. 12 Sheet with the Securities and Exchange Commission on May 15, 1987,
stating that its office address is at 355 Maysan Road, Valenzuela,
The conditions under which the juridical entity may be disregarded vary Metro Manila. On the other hand, HPPI, the third-party claimant,
according to the peculiar facts and circumstances of each case. No submitted on the same day, a similar information sheet stating that its
hard and fast rule can be accurately laid down, but certainly, there are office address is at 355 Maysan Road, Valenzuela, Metro Manila.
some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit: Furthermore, the NLRC stated that:

1. Stock ownership by one or common ownership of both corporations. Both information sheets were filed by the same Virgilio O. Casiño as
the corporate secretary of both corporations. It would also not be amiss
2. Identity of directors and officers. to note that both corporations had the same president, the same board
of directors, the same corporate officers, and substantially the same
subscribers. absence of showing of grave abuse of a discretion. 18

From the foregoing, it appears that, among other things, the respondent WHEREFORE, the petition is DISMISSED and the assailed resolutions
(herein petitioner) and the third-party claimant shared the same of the NLRC, dated April 23, 1992 and December 3, 1992, are
address and/or premises. Under this circumstances, (sic) it cannot be AFFIRMED.
said that the property levied upon by the sheriff were not of
respondents. 16 SO ORDERED.

Clearly, petitioner ceased its business operations in order to evade the G.R. No. L-23893 October 29, 1968
payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO E.
conduit of petitioner corporation and its emergence was skillfully FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC
orchestrated to avoid the financial liability that already attached to SERVICE COMMISSION, defendants. EUSEBIO E. FERRER and
petitioner corporation. PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

The facts in this case are analogous to Claparols v. Court of Industrial PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-
Relations, 17 where we had the occasion to rule: appellant, vs. JOSE M. VILLARAMA, third-party defendant-appellee.

Respondent court's findings that indeed the Claparols Steel and Nail Chuidian Law Office for plaintiff-appellant. Bengzon, Zarraga & Villegas
Plant, which ceased operation of June 30, 1957, was SUCCEEDED by for defendant-appellant / third-party plaintiff-appellant. Laurea & Pison
the Claparols Steel Corporation effective the next day, July 1, 1957, up for third-party defendant-appellee.
to December 7, 1962, when the latter finally ceased to operate, were
not disputed by petitioner. It is very clear that the latter corporation was
ANGELES, J.:
a continuation and successor of the first entity . . . . Both predecessors
and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of This is a tri-party appeal from the decision of the Court of First Instance
the same business. This "avoiding-the-liability" scheme is very patent, of Manila, Civil Case No. 41845, declaring null and void the sheriff's
considering that 90% of the subscribed shares of stock of the Claparols sale of two certificates of public convenience in favor of defendant
Steel Corporation (the second corporation) was owned by respondent . Eusebio E. Ferrer and the subsequent sale thereof by the latter to
. . Claparols himself, and all the assets of the dissolved Claparols Steel defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff
and Nail plant were turned over to the emerging Claparols Steel Villa Rey Transit, Inc., to be the lawful owner of the said certificates of
Corporation. public convenience; and ordering the private defendants, jointly and
severally, to pay to the plaintiff, the sum of P5,000.00 as and for
attorney's fees. The case against the PSC was dismissed.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately and maliciously designed to The rather ramified circumstances of the instant case can best be
evade its financial obligation to its employees. understood by a chronological narration of the essential facts, to wit:

In view of the failure of the sheriff, in the case at bar, to effect a levy Prior to 1959, Jose M. Villarama was an operator of a bus
upon the property subject of the execution, private respondents had no transportation, under the business name of Villa Rey Transit, pursuant
other recourse but to apply for a break-open order after the third-party to certificates of public convenience granted him by the Public Service
claim of HPPI was dismissed for lack of merit by the NLRC. This is in Commission (PSC, for short) in Cases Nos. 44213 and 104651, which
consonance with Section 3, Rule VII of the NLRC Manual of Execution authorized him to operate a total of thirty-two (32) units on various
of Judgment which provides that: routes or lines from Pangasinan to Manila, and vice-versa. On January
8, 1959, he sold the aforementioned two certificates of public
convenience to the Pangasinan Transportation Company, Inc.
Should the losing party, his agent or representative, refuse or prohibit
(otherwise known as Pantranco), for P350,000.00 with the condition,
the Sheriff or his representative entry to the place where the property
among others, that the seller (Villarama) "shall not for a period of 10
subject of execution is located or kept, the judgment creditor may apply
years from the date of this sale, apply for any TPU service identical or
to the Commission or Labor Arbiter concerned for a break-open order.
competing with the buyer."

Furthermore, our perusal of the records shows that the twin


Barely three months thereafter, or on March 6, 1959: a corporation
requirements of due notice and hearing were complied with. Petitioner
called Villa Rey Transit, Inc. (which shall be referred to hereafter as the
and the third-party claimant were given the opportunity to submit
Corporation) was organized with a capital stock of P500,000.00 divided
evidence in support of their claim. into 5,000 shares of the par value of P100.00 each; P200,000.00 was
the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama)
Hence, the NLRC did not commit any grave abuse of discretion when it was one of the incorporators, and she subscribed for P1,000.00; the
affirmed the break-open order issued by the Labor Arbiter. balance of P199,000.00 was subscribed by the brother and sister-in-
law of Jose M. Villarama; of the subscribed capital stock, P105,000.00
Finally, we do not find any reason to disturb the rule that factual was paid to the treasurer of the corporation, who was Natividad R.
findings of quasi-judicial agencies supported by substantial evidence Villarama.
are binding on this Court and are entitled to great respect, in the
In less than a month after its registration with the Securities and because the contract pursuant to which it acquired them from Fernando
Exchange Commission (March 10, 1959), the Corporation, on April 7, was subject to a suspensive condition — the approval of the PSC —
1959, bought five certificates of public convenience, forty-nine buses, which has not yet been fulfilled, and, therefore, the Sheriff's levy and
tools and equipment from one Valentin Fernando, for the sum of the consequent sale at public auction of the certificates referred to, as
P249,000.00, of which P100,000.00 was paid upon the signing of the well as the sale of the same by Ferrer to Pantranco, were valid and
contract; P50,000.00 was payable upon the final approval of the sale by regular, and vested unto Pantranco, a superior right thereto.
the PSC; P49,500.00 one year after the final approval of the sale; and
the balance of P50,000.00 "shall be paid by the BUYER to the different Pantranco, on its part, filed a third-party complaint against Jose M.
suppliers of the SELLER." Villarama, alleging that Villarama and the Corporation, are one and the
same; that Villarama and/or the Corporation was disqualified from
The very same day that the aforementioned contract of sale was operating the two certificates in question by virtue of the
executed, the parties thereto immediately applied with the PSC for its aforementioned agreement between said Villarama and Pantranco,
approval, with a prayer for the issuance of a provisional authority in which stipulated that Villarama "shall not for a period of 10 years from
favor of the vendee Corporation to operate the service therein the date of this sale, apply for any TPU service identical or competing
involved.1 On May 19, 1959, the PSC granted the provisional permit with the buyer."
prayed for, upon the condition that "it may be modified or revoked by
the Commission at any time, shall be subject to whatever action that Upon the joinder of the issues in both the complaint and third-party
may be taken on the basic application and shall be valid only during the complaint, the case was tried, and thereafter decision was rendered in
pendency of said application." Before the PSC could take final action the terms, as above stated.
on said application for approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five certificates of public
As stated at the beginning, all the parties involved have appealed from
convenience involved therein, namely, those issued under PSC cases
the decision. They submitted a joint record on appeal.
Nos. 59494 and 63780, pursuant to a writ of execution issued by the
Court of First Instance of Pangasinan in Civil Case No. 13798, in favor
of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Pantranco disputes the correctness of the decision insofar as it holds
Fernando, defendant, judgment debtor. The Sheriff made and entered that Villa Rey Transit, Inc. (Corporation) is a distinct and separate entity
the levy in the records of the PSC. On July 16, 1959, a public sale was from Jose M. Villarama; that the restriction clause in the contract of
conducted by the Sheriff of the said two certificates of public January 8, 1959 between Pantranco and Villarama is null and void; that
convenience. Ferrer was the highest bidder, and a certificate of sale the Sheriff's sale of July 16, 1959, is likewise null and void; and the
was issued in his name. failure to award damages in its favor and against Villarama.

Thereafter, Ferrer sold the two certificates of public convenience to Ferrer, for his part, challenges the decision insofar as it holds that the
Pantranco, and jointly submitted for approval their corresponding sheriff's sale is null and void; and the sale of the two certificates in
contract of sale to the PSC.2 Pantranco therein prayed that it be question by Valentin Fernando to the Corporation, is valid. He also
authorized provisionally to operate the service involved in the said two assails the award of P5,000.00 as attorney's fees in favor of the
certificates. Corporation, and the failure to award moral damages to him as prayed
for in his counterclaim.
The applications for approval of sale, filed before the PSC, by
Fernando and the Corporation, Case No. 124057, and that of Ferrer The Corporation, on the other hand, prays for a review of that portion of
and Pantranco, Case No. 126278, were scheduled for a joint hearing. the decision awarding only P5,000.00 as attorney's fees, and insisting
In the meantime, to wit, on July 22, 1959, the PSC issued an order that it is entitled to an award of P100,000.00 by way of exemplary
disposing that during the pendency of the cases and before a final damages.
resolution on the aforesaid applications, the Pantranco shall be the one
to operate provisionally the service under the two certificates embraced After a careful study of the facts obtaining in the case, the vital issues
in the contract between Ferrer and Pantranco. The Corporation took to be resolved are: (1) Does the stipulation between Villarama and
issue with this particular ruling of the PSC and elevated the matter to Pantranco, as contained in the deed of sale, that the former "SHALL
the Supreme Court,3 which decreed, after deliberation, that until the NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS
issue on the ownership of the disputed certificates shall have been SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING
finally settled by the proper court, the Corporation should be the one to WITH THE BUYER," apply to new lines only or does it include existing
operate the lines provisionally. lines?; (2) Assuming that said stipulation covers all kinds of lines, is
such stipulation valid and enforceable?; (3) In the affirmative, that said
On November 4, 1959, the Corporation filed in the Court of First stipulation is valid, did it bind the Corporation?
Instance of Manila, a complaint for the annulment of the sheriff's sale of
the aforesaid two certificates of public convenience (PSC Cases Nos. For convenience, We propose to discuss the foregoing issues by
59494 and 63780) in favor of the defendant Ferrer, and the subsequent starting with the last proposition.
sale thereof by the latter to Pantranco, against Ferrer, Pantranco and
the PSC. The plaintiff Corporation prayed therein that all the orders of The evidence has disclosed that Villarama, albeit was not an
the PSC relative to the parties' dispute over the said certificates be incorporator or stockholder of the Corporation, alleging that he did not
annulled. become such, because he did not have sufficient funds to invest, his
wife, however, was an incorporator with the least subscribed number of
In separate answers, the defendants Ferrer and Pantranco averred that shares, and was elected treasurer of the Corporation. The finances of
the plaintiff Corporation had no valid title to the certificates in question the Corporation which, under all concepts in the law, are supposed to
be under the control and administration of the treasurer keeping them
as trust fund for the Corporation, were, nonetheless, manipulated and and I do not know exactly for what.
disbursed as if they were the private funds of Villarama, in such a way
and extent that Villarama appeared to be the actual owner-treasurer of The evidence further shows that the initial cash capitalization of the
the business without regard to the rights of the stockholders. The corporation of P105,000.00 was mostly financed by Villarama. Of the
following testimony of Villarama,4 together with the other evidence on P105,000.00 deposited in the First National City Bank of New York,
record, attests to that effect: representing the initial paid-up capital of the Corporation, P85,000.00
was covered by Villarama's personal check. The deposit slip for the
Q. Doctor, I want to go back again to the incorporation of the Villa said amount of P105,000.00 was admitted in evidence as Exh. 23,
Rey Transit, Inc. You heard the testimony presented here by the bank which shows on its face that P20,000.00 was paid in cash and
regarding the initial opening deposit of ONE HUNDRED FIVE P85,000.00 thereof was covered by Check No. F-50271 of the First
THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos National City Bank of New York. The testimonies of Alfonso Sancho5
was a check drawn by yourself personally. In the direct examination and Joaquin Amansec,6 both employees of said bank, have proved that
you told the Court that the reason you drew a check for Eighty-Five the drawer of the check was Jose Villarama himself.
Thousand Pesos was because you and your wife, or your wife, had
spent the money of the stockholders given to her for incorporation. Will Another witness, Celso Rivera, accountant of the Corporation, testified
you please tell the Honorable Court if you knew at the time your wife that while in the books of the corporation there appears an entry that
was spending the money to pay debts, you personally knew she was the treasurer received P95,000.00 as second installment of the paid-in
spending the money of the incorporators? subscriptions, and, subsequently, also P100,000.00 as the first
installment of the offer for second subscriptions worth P200,000.00
A. You know my money and my wife's money are one. We never from the original subscribers, yet Villarama directed him (Rivera) to
talk about those things. make vouchers liquidating the sums.7 Thus, it was made to appear that
the P95,000.00 was delivered to Villarama in payment for equipment
Q. Doctor, your answer then is that since your money and your purchased from him, and the P100,000.00 was loaned as advances to
wife's money are one money and you did not know when your wife was the stockholders. The said accountant, however, testified that he was
paying debts with the incorporator's money? not aware of any amount of money that had actually passed hands
among the parties involved,8 and actually the only money of the
corporation was the P105,000.00 covered by the deposit slip Exh. 23,
A. Because sometimes she uses my money, and sometimes the
of which as mentioned above, P85,000.00 was paid by Villarama's
money given to her she gives to me and I deposit the money.
personal check.
Q. Actually, aside from your wife, you were also the custodian of
Further, the evidence shows that when the Corporation was in its initial
some of the incorporators here, in the beginning?
months of operation, Villarama purchased and paid with his personal
checks Ford trucks for the Corporation. Exhibits 20 and 21 disclose that
A. Not necessarily, they give to my wife and when my wife hands to the said purchases were paid by Philippine Bank of Commerce Checks
me I did not know it belonged to the incorporators. Nos. 992618-B and 993621-B, respectively. These checks have been
sufficiently established by Fausto Abad, Assistant Accountant of Manila
Q. It supposes then your wife gives you some of the money Trading & Supply Co., from which the trucks were purchased9 and
received by her in her capacity as treasurer of the corporation? Aristedes Solano, an employee of the Philippine Bank of Commerce,10
as having been drawn by Villarama.
A. Maybe.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger
Q. What did you do with the money, deposit in a regular account? entries and vouchers showing that Villarama had co-mingled his
personal funds and transactions with those made in the name of the
A. Deposit in my account. Corporation, are very illuminating evidence. Villarama has assailed the
admissibility of these exhibits, contending that no evidentiary value
whatsoever should be given to them since "they were merely
Q. Of all the money given to your wife, she did not receive any
photostatic copies of the originals, the best evidence being the originals
check?
themselves." According to him, at the time Pantranco offered the said
exhibits, it was the most likely possessor of the originals thereof
A. I do not remember. because they were stolen from the files of the Corporation and only
Pantranco was able to produce the alleged photostat copies thereof.
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos
without even asking what is this? Section 5 of Rule 130 of the Rules of Court provides for the requisites
for the admissibility of secondary evidence when the original is in the
xxx xxx xxx custody of the adverse party, thus: (1) opponent's possession of the
original; (2) reasonable notice to opponent to produce the original; (3)
JUDGE: Reform the question. satisfactory proof of its existence; and (4) failure or refusal of opponent
to produce the original in court.11 Villarama has practically admitted the
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two second and fourth requisites.12 As to the third, he admitted their
previous existence in the files of the Corporation and also that he had
Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?
seen some of them.13 Regarding the first element, Villarama's theory is
that since even at the time of the issuance of the subpoena duces
A. I have testified before that sometimes my wife gives me money
tecum, the originals were already missing, therefore, the Corporation On his having paid for purchases by the Corporation of trucks from the
was no longer in possession of the same. However, it is not necessary Manila Trading & Supply Co. with his personal checks, his reason was
for a party seeking to introduce secondary evidence to show that the that he was only sharing with the Corporation his credit with some
original is in the actual possession of his adversary. It is enough that companies. And his main reason for mingling his funds with that of the
the circumstances are such as to indicate that the writing is in his Corporation and for the latter's paying his private bills is that it would be
possession or under his control. Neither is it required that the party more convenient that he kept the money to be used in paying the
entitled to the custody of the instrument should, on being notified to registration fees on time, and since he had loaned money to the
produce it, admit having it in his possession.14 Hence, secondary Corporation, this would be set off by the latter's paying his bills.
evidence is admissible where he denies having it in his possession. Villarama admitted, however, that the corporate funds in his possession
The party calling for such evidence may introduce a copy thereof as in were not only for registration fees but for other important obligations
the case of loss. For, among the exceptions to the best evidence rule is which were not specified.26
"when the original has been lost, destroyed, or cannot be produced in
court."15 The originals of the vouchers in question must be deemed to Indeed, while Villarama was not the Treasurer of the Corporation but
have been lost, as even the Corporation admits such loss. Viewed was, allegedly, only a part-time manager,27 he admitted not only having
upon this light, there can be no doubt as to the admissibility in evidence held the corporate money but that he advanced and lent funds for the
of Exhibits 6 to 19 and 22. Corporation, and yet there was no Board Resolution allowing it.28

Taking account of the foregoing evidence, together with Celso Rivera's Villarama's explanation on the matter of his involvement with the
testimony,16 it would appear that: Villarama supplied the organization corporate affairs of the Corporation only renders more credible
expenses and the assets of the Corporation, such as trucks and Pantranco's claim that his control over the corporation, especially in the
equipment;17 there was no actual payment by the original subscribers management and disposition of its funds, was so extensive and
of the amounts of P95,000.00 and P100,000.00 as appearing in the intimate that it is impossible to segregate and identify which money
books;18 Villarama made use of the money of the Corporation and belonged to whom. The interference of Villarama in the complex affairs
deposited them to his private accounts;19 and the Corporation paid his of the corporation, and particularly its finances, are much too
personal accounts.20 inconsistent with the ends and purposes of the Corporation law, which,
precisely, seeks to separate personal responsibilities from corporate
Villarama himself admitted that he mingled the corporate funds with his undertakings. It is the very essence of incorporation that the acts and
own money.21 He also admitted that gasoline purchases of the conduct of the corporation be carried out in its own corporate name
Corporation were made in his name22 because "he had existing because it has its own personality.
account with Stanvac which was properly secured and he wanted the
Corporation to benefit from the rebates that he received."23 The doctrine that a corporation is a legal entity distinct and separate
from the members and stockholders who compose it is recognized and
The foregoing circumstances are strong persuasive evidence showing respected in all cases which are within reason and the law.29 When the
that Villarama has been too much involved in the affairs of the fiction is urged as a means of perpetrating a fraud or an illegal act or as
Corporation to altogether negative the claim that he was only a part- a vehicle for the evasion of an existing obligation, the circumvention of
time general manager. They show beyond doubt that the Corporation is statutes, the achievement or perfection of a monopoly or generally the
his alter ego. perpetration of knavery or crime,30 the veil with which the law covers
and isolates the corporation from the members or stockholders who
It is significant that not a single one of the acts enumerated above as compose it will be lifted to allow for its consideration merely as an
proof of Villarama's oneness with the Corporation has been denied by aggregation of individuals.
him. On the contrary, he has admitted them with offered excuses.
Upon the foregoing considerations, We are of the opinion, and so hold,
Villarama has admitted, for instance, having paid P85,000.00 of the that the preponderance of evidence have shown that the Villa Rey
initial capital of the Corporation with the lame excuse that "his wife had Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive
requested him to reimburse the amount entrusted to her by the clause in the contract entered into by the latter and Pantranco is also
incorporators and which she had used to pay the obligations of Dr. enforceable and binding against the said Corporation. For the rule is
Villarama (her husband) incurred while he was still the owner of Villa that a seller or promisor may not make use of a corporate entity as a
Rey Transit, a single proprietorship." But with his admission that he had means of evading the obligation of his covenant.31 Where the
received P350,000.00 from Pantranco for the sale of the two Corporation is substantially the alter ego of the covenantor to the
certificates and one unit,24 it becomes difficult to accept Villarama's restrictive agreement, it can be enjoined from competing with the
explanation that he and his wife, after consultation,25 spent the money covenantee.32
of their relatives (the stockholders) when they were supposed to have
their own money. Even if Pantranco paid the P350,000.00 in check to The Corporation contends that even on the supposition that Villa Rey
him, as claimed, it could have been easy for Villarama to have Transit, Inc. and Villarama are one and the same, the restrictive clause
deposited said check in his account and issued his own check to pay in the contract between Villarama and Pantranco does not include the
his obligations. And there is no evidence adduced that the said amount purchase of existing lines but it only applies to application for the new
of P350,000.00 was all spent or was insufficient to settle his prior lines. The clause in dispute reads thus:
obligations in his business, and in the light of the stipulation in the deed
of sale between Villarama and Pantranco that P50,000.00 of the selling (4) The SELLER shall not, for a period of ten (10) years from the date
price was earmarked for the payments of accounts due to his creditors, of this sale apply for any TPU service identical or competing with the
the excuse appears unbelievable. BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof has gone through a long series of changes from time to time with the
that the intention of the parties was to eliminate the seller as a changing condition of trade and commerce. With trifling exceptions,
competitor of the buyer for ten years along the lines of operation said changes have been a continuous development of a general rule.
covered by the certificates of public convenience subject of their The early cases show plainly a disposition to avoid and annul all
transaction. The word "apply" as broadly used has for frame of contract which prohibited or restrained any one from using a lawful
reference, a service by the seller on lines or routes that would compete trade "at any time or at any place," as being against the benefit of the
with the buyer along the routes acquired by the latter. In this state. Later, however, the rule became well established that if the
jurisdiction, prior authorization is needed before anyone can operate a restraint was limited to "a certain time" and within "a certain place,"
TPU service,33whether the service consists in a new line or an old one such contracts were valid and not "against the benefit of the state."
acquired from a previous operator. The clear intention of the parties Later cases, and we think the rule is now well established, have held
was to prevent the seller from conducting any competitive line for 10 that a contract in restraint of trade is valid providing there is a limitation
years since, anyway, he has bound himself not to apply for upon either time or place. A contract, however, which restrains a man
authorization to operate along such lines for the duration of such from entering into business or trade without either a limitation as to time
period.34 or place, will be held invalid.

If the prohibition is to be applied only to the acquisition of new The public welfare of course must always be considered and if it be not
certificates of public convenience thru an application with the Public involved and the restraint upon one party is not greater than protection
Service Commission, this would, in effect, allow the seller just the same to the other requires, contracts like the one we are discussing will be
to compete with the buyer as long as his authority to operate is only sustained. The general tendency, we believe, of modern authority, is to
acquired thru transfer or sale from a previous operator, thus defeating make the test whether the restraint is reasonably necessary for the
the intention of the parties. For what would prevent the seller, under the protection of the contracting parties. If the contract is reasonably
circumstances, from having a representative or dummy apply in the necessary to protect the interest of the parties, it will be upheld.
latter's name and then later on transferring the same by sale to the (Emphasis supplied.)
seller? Since stipulations in a contract is the law between the
contracting parties, Analyzing the characteristics of the questioned stipulation, We find that
although it is in the nature of an agreement suppressing competition, it
Every person must, in the exercise of his rights and in the performance is, however, merely ancillary or incidental to the main agreement which
of his duties, act with justice, give everyone his due, and observe is that of sale. The suppression or restraint is only partial or limited:
honesty and good faith. (Art. 19, New Civil Code.) first, in scope, it refers only to application for TPU by the seller in
competition with the lines sold to the buyer; second, in duration, it is
We are not impressed of Villarama's contention that the re-wording of only for ten (10) years; and third, with respect to situs or territory, the
the two previous drafts of the contract of sale between Villarama and restraint is only along the lines covered by the certificates sold. In view
Pantranco is significant in that as it now appears, the parties intended of these limitations, coupled with the consideration of P350,000.00 for
to effect the least restriction. We are persuaded, after an examination just two certificates of public convenience, and considering,
of the supposed drafts, that the scope of the final stipulation, while not furthermore, that the disputed stipulation is only incidental to a main
as long and prolix as those in the drafts, is just as broad and agreement, the same is reasonable and it is not harmful nor obnoxious
comprehensive. At most, it can be said that the re-wording was done to public service.38 It does not appear that the ultimate result of the
merely for brevity and simplicity. clause or stipulation would be to leave solely to Pantranco the right to
operate along the lines in question, thereby establishing monopoly or
predominance approximating thereto. We believe the main purpose of
The evident intention behind the restriction was to eliminate the sellers
as a competitor, and this must be, considering such factors as the good the restraint was to protect for a limited time the business of the buyer.
will35 that the seller had already gained from the riding public and his
adeptness and proficiency in the trade. On this matter, Corbin, an Indeed, the evils of monopoly are farfetched here. There can be no
authority on Contracts has this to say.36 danger of price controls or deterioration of the service because of the
close supervision of the Public Service Commission.39 This Court had
stated long ago,40 that "when one devotes his property to a use in
When one buys the business of another as a going concern, he usually
which the public has an interest, he virtually grants to the public an
wishes to keep it going; he wishes to get the location, the building, the
interest in that use and submits it to such public use under reasonable
stock in trade, and the customers. He wishes to step into the seller's
shoes and to enjoy the same business relations with other men. He is rules and regulations to be fixed by the Public Utility Commission."
willing to pay much more if he can get the "good will" of the business,
meaning by this the good will of the customers, that they may continue Regarding that aspect of the clause that it is merely ancillary or
to tread the old footpath to his door and maintain with him the business incidental to a lawful agreement, the underlying reason sustaining its
relations enjoyed by the seller. validity is well explained in 36 Am. Jur. 537-539, to wit:

... In order to be well assured of this, he obtains and pays for the ... Numerous authorities hold that a covenant which is incidental to the
seller's promise not to reopen business in competition with the sale and transfer of a trade or business, and which purports to bind the
business sold. seller not to engage in the same business in competition with the
purchaser, is lawful and enforceable. While such covenants are
designed to prevent competition on the part of the seller, it is ordinarily
As to whether or not such a stipulation in restraint of trade is valid, our
neither their purpose nor effect to stifle competition generally in the
jurisprudence on the matter37says:
locality, nor to prevent it at all in a way or to an extent injurious to the
public. The business in the hands of the purchaser is carried on just as
The law concerning contracts which tend to restrain business or trade
it was in the hands of the seller; the former merely takes the place of provision of Article 1544 of the Civil Code, that "If the same thing
the latter; the commodities of the trade are as open to the public as should have been sold to different vendees, the ownership shall be
they were before; the same competition exists as existed before; there transferred to the person who may have first taken possession thereof
is the same employment furnished to others after as before; the profits in good faith, if it should be movable property."
of the business go as they did before to swell the sum of public wealth;
the public has the same opportunities of purchasing, if it is a mercantile There is no merit in Pantranco and Ferrer's theory that the sale of the
business; and production is not lessened if it is a manufacturing plant. certificates of public convenience in question, between the Corporation
and Fernando, was not consummated, it being only a conditional sale
The reliance by the lower court on tile case of Red Line Transportation subject to the suspensive condition of its approval by the Public Service
Co. v. Bachrach41 and finding that the stipulation is illegal and void Commission. While section 20(g) of the Public Service Act provides
seems misplaced. In the said Red Line case, the agreement therein that "subject to established limitation and exceptions and saving
sought to be enforced was virtually a division of territory between two provisions to the contrary, it shall be unlawful for any public service or
operators, each company imposing upon itself an obligation not to for the owner, lessee or operator thereof, without the approval and
operate in any territory covered by the routes of the other. Restraints of authorization of the Commission previously had ... to sell, alienate,
this type, among common carriers have always been covered by the mortgage, encumber or lease its property, franchise, certificates,
general rule invalidating agreements in restraint of trade. 42 privileges, or rights or any part thereof, ...," the same section also
provides:
Neither are the other cases relied upon by the plaintiff-appellee
applicable to the instant case. In Pampanga Bus Co., Inc. v. ... Provided, however, That nothing herein contained shall be construed
Enriquez,43the undertaking of the applicant therein not to apply for the to prevent the transaction from being negotiated or completed before its
lifting of restrictions imposed on his certificates of public convenience approval or to prevent the sale, alienation, or lease by any public
was not an ancillary or incidental agreement. The restraint was the service of any of its property in the ordinary course of its business.
principal objective. On the other hand, in Red Line Transportation Co.,
Inc. v. Gonzaga,44 the restraint there in question not to ask for It is clear, therefore, that the requisite approval of the PSC is not a
extension of the line, or trips, or increase of equipment — was not an condition precedent for the validity and consummation of the sale.
agreement between the parties but a condition imposed in the
certificate of public convenience itself. Anent the question of damages allegedly suffered by the parties, each
of the appellants has its or his own version to allege.
Upon the foregoing considerations, Our conclusion is that the
stipulation prohibiting Villarama for a period of 10 years to "apply" for
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of
TPU service along the lines covered by the certificates of public
defendants (Pantranco and Ferrer) in acquiring the certificates of public
convenience sold by him to Pantranco is valid and reasonable. Having
convenience in question, despite constructive and actual knowledge on
arrived at this conclusion, and considering that the preponderance of
their part of a prior sale executed by Fernando in favor of the said
the evidence have shown that Villa Rey Transit, Inc. is itself the alter
corporation, which necessitated the latter to file the action to annul the
ego of Villarama, We hold, as prayed for in Pantranco's third party
sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is
complaint, that the said Corporation should, until the expiration of the 1-
entitled to collect actual and compensatory damages, and attorney's
year period abovementioned, be enjoined from operating the line
fees in the amount of P25,000.00. The evidence on record, however,
subject of the prohibition. does not clearly show that said defendants acted in bad faith in their
acquisition of the certificates in question. They believed that because
To avoid any misunderstanding, it is here to be emphasized that the the bill of sale has yet to be approved by the Public Service
10-year prohibition upon Villarama is not against his application for, or Commission, the transaction was not a consummated sale, and,
purchase of, certificates of public convenience, but merely the therefore, the title to or ownership of the certificates was still with the
operation of TPU along the lines covered by the certificates sold by him seller. The award by the lower court of attorney's fees of P5,000.00 in
to Pantranco. Consequently, the sale between Fernando and the favor of Villa Rey Transit, Inc. is, therefore, without basis and should be
Corporation is valid, such that the rightful ownership of the disputed set aside.
certificates still belongs to the plaintiff being the prior purchaser in good
faith and for value thereof. In view of the ancient rule of caveat emptor
Eusebio Ferrer's charge that by reason of the filing of the action to
prevailing in this jurisdiction, what was acquired by Ferrer in the
annul the sheriff's sale, he had suffered and should be awarded moral,
sheriff's sale was only the right which Fernando, judgment debtor, had
exemplary damages and attorney's fees, cannot be entertained, in view
in the certificates of public convenience on the day of the sale.45 of the conclusion herein reached that the sale by Fernando to the
Corporation was valid.
Accordingly, by the "Notice of Levy Upon Personalty" the
Commissioner of Public Service was notified that "by virtue of an Order
Pantranco, on the other hand, justifies its claim for damages with the
of Execution issued by the Court of First Instance of Pangasinan, the
allegation that when it purchased ViIlarama's business for
rights, interests, or participation which the defendant, VALENTIN A.
P350,000.00, it intended to build up the traffic along the lines covered
FERNANDO — in the above entitled case may have in the following
by the certificates but it was rot afforded an opportunity to do so since
realty/personalty is attached or levied upon, to wit: The rights, interests
barely three months had elapsed when the contract was violated by
and participation on the Certificates of Public Convenience issued to
Villarama operating along the same lines in the name of Villa Rey
Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to
Transit, Inc. It is further claimed by Pantranco that the underhanded
Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows
manner in which Villarama violated the contract is pertinent in
that Ferrer, the vendee at auction of said certificates, merely stepped
establishing punitive or moral damages. Its contention as to the proper
into the shoes of the judgment debtor. Of the same principle is the
measure of damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in accord with For our review in particular is the propriety of the permissive
Pantranco's claim of entitlement to damages it suffered as a result of counterclaim which private respondents filed together with their answer
Villarama's breach of his contract with it, the record does not sufficiently to petitioner's complaint for a sum of money. Private respondent
supply the necessary evidentiary materials upon which to base the Gregorio Manuel alleged as an affirmative defense that, while he was
award and there is need for further proceedings in the lower court to petitioner's Assistant Legal Officer, he represented members of the
ascertain the proper amount. Francisco family in the intestate estate proceedings of the late Benita
Trinidad. However, even after the termination of the proceedings, his
PREMISES CONSIDERED, the judgment appealed from is hereby services were not paid. Said family members, he said, were also
modified as follows: incorporators, directors and officers of petitioner. Hence to petitioner's
collection suit, he filed a counter permissive counterclaim for the unpaid
1. The sale of the two certificates of public convenience in question by attorney's fees. 6
Valentin Fernando to Villa Rey Transit, Inc. is declared preferred over
that made by the Sheriff at public auction of the aforesaid certificate of For failure of petitioner to answer the counterclaim, the trial court
public convenience in favor of Eusebio Ferrer; declared petitioner in default on this score, and evidence ex-parte was
presented on the counterclaim. The trial court ruled in favor of private
respondents and found that Gregorio Manuel indeed rendered legal
2. Reversed, insofar as it dismisses the third-party complaint filed by
services to the Francisco family in Special Proceedings Number 7803
Pangasinan Transportation Co. against Jose M. Villarama, holding that
— "In the Matter of Intestate Estate of Benita Trinidad". Said court also
Villa Rey Transit, Inc. is an entity distinct and separate from the
found that his legal services were not compensated despite repeated
personality of Jose M. Villarama, and insofar as it awards the sum of
demands, and thus ordered petitioner to pay him the amount of fifty
P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;
thousand (P50,000.00) pesos. 7
3. The case is remanded to the trial court for the reception of evidence
Dissatisfied with the trial court's order, petitioner elevated the matter to
in consonance with the above findings as regards the amount of
the Court of Appeals, posing the following issues:
damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered. I.

G.R. No. 100812 June 25, 1999 WHETHER OR NOT THE DECISION RENDERED BY THE LOWER
COURT IS NULL AND VOID AS IT NEVER ACQUIRED
FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF JURISDICTION OVER THE PERSON OF THE DEFENDANT.
APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL,
respondents. II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL


PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD
BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.
QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of III.
Court, seeks to annul the decision 1 of the Court of Appeals in C.A.
G.R. CV No. 10014 affirming the decision rendered by Branch 135, WHETHER OR NOT THERE IS FAILURE ON THE PART OF
Regional Trial Court of Makati, Metro Manila. The procedural PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED PERMISSIVE
antecedents of this petition are as follows: COUNTERCLAIM. 8

On January 23, 1985, petitioner filed a complaint 2 against private Petitioner contended that the trial court did not acquire jurisdiction over
respondents to recover three thousand four hundred twelve and six it because no summons was validly served on it together with the copy
centavos (P3,412.06), representing the balance of the jeep body of the answer containing the permissive counterclaim. Further,
purchased by the Manuels from petitioner; an additional sum of twenty petitioner questions the propriety of its being made party to the case
thousand four hundred fifty-four and eighty centavos (P20,454.80) because it was not the real party in interest but the individual members
representing the unpaid balance on the cost of repair of the vehicle; of the Francisco family concerned with the intestate case.
and six thousand pesos (P6,000.00) for cost of suit and attorney's fees.
3 To the original balance on the price of jeep body were added the In its assailed decision now before us for review, respondent Court of
costs of repair. 4 In their answer, private respondents interposed a Appeals held that a counterclaim must be answered in ten (10) days,
counterclaim for unpaid legal services by Gregorio Manuel in the pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere
amount of fifty thousand pesos (P50,000) which was not paid by the does it state in the Rules that a party still needed to be summoned
incorporators, directors and officers of the petitioner. The trial court anew if a counterclaim was set up against him. Failure to serve
decided the case on June 26, 1985, in favor of petitioner in regard to summons, said respondent court, did not effectively negate trial court's
the petitioner's claim for money, but also allowed the counter-claim of jurisdiction over petitioner in the matter of the counterclaim. It likewise
private respondents. Both parties appealed. On April 15, 1991, the pointed out that there was no reason for petitioner to be excused from
Court of Appeals sustained the trial court's decision. 5 Hence, the answering the counterclaim. Court records showed that its former
present petition. counsel, Nicanor G. Alvarez, received the copy of the answer with
counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioner's new counsel, Jose N. Aquino, respondent against petitioner; personal concerns of the heirs should be
entered his appearance, three (3) days still remained within the period distinguished from those involving corporate affairs. Petitioner further
to file an answer to the counterclaim. Having failed to answer, petitioner contends that the present case does not fall among the instances
was correctly considered in default by the trial court. 9 Even assuming wherein the courts may look beyond the distinct personality of a
that the trial court acquired no jurisdiction over petitioner, respondent corporation. According to petitioner, the services for which respondent
court also said, but having filed a motion for reconsideration seeking Gregorio Manuel seeks to collect fees from petitioner are personal in
relief from the said order of default, petitioner was estopped from nature. Hence, it avers the heirs should have been sued in their
further questioning the trial court's jurisdiction. 10 personal capacity, and not involve the corporation. 14

On the question of its liability for attorney's fees owing to private With regard to the permissive counterclaim, petitioner also insists that
respondent Gregorio Manuel, petitioner argued that being a there was no proper service of the answer containing the permissive
corporation, it should not be held liable therefor because these fees counterclaim. It claims that the counterclaim is a separate case which
were owed by the incorporators, directors and officers of the can only be properly served upon the opposing party through
corporation in their personal capacity as heirs of Benita Trinidad. summons. Further petitioner states that by nature, a permissive
Petitioner stressed that the personality of the corporation, vis-a-vis the counterclaim is one which does not arise out of nor is necessarily
individual persons who hired the services of private respondent, is connected with the subject of the opposing party's claim. Petitioner
separate and distinct, 11 hence, the liability of said individuals did not avers that since there was no service of summons upon it with regard
become an obligation chargeable against petitioner. to the counterclaim, then the court did not acquire jurisdiction over
petitioner. Since a counterclaim is considered an action independent
Nevertheless, on the foregoing issue, the Court of Appeals ruled as from the answer, according to petitioner, then in effect there should be
follows: two simultaneous actions between the same parties: each party is at
the same time both plaintiff and defendant with respect to the other, 15
requiring in each case separate summonses.
However, this distinct and separate personality is merely a fiction
created by law for convenience and to promote justice. Accordingly,
this separate personality of the corporation may be disregarded, or the In their Comment, private respondents focus on the two questions
veil of corporate fiction pierced, in cases where it is used as a cloak or raised by petitioner. They defend the propriety of piercing the veil of
cover for found (sic) illegality, or to work an injustice, or where corporate fiction, but deny the necessity of serving separate
necessary to achieve equity or when necessary for the protection of summonses on petitioner in regard to their permissive counterclaim
creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) contained in the answer.
Corporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of Private respondents maintain both trial and appellate courts found that
injustice and inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 respondent Gregorio Manuel was employed as assistant legal officer of
SCRA 408). petitioner corporation, and that his services were solicited by the
incorporators, directors and members to handle and represent them in
In the instant case, evidence shows that the plaintiff-appellant Special Proceedings No. 7803, concerning the Intestate Estate of the
Francisco Motors Corporation is composed of the heirs of the late late Benita Trinidad. They assert that the members of petitioner
Benita Trinidad as directors and incorporators for whom defendant corporation took advantage of their positions by not compensating
Gregorio Manuel rendered legal services in the intestate estate case of respondent Gregorio Manuel after the termination of the estate
their deceased mother. Considering the aforestated principles and proceedings despite his repeated demands for payment of his services.
circumstances established in this case, equity and justice demands They cite findings of the appellate court that support piercing the veil of
plaintiff-appellant's veil of corporate identity should be pierced and the corporate identity in this particular case. They assert that the corporate
defendant be compensated for legal services rendered to the heirs, veil may be disregarded when it is used to defeat public convenience,
who are directors of the plaintiff-appellant corporation. 12 justify wrong, protect fraud, and defend crime. It may also be pierced,
according to them, where the corporate entity is being used as an alter
ego, adjunct, or business conduit for the sole benefit of the
Now before us, petitioner assigns the following errors:
stockholders or of another corporate entity. In these instances, they
aver, the corporation should be treated merely as an association of
I. individual persons. 16

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE Private respondents dispute petitioner's claim that its right to due
OF PIERCING THE VEIL OF CORPORATE ENTITY. process was violated when respondents' counterclaim was granted due
course, although no summons was served upon it. They claim that no
II. provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE petitioner filed its complaint before the trial court it voluntarily submitted
WAS JURISDICTION OVER PETITIONER WITH RESPECT TO THE itself to the jurisdiction of the court. As a consequence, the issuance of
COUNTERCLAIM. 13 summons on it was no longer necessary. Private respondents say they
served a copy of their answer with affirmative defenses and
Petitioner submits that respondent court should not have resorted to counterclaim on petitioner's former counsel, Nicanor G. Alvarez. While
piercing the veil of corporate fiction because the transaction concerned petitioner would have the Court believe that respondents served said
only respondent Gregorio Manuel and the heirs of the late Benita copy upon Alvarez after he had withdrawn his appearance as counsel
Trinidad. According to petitioner, there was no cause of action by said for the petitioner, private respondents assert that this contention is
utterly baseless. Records disclose that the answer was received two (2)
days before the former counsel for petitioner withdrew his appearance, When directors and officers of a corporation are unable to compensate
according to private respondents. They maintain that the present a party for a personal obligation, it is far-fetched to allege that the
petition is but a form of dilatory appeal, to set off petitioner's obligations corporation is perpetuating fraud or promoting injustice, and be thereby
to the respondents by running up more interest it could recover from held liable therefor by piercing its corporate veil. While there are no
them. Private respondents therefore claim damages against petitioner. hard and fast rules on disregarding separate corporate identity, we
17 must always be mindful of its function and purpose. A court should be
careful in assessing the milieu where the doctrine of piercing the
To resolve the issues in this case, we must first determine the propriety corporate veil may be applied. Otherwise an injustice, although
of piercing the veil of corporate fiction. unintended, may result from its erroneous application.

Basic in corporation law is the principle that a corporation has a The personality of the corporation and those of its incorporators,
separate personality distinct from its stockholders and from other directors and officers in their personal capacities ought to be kept
corporations to which it may be connected. 18 However, under the separate in this case. The claim for legal fees against the concerned
doctrine of piercing the veil of corporate entity, the corporation's individual incorporators, officers and directors could not be properly
separate juridical personality may be disregarded, for example, when directed against the corporation without violating basic principles
the corporate identity is used to defeat public convenience, justify governing corporations. Moreover, every action — including a
wrong, protect fraud, or defend crime. Also, where the corporation is a counterclaim — must be prosecuted or defended in the name of the
mere alter ego or business conduit of a person, or where the real party in interest. 20 It is plainly an error to lay the claim for legal
corporation is so organized and controlled and its affairs are so fees of private respondent Gregorio Manuel at the door of petitioner
conducted as to make it merely an instrumentality, agency, conduit or (FMC) rather than individual members of the Francisco family.
adjunct of another corporation, then its distinct personality may be
ignored. 19 In these circumstances, the courts will treat the corporation However, with regard to the procedural issue raised by petitioner's
as a mere aggrupation of persons and the liability will directly attach to allegation, that it needed to be summoned anew in order for the court to
them. The legal fiction of a separate corporate personality in those cited acquire jurisdiction over it, we agree with respondent court's view to the
instances, for reasons of public policy and in the interest of justice, will contrary. Section 4, Rule 11 of the Rules of Court provides that a
be justifiably set aside. counterclaim or cross-claim must be answered within ten (10) days
from service. Nothing in the Rules of Court says that summons should
In our view, however, given the facts and circumstances of this case, first be served on the defendant before an answer to counterclaim must
the doctrine of piercing the corporate veil has no relevant application be made. The purpose of a summons is to enable the court to acquire
here. Respondent court erred in permitting the trial court's resort to this jurisdiction over the person of the defendant. Although a counterclaim
doctrine. The rationale behind piercing a corporation's identity in a is treated as an entirely distinct and independent action, the defendant
given case is to remove the barrier between the corporation from the in the counterclaim, being the plaintiff in the original complaint, has
persons comprising it to thwart the fraudulent and illegal schemes of already submitted to the jurisdiction of the court. Following Rule 9,
those who use the corporate personality as a shield for undertaking Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant
certain proscribed activities. However, in the case at bar, instead of (herein petitioner) fails to answer the counterclaim, then upon motion of
holding certain individuals or persons responsible for an alleged plaintiff, the defendant may be declared in default. This is what
corporate act, the situation has been reversed. It is the petitioner as a happened to petitioner in this case, and this Court finds no procedural
corporation which is being ordered to answer for the personal liability of error in the disposition of the appellate court on this particular issue.
certain individual directors, officers and incorporators concerned. Moreover, as noted by the respondent court, when petitioner filed its
Hence, it appears to us that the doctrine has been turned upside down motion seeking to set aside the order of default, in effect it submitted
because of its erroneous invocation. Note that according to private itself to the jurisdiction of the court. As well said by respondent court:
respondent Gregorio Manuel his services were solicited as counsel for
members of the Francisco family to represent them in the intestate Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he
proceedings over Benita Trinidad's estate. These estate proceedings records show that upon its request, plaintiff-appellant was granted time
did not involve any business of petitioner. to file a motion for reconsideration of the disputed decision. Plaintiff-
appellant did file its motion for reconsideration to set aside the order of
Note also that he sought to collect legal fees not just from certain default and the judgment rendered on the counterclaim.
Francisco family members but also from petitioner corporation on the
claims that its management had requested his services and he Thus, even if the court acquired no jurisdiction over plaintiff-appellant
acceded thereto as an employee of petitioner from whom it could be on the counterclaim, as it vigorously insists, plaintiff-appellant is
deduced he was also receiving a salary. His move to recover unpaid considered to have submitted to the court's jurisdiction when it filed the
legal fees through a counterclaim against Francisco Motors motion for reconsideration seeking relief from the court. (Soriano vs.
Corporation, to offset the unpaid balance of the purchase and repair of Palacio, 12 SCRA 447). A party is estopped from assailing the
a jeep body could only result from an obvious misapprehension that jurisdiction of a court after voluntarily submitting himself to its
petitioner's corporate assets could be used to answer for the liabilities jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar
of its individual directors, officers, and incorporators. Such result if against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA
permitted could easily prejudice the corporation, its own creditors, and 37). 22
even other stockholders; hence, clearly inequitous to petitioner.
WHEREFORE, the petition is hereby GRANTED and the assailed
Furthermore, considering the nature of the legal services involved, decision is hereby REVERSED insofar only as it held Francisco Motors
whatever obligation said incorporators, directors and officers of the Corporation liable for the legal obligation owing to private respondent
corporation had incurred, it was incurred in their personal capacity. Gregorio Manuel; but this decision is without prejudice to his filing the
proper suit against the concerned members of the Francisco family in In a certification election held on July 1, 1997, TEU was certified as the
their personal capacity. No pronouncement as to costs.1âwphi1.nêt sole and exclusive collective bargaining agent in Times. Consequently,
TEU’s president wrote the management of Times and requested for
SO ORDERED. collective bargaining. Times refused on the ground that the decision of
the Med-Arbiter upholding the validity of the certification election was
G.R. No. 163786 February 16, 2005 not yet final and executory.

TIMES TRANSPORTATION COMPANY, INC., petitioner, TEU filed a Notice of Strike on August 8, 1997. Another
vs. SANTOS SOTELO, CONRADO B. SALONGA, SAMSON C. conciliation/mediation proceeding was conducted for the purpose of
SOLIVEN, BIENVENIDO F. MALANA, JR., JOVITO V. ALCAUSIN, settling the brewing dispute. In the meantime, Times’ management
EFREN A. RAMOS, RODRIGO P. CABUSAO, JR., EDGAR G. implemented a retrenchment program and notices of retrenchment
PONCE, RONALD ALLAN PARINAS, RODEL PALO, REYNALDO R. dated September 16, 1997 were sent to some of its employees,
RAGUCOS, MARIO T. TOLEDO, BERNARDINO PADUA, DOMINGO including the respondents herein, informing them of their retrenchment
P. BILAN, ARNEL VALLEDORES, RAMON RETUTA, JR., effective 30 days thereafter.
PANTALEON TABANGIN, ALBERTO PANDO, VIRGILIO E. OBAR,
EULOGIO D. DIGA, SR., DANIEL LLADO, RONILO BALTAZAR, On October 17, 1997, TEU held a strike vote on grounds of unfair labor
MARITO PANDO, LEOPOLDO FUNTILA, GERRY B. CARRIDO, practice on the part of Times. For alleged participation in what it
WILLIAM A. TABUCOL, ANTONIO L. RAMOS, SR., PABLO P. deemed was an illegal strike, Times terminated all the 123 striking
PADRE, HENRY B. GANIR, TEOTIMO R. REQUILMAN, CIPRIANO employees by virtue of two notices dated October 26, 1997 and
ULPINDO, ROGER BABIDA, SAMUEL PERALTA, BONIFACIO November 24, 1997.3 On November 17, 1997, then DOLE Secretary
TUMALIP, EDGAR ABLOG, EFREN ABELLA, RODRIGO RABOY, Quisumbing issued the second return-to-work order certifying the
RENATO SILVA, GEORGE PERALTA, RONILO BARBOSA, JULIAN dispute to the NLRC. While the strike was ended, the employees were
BUENAFE, FLORENCIO CARIÑO, BERNIE TUMBAGA, RODRIGO no longer admitted back to work.
CABAÑERO, ELMER TAMO, LEOPOLDO NANA, NELIE BOSE,
DEMETRIO HERRERA, RODOLFO ABELLA, ALVIN ELEFANTE, In the meantime, by December 12, 1997, Mencorp Transport Systems,
REDENTOR GARCIA, JERRY PALACPAC, JOSE PAET, ARTHUR Inc. (Mencorp) had acquired ownership over Times’ Certificates of
IBEA, ELIZER BORJA, EDMUNDO ASPIRAS, JOSE V. PESCADOR, Public Convenience and a number of its bus units by virtue of several
WILLIAM GARCIA, ERNESTO P. MANGULABNAN, BENJAMIN B. deeds of sale.4 Mencorp is controlled and operated by Mrs. Virginia
BLAZA, JOSELITO P. CACABELOS, LEON R. GALANTA, JR., Mendoza, daughter of Santiago Rondaris, the majority stockholder of
MARIANO P. TEJADA, PEDRITO C. ORTIZ, JR., NESTOR E. Times.
BALCITA, FLOR BURBANO, HERNANDO A. PIMENTEL, ALEX A.
GOMEZ, ARNALDO P. BOSE, NAPOLEON BALDERAS, CARLINO
On May 21, 1998, the NLRC rendered a decision5 in the cases certified
V. RULLODA, JR., RANDY R. AMODO, CORNELIO R. RAGUINI,
to it by the DOLE, the dispositive portion of which read:
ROBERT CERIA, JUANITO U. UGALDE, ALBERTO PAJO,
ALFREDO VALOROSO, RUFINO ADRIATICO, BARTOLOME C.
EDROSOLAN, JR., REYNANTE A. ALCAIN, NOELITO SUSA and WHEREFORE, the respondents’ first strike, conducted from March 3,
VICENTE NAVA, respondents. 1997 to March 12, 1997, is hereby declared LEGAL; its second strike,
which commenced on October 17, 1997, is hereby declared ILLEGAL.
Consequently, those … 23 persons who participated in the illegal strike
DECISION … are deemed to have lost their employment status and were therefore
validly dismissed from employment: …
YNARES-SANTIAGO, J.:
The respondents’ "Motion to Implead Mencorp Transport Systems, Inc.
This petition for review on certiorari assails the decision of the Court of and/or Virginia Mendoza and/or Santiago Rondaris" is hereby DENIED
Appeals dated January 30, 2004 in CA-G.R. SP No. 75291,1 which set for lack of merit.
aside the decision and resolution of the National Labor Relations
Commission, and its resolution dated May 24, 20042 denying
SO ORDERED.6
reconsideration thereof.
Times and TEU both appealed the decision of the NLRC, which the
Petitioner Times Transportation Company, Inc. (Times) is a corporation
Court of Appeals affirmed on November 17, 2000.7 Upon denial of its
engaged in the business of land transportation. Prior to its closure in
motion for reconsideration, Times filed a petition for review on
1997, the Times Employees Union (TEU) was formed and issued a
certiorari,8 docketed as G.R. Nos. 148500-01, now pending with the
certificate of union registration. Times challenged the legitimacy of TEU
Third Division of this Court. TEU likewise appealed but its petition was
by filing a petition for the cancellation of its union registration.
denied due course.

On March 3, 1997, TEU held a strike in response to Times’ alleged


In 1998, and after the closure of Times, the retrenched employees,
attempt to form a rival union and its dismissal of the employees
including practically all the respondents herein, filed cases for illegal
identified to be active union members. Upon petition by Times, then
dismissal, money claims and unfair labor practices against Times
Labor Secretary, and now Associate Justice of this Court, Leonardo A.
before the Regional Arbitration Branch in San Fernando City, La Union.
Quisumbing, assumed jurisdiction over the case and referred the
Times filed a Motion to Dismiss but on October 30, 1998, the arbitration
matter to the NLRC for compulsory arbitration. The case was docketed
branch ordered the archiving of the cases pending resolution of G.R.
as NLRC NCR CC-000134-97. A return-to-work order was likewise
Nos. 148500-01.9
issued on March 10, 1997.
The dismissed employees did not interpose an appeal from said Order. On May 18, 2002, Times moved to reconsider said order arguing
Instead, they withdrew their complaints with leave of court and filed a mainly that it did not have sufficient funds to put up the required bond.
new set of cases before the National Capital Region Arbitration Branch. On July 26, 2002, Mencorp and the Spouses Mendoza posted an
This time, they impleaded Mencorp and the Spouses Reynaldo and additional P10 million appeal bond. Thus far, the total amount of bond
Virginia Mendoza. Times sought the dismissal of these cases on the posted was P15 million. On August 7, 2002, the NLRC granted the
ground of litis pendencia and forum shopping. On January 31, 2002, Motion for Reduction of Bond and approved the P10 million additional
Labor Arbiter Renaldo O. Hernandez rendered a decision stating: appeal bond.12

WHEREFORE, premises considered, judgment is hereby entered On September 17, 2002, the NLRC rendered its decision, stating:
FINDING that the dismissals of complainants, excluding the expunged
ones, by respondent Times Transit (sic) Company, Inc. effected, WHEREFORE, the foregoing premises duly considered, the decision
participated in, authorized or ratified by respondent Santiago Rondaris appealed from is hereby VACATED. The records of these consolidated
constituted the prohibited act of unfair labor practice under Article cases are hereby ordered REMANDED to the Arbitration Branch of
248(a) and (e) of the Labor Code, as amended and hence, illegal and origin for disposition and for the conduct of appropriate proceedings for
that the sale of said respondent company to respondents Mencorp a decision to be rendered with dispatch.
Transport Systems Company (sic), Inc. and/or Virginia Mendoza and
Reynaldo Mendoza was simulated and/or effected in bad faith,
SO ORDERED.13
ORDERING:
Reconsideration thereof was denied by the NLRC on October 30, 2002.
1. respondents Times Transit (sic) Company, Inc. and Santiago
Thus, the respondents appealed to the Court of Appeals by way of a
Rondaris as the officer administratively held liable of the unfair labor
petition for certiorari, attributing grave abuse of discretion on the NLRC
practice herein to CEASE AND DESIST therefore (sic); for: (1) not dismissing the appeals of Times, Mencorp and the Spouses
Mendoza despite their failure to post the required bond; (2) remanding
2. respondents Times Transit (sic) Company, Inc. and/or Santiago the case for further proceedings despite the sufficiency of the evidence
Rondaris and Mencorp Transport Systems Company, Inc. and/or presented by the parties; (3) not sustaining the labor arbiter’s ruling that
Virginia Mendoza and Reynaldo Mendoza to cause the reinstatement they were illegally dismissed; (4) not affirming the labor arbiter’s ruling
therein of complainants to their former positions without loss of seniority that there was no litis pendencia; and (5) not ruling that Times and
rights and benefits and to pay jointly and severally said complainants Mencorp are one and the same entity.1ªvvphi1.nét
full back wages reckoned from their respective dates of illegal dismissal
as above-indicated, until actually reinstated or in lieu of such
On January 30, 2004, the Court of Appeals rendered the decision now
reinstatement, at the option of said complainants, payment of their
assailed in this petition, the decretal portion of which states:
separation pay of one (1) month pay per year of service, reckoned from
their date of hire as above-indicated, until actual payment and/or finality
of this decision; WHEREFORE, based on the foregoing, the instant petition is hereby
GRANTED. The assailed Decision and Resolution of the NLRC are
hereby SET ASIDE. The Decision of the Labor Arbiter dated January
3. and finally for respondents Times Transit (sic) Company, Inc. and/or
31, 2002 is hereby REINSTATED.
Santiago Rondaris to pay jointly and severally said complainants as
moral and exemplary damages the combined amount of P75,000.00
and 5% of the total award as attorney’s fees. SO ORDERED.14

All other claims of complainants are dismissed for lack of merit. Times, Mencorp and the Spouses Mendoza filed Motions for
Reconsideration, which were denied in a resolution promulgated on
May 24, 2004. Hence, this petition for review based on the following
….
grounds:

SO ORDERED.10
I. Petitioner respectfully maintains that the Honorable Court a quo, in
not dismissing the complaints against the petitioner on the ground of lis
The monetary award amounted to P43,347,341.69. On March 4, 2002, pendens, decided the matter in a way not in accord with existing laws
Times, Mencorp and the Spouses Mendoza submitted their respective and applicable decisions of this Honorable Court.
memorandum of appeal to the NLRC with motions to reduce the bond.
Mencorp posted a P5 million bond issued by Security Pacific
II. Petitioner, further, respectfully maintains that the Honorable Court a
Assurance Corp. (SPAC). On April 30, 2002, the NLRC issued an order
quo, in determining that herein petitioners hitherto lost their right to
disposing of the said motion, thus: appeal to the NLRC on account of their purported failure to post an
adequate appeal bond, radically departed from the accepted and usual
WHEREFORE, premises considered, the Urgent Motion for Reduction course of judicial proceedings, not to mention resolved said issue in a
of Bond is denied for lack of merit. Respondents are hereby ordered to manner and fashion antithetical to existing jurisprudence.
complete the bond equivalent to the monetary award in the Labor
Arbiter’s Decision, within an unextendible period of ten (10) days from
III. Petitioner, furthermore, respectfully maintains that the Honorable
receipt hereof, otherwise, the appeal shall be dismissed for non-
Court a quo, in applying wholesale the doctrine of piercing the veil of
perfection thereof. corporate fiction and finding Times’ co-petitioners liable for the former’s
obligations, resolved the matter in a manner contradictory to existing
SO ORDERED.11 applicable laws and dispositions of this Honorable Court, and departed
from the accepted and usual course of judicial proceedings with regard perfect an appeal has the effect of making the judgment final and
to admitting evidence to sustain the application of such principle.15 executory.18 However, in several cases, we have relaxed the rules
regarding the appeal bond especially where it must necessarily yield to
The petition lacks merit. the broader interest of substantial justice.19 The Rules of Procedure of
the NLRC allows for the reduction of the appeal bond upon motion of
the appellant and on meritorious grounds.20 It is required however that
As to the first issue, Times argues that there exists an identity of
issues, rights asserted, relief sought and causes of action between the such motion is filed within the reglementary period to appeal.
present case and the one concerning the legality of the second strike,
which is now pending with the Third Division of this Court. As such, the The records reveal that Times, Mencorp and the Spouses Mendoza’s
Court of Appeals erred in not dismissing the case at bar on the ground motion to reduce the bond was denied and the NLRC ordered them to
of litis pendencia. post the required amount within an unextendible period of ten (10)
days.21 However, instead of complying with the directive, Times filed
another motion for reconsideration of the order of denial. Several
Litis pendencia as a ground for dismissal of an action refers to that
weeks later, Mencorp posted an additional bond, which was still less
situation wherein another action is pending between the same parties
than the required amount. Three (3) months after the filing of the
for the same cause of action and the second action becomes
motion for reconsideration, the NLRC reversed its previous order and
unnecessary and vexatious.16 We agree with the findings of the Court
of Appeals that there is no litis pendencia as the two cases involve granted the motion for reduction of bond.1awphi1.nét
dissimilar causes of action. The first case, now pending with the Third
Division, pertains to the alleged error of the NLRC in not upholding the We agree with the Court of Appeals that the foregoing constitutes grave
dismissal of all the striking employees (not only of the 23 strikers so abuse of discretion on the part of the NLRC. By delaying the resolution
declared to have lost their employment) in spite of the latter’s ruling that of Times’ motion for reconsideration, it has unnecessarily prolonged the
the second strike was illegal. None of the respondents herein were period of appeal. We have held that to extend the period of appeal is to
among those deemed terminated by virtue of the NLRC decision. prolong the resolution of the case, a circumstance which would give the
employer the opportunity to wear out the energy and meager resources
of the workers to the point that they would be constrained to give up for
In the instant case, the issue is the validity of the retrenchment
less than what they deserve in law.22 The NLRC is well to take notice of
implemented by Times prior to the second strike and the subsequent
dismissal of the striking employees. As such, there can be no question our pronouncement in Santos v. Velarde:23
that respondents were still employees of Times when they were
retrenched. In short, the outcome of this case does not hinge on the The Court is aware that the NLRC is not bound by the technical rules of
legality of the second strike or the validity of the dismissal of the striking procedure and is allowed to be liberal in the interpretation of rules in
employees, which issues are yet to be resolved in G.R. Nos. 148500- deciding labor cases. However, such liberality should not be applied in
01. Consequently, litis pendencia does not arise. the instant case as it would render futile the very purpose for which the
principle of liberality is adopted. … From the decision of the Labor
Arbiter, it took the NLRC four months to rule on the "motion" for
Anent the issue on whether Times perfected its appeal to the NLRC,
exemption to pay bond and another four months to decide the merits of
the right to appeal is a statutory right and one who seeks to avail of the
the case. This Court has repeatedly ruled that delay in the settlement of
right must comply with the statute or rules. The rules for perfecting an
labor cases cannot be countenanced. Not only does it involve the
appeal must be strictly followed as they are considered indispensable
survival of an employee and his loved ones who are dependent on
interdictions against needless delays and for orderly discharge of
him…, it also wears down the meager resources of the workers...24
judicial business.17 Section 3(a), Rule VI of the NLRC Rules of
(Emphasis supplied)
Procedure outlines the requisites for perfecting an appeal, to wit:

The NLRC’s reversal of its previous order of denial lacks basis. In the
SECTION 3. Requisites for Perfection of Appeal. — a) The Appeal shall
first motion, Mencorp and Spouses Mendoza moved for the reduction
be filed within the reglementary period as provided in Section 1 of this
of the appeal bond on the ground that the computation of the monetary
Rule and shall be under oath with proof of payment of the required
award was highly suspicious and anomalous. In their motion for
appeal fee and the posting of a cash or surety bond as provided in
reconsideration of the NLRC’s denial, Mencorp and the Spouses
Section 6 of this Rule; shall be accompanied by memorandum of
Mendoza cited financial difficulties in completing the appeal bond.
appeal which shall state the grounds relied upon and the arguments in
support thereof; the relief prayed for and a statement of the date when Neither ground is well-taken.
the appellant received the appealed decision, order or award and proof
of service on the other party of such appeal. Times and Mencorp failed to substantiate their allegations of errors in
the computation of the monetary award. They merely asserted
"inaccuracies" without specifying which aspect of the computation was
A mere notice of appeal without complying with the other requisites
inaccurate. If Times and Mencorp truly believed that there were errors
aforestated shall not stop the running of the period for perfecting an
in the computation, they could have presented their own computation
appeal. (Emphasis supplied)
for comparison. As to the claim of financial difficulties, suffice it to say
that the law does not require outright payment of the total monetary
Article 223 of the Labor Code provides that in case of a judgment award, but only the posting of a bond to ensure that the award will be
involving a monetary award, an appeal by the employer may be eventually paid should the appeal fail.l^vvphi1.net What Times has to
perfected only upon the posting of a cash or surety bond issued by a pay is a moderate and reasonable sum for the premium for such
reputable bonding company duly accredited by the NLRC in the amount bond.25 The impression thus created was that Times, Mencorp and the
equivalent to the monetary award in the judgment appealed from. The Spouses Mendoza were clearly circumventing, if not altogether
perfection of an appeal in the manner and within the period prescribed dodging, the rules on the posting of appeal bonds.
by law is not only mandatory but also jurisdictional, and failure to
On the propriety of the piercing of the corporate veil, Times claims that
"to drag Mencorp, [Spouses] Mendoza and Rondaris into the picture on G.R. No. 119002 October 19, 2000
the purported ground that a fictitious sale of Times’ assets in their favor
was consummated with the end in view of frustrating the ends of justice INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC.,
and for purposes of evading compliance with the judgment is … the petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN,
height of judicial arrogance."26 The Court of Appeals believes otherwise PHILIPPINE FOOTBALL FEDERATION, respondents.
and reckons that Times and Mencorp failed to adduce evidence to
refute allegations of collusion between them.
KAPUNAN, J.:

We have held that piercing the corporate veil is warranted only in cases
On June 30 1989, petitioner International Express Travel and Tour
when the separate legal entity is used to defeat public convenience,
Services, Inc., through its managing director, wrote a letter to the
justify wrong, protect fraud, or defend crime, such that in the case of
Philippine Football Federation (Federation), through its president
two corporations, the law will regard the corporations as merged into
private respondent Henri Kahn, wherein the former offered its services
one.27 It may be allowed only if the following elements concur: (1)
as a travel agency to the latter.1 The offer was accepted.
control—not mere stock control, but complete domination—not only of
finances, but of policy and business practice in respect to the
transaction attacked; (2) such control must have been used to commit a Petitioner secured the airline tickets for the trips of the athletes and
fraud or a wrong to perpetuate the violation of a statutory or other officials of the Federation to the South East Asian Games in Kuala
positive legal duty, or a dishonest and an unjust act in contravention of Lumpur as well as various other trips to the People's Republic of China
a legal right; and (3) the said control and breach of duty must have and Brisbane. The total cost of the tickets amounted to P449,654.83.
proximately caused the injury or unjust loss complained of.28 For the tickets received, the Federation made two partial payments,
both in September of 1989, in the total amount of P176,467.50.2
The following findings of the Labor Arbiter, which were cited and
affirmed by the Court of Appeals, have not been refuted by Times, to On 4 October 1989, petitioner wrote the Federation, through the private
wit: respondent a demand letter requesting for the amount of P265,894.33.3
On 30 October 1989, the Federation, through the Project Gintong Alay,
paid the amount of P31,603.00.4
1. The sale was transferred to a corporation controlled by V. Mendoza,
the daughter of respondent S. Rondaris of [Times] where she is/was
also a director, as proven by the articles of incorporation of [Mencorp]; On 27 December 1989, Henri Kahn issued a personal check in the
amount of P50,000 as partial payment for the outstanding balance of
the Federation.5 Thereafter, no further payments were made despite
2. All of the stockholders/incorporators of [Mencorp]: Reynaldo M.
repeated demands.
Mendoza, Virginia R. Mendoza, Vernon Gerard R. Mendoza, Vivian
Charity R. Mendoza, Vevey Rosario R. Mendoza are all relatives of
respondent S. Rondaris; This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity
and as President of the Federation and impleaded the Federation as an
3. The timing of the sale evidently was to negate the
alternative defendant. Petitioner sought to hold Henri Kahn liable for the
employees/complainants/members’ right to organization as it was
unpaid balance for the tickets purchased by the Federation on the
effected when their union (TEU) was just organized/requesting [Times]
ground that Henri Kahn allegedly guaranteed the said obligation.6
to bargain;
Henri Kahn filed his answer with counterclaim. While not denying the
… allegation that the Federation owed the amount P207,524.20,
representing the unpaid balance for the plane tickets, he averred that
5. [Mencorp] never obtained a franchise since its supposed the petitioner has no cause of action against him either in his personal
incorporation in 10 May 1994 but at present, all the buses of [Times] capacity or in his official capacity as president of the Federation. He
are already being run/operated by respondent [Mencorp], the franchise maintained that he did not guarantee payment but merely acted as an
of [Times] having been transferred to it.29 agent of the Federation which has a separate and distinct juridical
personality.7
We uphold the findings of the labor arbiter and the Court of Appeals.
The sale of Times’ franchise as well as most of its bus units to a On the other hand, the Federation failed to file its answer, hence, was
company owned by Rondaris’ daughter and family members, right in declared in default by the trial court.8
the middle of a labor dispute, is highly suspicious. It is evident that the
transaction was made in order to remove Times’ remaining assets from
In due course, the trial court rendered judgment and ruled in favor of
the reach of any judgment that may be rendered in the unfair labor
the petitioner and declared Henri Kahn personally liable for the unpaid
practice cases filed against it. obligation of the Federation. In arriving at the said ruling, the trial court
rationalized:
WHEREFORE, premises considered, the petition is DENIED. The
decision of the Court of Appeals in CA-G.R. SP No. 75291 dated
Defendant Henri Kahn would have been correct in his contentions had
January 30, 2004 and its resolution dated May 24, 2004, are hereby
it been duly established that defendant Federation is a corporation. The
AFFIRMED in toto. trouble, however, is that neither the plaintiff nor the defendant Henri
Kahn has adduced any evidence proving the corporate existence of the
SO ORDERED. defendant Federation. In paragraph 2 of its complaint, plaintiff asserted
that "Defendant Philippine Football Federation is a sports association Petitioner now seeks recourse to this Court and alleges that the
xxx." This has not been denied by defendant Henri Kahn in his Answer. respondent court committed the following assigned errors:13
Being the President of defendant Federation, its corporate existence is
within the personal knowledge of defendant Henri Kahn. He could have A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
easily denied specifically the assertion of the plaintiff that it is a mere THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL
sports association, if it were a domestic corporation. But he did not. FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT
HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
xxx ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE
PERSONALITY.
A voluntary unincorporated association, like defendant Federation has
no power to enter into, or to ratify, a contract. The contract entered into B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
by its officers or agents on behalf of such association is not binding on, HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY
or enforceable against it. The officers or agents are themselves LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF,
personally liable. HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE
OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT
x x x9 AND ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
The dispositive portion of the trial court's decision reads:
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS
NOT PERSONALLY LIABLE, THE HONORABLE COURT OF
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to
APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS
pay the plaintiff the principal sum of P207,524.20, plus the interest
DECISION THAT THE PFF IS SOLELY LIABLE FOR THE
thereon at the legal rate computed from July 5, 1990, the date the
complaint was filed, until the principal obligation is fully liquidated; and OBLIGATION.
another sum of P15,000.00 for attorney's fees.
The resolution of the case at bar hinges on the determination of the
existence of the Philippine Football Federation as a juridical person. In
The complaint of the plaintiff against the Philippine Football Federation
the assailed decision, the appellate court recognized the existence of
and the counterclaims of the defendant Henri Kahn are hereby
the Federation. In support of this, the CA cited Republic Act 3135,
dismissed.
otherwise known as the Revised Charter of the Philippine Amateur
Athletic Federation, and Presidential Decree No. 604 as the laws from
With the costs against defendant Henri Kahn.10 which said Federation derives its existence.

Only Henri Kahn elevated the above decision to the Court of Appeals. As correctly observed by the appellate court, both R.A. 3135 and P.D.
On 21 December 1994, the respondent court rendered a decision No. 604 recognized the juridical existence of national sports
reversing the trial court, the decretal portion of said decision reads: associations. This may be gleaned from the powers and functions
granted to these associations. Section 14 of R.A. 3135 provides:
WHEREFORE, premises considered, the judgment appealed from is
hereby REVERSED and SET ASIDE and another one is rendered SEC. 14. Functions, powers and duties of Associations. - The National
dismissing the complaint against defendant Henri S. Kahn.11 Sports' Association shall have the following functions, powers and
duties:
In finding for Henri Kahn, the Court of Appeals recognized the juridical
existence of the Federation. It rationalized that since petitioner failed to 1. To adopt a constitution and by-laws for their internal organization
prove that Henri Kahn guaranteed the obligation of the Federation, he and government;
should not be held liable for the same as said entity has a separate and
distinct personality from its officers.
2. To raise funds by donations, benefits, and other means for their
purposes.
Petitioner filed a motion for reconsideration and as an alternative prayer
pleaded that the Federation be held liable for the unpaid obligation. The
3. To purchase, sell, lease or otherwise encumber property both real
same was denied by the appellate court in its resolution of 8 February
and personal, for the accomplishment of their purpose;
1995, where it stated that:

4. To affiliate with international or regional sports' Associations after


As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine due consultation with the executive committee;
Football Federation (PFF) as liable for the unpaid obligation, it should
be remembered that the trial court dismissed the complaint against the xxx
Philippine Football Federation, and the plaintiff did not appeal from this
decision. Hence, the Philippine Football Federation is not a party to this 13. To perform such other acts as may be necessary for the proper
appeal and consequently, no judgment may be pronounced by this accomplishment of their purposes and not inconsistent with this Act.
Court against the PFF without violating the due process clause, let
alone the fact that the judgment dismissing the complaint against it, had Section 8 of P.D. 604, grants similar functions to these sports
already become final by virtue of the plaintiff's failure to appeal associations:
therefrom. The alternative prayer is therefore similarly DENIED.12
SEC. 8. Functions, Powers, and Duties of National Sports Association. having been taken thereon by the executive committee. Should the
- The National sports associations shall have the following functions, application be rejected, the reasons for such rejection shall be clearly
powers, and duties: stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be
1. Adopt a Constitution and By-Laws for their internal organization and considered as unacted upon: Provided, however, That until the
government which shall be submitted to the Department and any executive committee herein provided shall have been formed,
amendment thereto shall take effect upon approval by the Department: applications for recognition shall be passed upon by the duly elected
Provided, however, That no team, school, club, organization, or entity members of the present executive committee of the Philippine Amateur
shall be admitted as a voting member of an association unless 60 per Athletic Federation. The said executive committee shall be dissolved
cent of the athletes composing said team, school, club, organization, or upon the organization of the executive committee herein provided:
entity are Filipino citizens; Provided, further, That the functioning executive committee is charged
with the responsibility of seeing to it that the National Sports'
Associations are formed and organized within six months from and
2. Raise funds by donations, benefits, and other means for their
after the passage of this Act.
purpose subject to the approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and Section 7 of P.D. 604, similarly provides:
personal, for the accomplishment of their purpose;
SEC. 7. National Sports Associations. - Application for accreditation or
recognition as a national sports association for each individual sport in
4. Conduct local, interport, and international competitions, other than
the Philippines shall be filed with the Department together with, among
the Olympic and Asian Games, for the promotion of their sport;
others, a copy of the Constitution and By-Laws and a list of the
members of the proposed association.
5. Affiliate with international or regional sports associations after due
consultation with the Department;
The Department shall give the recognition applied for if it is satisfied
that the national sports association to be organized will promote the
xxx objectives of this Decree and has substantially complied with the rules
and regulations of the Department: Provided, That the Department may
13. Perform such other functions as may be provided by law. withdraw accreditation or recognition for violation of this Decree and
such rules and regulations formulated by it.
The above powers and functions granted to national sports
associations clearly indicate that these entities may acquire a juridical The Department shall supervise the national sports association:
personality. The power to purchase, sell, lease and encumber property Provided, That the latter shall have exclusive technical control over the
are acts which may only be done by persons, whether natural or development and promotion of the particular sport for which they are
artificial, with juridical capacity. However, while we agree with the organized.
appellate court that national sports associations may be accorded
corporate status, such does not automatically take place by the mere Clearly the above cited provisions require that before an entity may be
passage of these laws. considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur
It is a basic postulate that before a corporation may acquire juridical Athletic Federation under R.A. 3135, and the Department of Youth and
personality, the State must give its consent either in the form of a Sports Development under P.D. 604. This fact of recognition, however,
special law or a general enabling act. We cannot agree with the view of Henri Kahn failed to substantiate. In attempting to prove the juridical
the appellate court and the private respondent that the Philippine existence of the Federation, Henri Kahn attached to his motion for
Football Federation came into existence upon the passage of these reconsideration before the trial court a copy of the constitution and by-
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision laws of the Philippine Football Federation. Unfortunately, the same
creating the Philippine Football Federation. These laws merely does not prove that said Federation has indeed been recognized and
recognized the existence of national sports associations and provided accredited by either the Philippine Amateur Athletic Federation or the
the manner by which these entities may acquire juridical personality. Department of Youth and Sports Development. Accordingly, we rule
Section 11 of R.A. 3135 provides: that the Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and does not
SEC. 11. National Sports' Association; organization and recognition. - A have corporate existence of its own.
National Association shall be organized for each individual sports in the
Philippines in the manner hereinafter provided to constitute the Thus being said, it follows that private respondent Henry Kahn should
Philippine Amateur Athletic Federation. Applications for recognition as be held liable for the unpaid obligations of the unincorporated Philippine
a National Sports' Association shall be filed with the executive Football Federation. It is a settled principal in corporation law that any
committee together with, among others, a copy of the constitution and person acting or purporting to act on behalf of a corporation which has
by-laws and a list of the members of the proposed association, and a no valid existence assumes such privileges and becomes personally
filing fee of ten pesos. liable for contract entered into or for other acts performed as such
agent.14 As president of the Federation, Henri Kahn is presumed to
The Executive Committee shall give the recognition applied for if it is have known about the corporate existence or non-existence of the
satisfied that said association will promote the purposes of this Act and Federation. We cannot subscribe to the position taken by the appellate
particularly section three thereof. No application shall be held pending court that even assuming that the Federation was defectively
for more than three months after the filing thereof without any action incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in taking up all subjects including those they have passed already.
such a manner as to recognize and in effect admit its existence.15 The Several students had approached me stating that they had consulted
doctrine of corporation by estoppel is mistakenly applied by the with the DECS which told them that there is no such regulation. If
respondent court to the petitioner. The application of the doctrine [there] is no such regulation why is AMEC doing the same?
applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of xxx
defective incorporation.16 In the case at bar, the petitioner is not trying
to escape liability from the contract but rather is the one claiming from
Second: Earlier AMEC students in Physical Therapy had
the contract.
complained that the course is not recognized by DECS. xxx

WHEREFORE, the decision appealed from is REVERSED and SET


Third: Students are required to take and pay for the subject even if
ASIDE. The decision of the Regional Trial Court of Manila, Branch 35,
the subject does not have an instructor - such greed for money on
in Civil Case No. 90-53595 is hereby REINSTATED. the part of AMEC’s administration. Take the subject Anatomy:
students would pay for the subject upon enrolment because it is offered
SO ORDERED. by the school. However there would be no instructor for such subject.
Students would be informed that course would be moved to a later date
G.R. No. 141994 January 17, 2005 because the school is still searching for the appropriate instructor.

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO xxx


MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO,
It is a public knowledge that the Ago Medical and Educational Center
respondents. has survived and has been surviving for the past few years since its
inception because of funds support from foreign foundations. If you will
DECISION take a look at the AMEC premises you’ll find out that the names of the
buildings there are foreign soundings. There is a McDonald Hall. Why
CARPIO, J.: not Jose Rizal or Bonifacio Hall? That is a very concrete and
undeniable evidence that the support of foreign foundations for AMEC
The Case is substantial, isn’t it? With the report which is the basis of the expose
in DZRC today, it would be very easy for detractors and enemies of the
Ago family to stop the flow of support of foreign foundations who assist
This petition for review1 assails the 4 January 1999 Decision2 and 26
the medical school on the basis of the latter’s purpose. But if the
January 2000 Resolution of the Court of Appeals in CA-G.R. CV No.
purpose of the institution (AMEC) is to deceive students at cross
40151. The Court of Appeals affirmed with modification the 14
purpose with its reason for being it is possible for these foreign
December 1992 Decision3 of the Regional Trial Court of Legazpi City,
foundations to lift or suspend their donations temporarily.8
Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre
and Carmelo Rima liable for libel and ordered them to solidarily pay xxx
Ago Medical and Educational Center-Bicol Christian College of
Medicine moral damages, attorney’s fees and costs of suit. On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass
The Antecedents Communication in their effort to minimize expenses in terms of
salary are absorbing or continues to accept "rejects". For example
how many teachers in AMEC are former teachers of Aquinas University
"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’
but were removed because of immorality? Does it mean that the
Rima ("Rima") and Hermogenes ‘Jun’ Alegre ("Alegre").5 Exposé is
present administration of AMEC have the total definite moral foundation
aired every morning over DZRC-AM which is owned by Filipinas
from catholic administrator of Aquinas University. I will prove to you my
Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi
friends, that AMEC is a dumping ground, garbage, not merely of
City, the Albay municipalities and other Bicol areas.6
moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the
In the morning of 14 and 15 December 1989, Rima and Alegre exposed family name implies. She is too old to work, being an old woman. Is the
various alleged complaints from students, teachers and parents against AMEC administration exploiting the very [e]nterprising or compromising
Ago Medical and Educational Center-Bicol Christian College of and undemanding Lola? Could it be that AMEC is just patiently making
Medicine ("AMEC") and its administrators. Claiming that the broadcasts use of Dean Justita Lola were if she is very old. As in atmospheric
were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMEC’s situation – zero visibility – the plane cannot land, meaning she is very
College of Medicine, filed a complaint for damages7 against FBNI, old, low pay follows. By the way, Dean Justita Lola is also the chairman
Rima and Alegre on 27 February 1990. Quoted are portions of the of the committee on scholarship in AMEC. She had retired from Bicol
allegedly libelous broadcasts: University a long time ago but AMEC has patiently made use of her.

JUN ALEGRE: xxx

Let us begin with the less burdensome: if you have children taking MEL RIMA:
medical course at AMEC-BCCM, advise them to pass all subjects
because if they fail in any subject they will repeat their year level,
xxx My friends based on the expose, AMEC is a dumping ground for In absolving Rima from the charge, the trial court ruled that Rima’s only
moral and physically misfit people. What does this mean? Immoral and participation was when he agreed with Alegre’s exposé. The trial court
physically misfits as teachers. found Rima’s statement within the "bounds of freedom of speech,
expression, and of the press." The dispositive portion of the decision
May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth reads:
is this, that your are no longer fit to teach. You are too old. As an
aviation, your case is zero visibility. Don’t insist. WHEREFORE, premises considered, this court finds for the plaintiff.
Considering the degree of damages caused by the controversial
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman utterances, which are not found by this court to be really very
of the scholarship committee at that. The reason is practical cost saving serious and damaging, and there being no showing that indeed
in salaries, because an old person is not fastidious, so long as she has the enrollment of plaintiff school dropped, defendants Hermogenes
money to buy the ingredient of beetle juice. The elderly can get by – "Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the
that’s why she (Lola) was taken in as Dean. radio station DZRC), are hereby jointly and severally ordered to pay
plaintiff Ago Medical and Educational Center-Bicol Christian College of
Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages,
xxx
plus P30,000.00 reimbursement of attorney’s fees, and to pay the costs
of suit.
xxx On our end our task is to attend to the interests of students. It is
likely that the students would be influenced by evil. When they
become members of society outside of campus will be liabilities SO ORDERED. 13 (Emphasis supplied)
rather than assets. What do you expect from a doctor who while
studying at AMEC is so much burdened with unreasonable imposition? Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC
What do you expect from a student who aside from peculiar problems – and Ago, on the other, appealed the decision to the Court of Appeals.
because not all students are rich – in their struggle to improve their The Court of Appeals affirmed the trial court’s judgment with
social status are even more burdened with false regulations. xxx9 modification. The appellate court made Rima solidarily liable with FBNI
(Emphasis supplied) and Alegre. The appellate court denied Ago’s claim for damages and
attorney’s fees because the broadcasts were directed against AMEC,
and not against her. The dispositive portion of the Court of Appeals’
The complaint further alleged that AMEC is a reputable learning
institution. With the supposed exposés, FBNI, Rima and Alegre decision reads:
"transmitted malicious imputations, and as such, destroyed plaintiffs’
(AMEC and Ago) reputation." AMEC and Ago included FBNI as WHEREFORE, the decision appealed from is hereby AFFIRMED,
defendant for allegedly failing to exercise due diligence in the selection subject to the modification that broadcaster Mel Rima is SOLIDARILY
and supervision of its employees, particularly Rima and Alegre. ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, SO ORDERED.14
filed an Answer10 alleging that the broadcasts against AMEC were fair
and true. FBNI, Rima and Alegre claimed that they were plainly FBNI, Rima and Alegre filed a motion for reconsideration which the
impelled by a sense of public duty to report the "goings-on in AMEC, Court of Appeals denied in its 26 January 2000 Resolution.
[which is] an institution imbued with public interest."
Hence, FBNI filed this petition.15
Thereafter, trial ensued. During the presentation of the evidence for the
defense, Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, The Ruling of the Court of Appeals
filed a Motion to Dismiss11 on FBNI’s behalf. The trial court denied the
motion to dismiss. Consequently, FBNI filed a separate Answer
The Court of Appeals upheld the trial court’s ruling that the questioned
claiming that it exercised due diligence in the selection and supervision
broadcasts are libelous per se and that FBNI, Rima and Alegre failed to
of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the
overcome the legal presumption of malice. The Court of Appeals found
broadcaster should (1) file an application; (2) be interviewed; and (3)
Rima and Alegre’s claim that they were actuated by their moral and
undergo an apprenticeship and training program after passing the
social duty to inform the public of the students’ gripes as insufficient to
interview. FBNI likewise claimed that it always reminds its broadcasters
justify the utterance of the defamatory remarks.
to "observe truth, fairness and objectivity in their broadcasts and to
refrain from using libelous and indecent language." Moreover, FBNI
requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Finding no factual basis for the imputations against AMEC’s
Pilipinas ("KBP") accreditation test and to secure a KBP permit. administrators, the Court of Appeals ruled that the broadcasts were
made "with reckless disregard as to whether they were true or false."
The appellate court pointed out that FBNI, Rima and Alegre failed to
On 14 December 1992, the trial court rendered a Decision12 finding
present in court any of the students who allegedly complained against
FBNI and Alegre liable for libel except Rima. The trial court held that
AMEC. Rima and Alegre merely gave a single name when asked to
the broadcasts are libelous per se. The trial court rejected the
identify the students. According to the Court of Appeals, these
broadcasters’ claim that their utterances were the result of straight
circumstances cast doubt on the veracity of the broadcasters’ claim that
reporting because it had no factual basis. The broadcasters did not
they were "impelled by their moral and social duty to inform the public
even verify their reports before airing them to show good faith. In
about the students’ gripes."
holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
The Court of Appeals found Rima also liable for libel since he remarked
that "(1) AMEC-BCCM is a dumping ground for morally and physically AMEC students who graduate "will be liabilities rather than assets" of
misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to the society are libelous per se. Taken as a whole, the broadcasts
minimize expenses on its employees’ salaries; and (3) AMEC burdened suggest that AMEC is a money-making institution where physically and
the students with unreasonable imposition and false regulations."16 morally unfit teachers abound.

The Court of Appeals held that FBNI failed to exercise due diligence in However, FBNI contends that the broadcasts are not malicious. FBNI
the selection and supervision of its employees for allowing Rima and claims that Rima and Alegre were plainly impelled by their civic duty to
Alegre to make the radio broadcasts without the proper KBP air the students’ gripes. FBNI alleges that there is no evidence that ill
accreditation. The Court of Appeals denied Ago’s claim for damages will or spite motivated Rima and Alegre in making the broadcasts. FBNI
and attorney’s fees because the libelous remarks were directed against further points out that Rima and Alegre exerted efforts to obtain
AMEC, and not against her. The Court of Appeals adjudged FBNI, AMEC’s side and gave Ago the opportunity to defend AMEC and its
Rima and Alegre solidarily liable to pay AMEC moral damages, administrators. FBNI concludes that since there is no malice, there is
attorney’s fees and costs of suit.1awphi1.nét no libel.

Issues FBNI’s contentions are untenable.

FBNI raises the following issues for resolution: Every defamatory imputation is presumed malicious.25 Rima and Alegre
failed to show adequately their good intention and justifiable motive in
I. WHETHER THE BROADCASTS ARE LIBELOUS; airing the supposed gripes of the students. As hosts of a documentary
or public affairs program, Rima and Alegre should have presented the
public issues "free from inaccurate and misleading information."26
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
Hearing the students’ alleged complaints a month before the exposé,27
they had sufficient time to verify their sources and information.
III. WHETHER THE AWARD OF ATTORNEY’S FEES IS PROPER; However, Rima and Alegre hardly made a thorough investigation of the
and students’ alleged gripes. Neither did they inquire about nor confirm the
purported irregularities in AMEC from the Department of Education,
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND Culture and Sports. Alegre testified that he merely went to AMEC to
ALEGRE FOR PAYMENT OF MORAL DAMAGES, ATTORNEY’S verify his report from an alleged AMEC official who refused to disclose
FEES AND COSTS OF SUIT. any information. Alegre simply relied on the words of the students
"because they were many and not because there is proof that what
The Court’s Ruling they are saying is true."28 This plainly shows Rima and Alegre’s
reckless disregard of whether their report was true or not.
We deny the petition.
Contrary to FBNI’s claim, the broadcasts were not "the result of straight
This is a civil action for damages as a result of the allegedly defamatory reporting." Significantly, some courts in the United States apply the
remarks of Rima and Alegre against AMEC.17 While AMEC did not privilege of "neutral reportage" in libel cases involving matters of public
point out clearly the legal basis for its complaint, a reading of the interest or public figures. Under this privilege, a republisher who
complaint reveals that AMEC’s cause of action is based on Articles 30 accurately and disinterestedly reports certain defamatory statements
and 33 of the Civil Code. Article 3018 authorizes a separate civil action made against public figures is shielded from liability, regardless of the
to recover civil liability arising from a criminal offense. On the other republisher’s subjective awareness of the truth or falsity of the
hand, Article 3319 particularly provides that the injured party may bring accusation.29 Rima and Alegre cannot invoke the privilege of neutral
a separate civil action for damages in cases of defamation, fraud, and reportage because unfounded comments abound in the broadcasts.
physical injuries. AMEC also invokes Article 1920 of the Civil Code to Moreover, there is no existing controversy involving AMEC when the
justify its claim for damages. AMEC cites Articles 217621 and 218022 of broadcasts were made. The privilege of neutral reportage applies
the Civil Code to hold FBNI solidarily liable with Rima and Alegre. where the defamed person is a public figure who is involved in an
existing controversy, and a party to that controversy makes the
defamatory statement.30
I.
However, FBNI argues vigorously that malice in law does not apply to
Whether the broadcasts are libelous this case. Citing Borjal v. Court of Appeals,31 FBNI contends that the
broadcasts "fall within the coverage of qualifiedly privileged
A libel23 is a public and malicious imputation of a crime, or of a vice or communications" for being commentaries on matters of public interest.
defect, real or imaginary, or any act or omission, condition, status, or Such being the case, AMEC should prove malice in fact or actual
circumstance tending to cause the dishonor, discredit, or contempt of a malice. Since AMEC allegedly failed to prove actual malice, there is no
natural or juridical person, or to blacken the memory of one who is libel.
dead.24
FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated
There is no question that the broadcasts were made public and on the "doctrine of fair comment," thus:
imputed to AMEC defects or circumstances tending to cause it
dishonor, discredit and contempt. Rima and Alegre’s remarks such as
[F]air commentaries on matters of public interest are privileged and
"greed for money on the part of AMEC’s administrators"; "AMEC is a
constitute a valid defense in an action for libel or slander. The doctrine
dumping ground, garbage of xxx moral and physical misfits"; and
of fair comment means that while in general every discreditable
imputation publicly made is deemed false, because every man is passed, nor their claim that the school charges laboratory fees even if
presumed innocent until his guilt is judicially proved, and every false there are no laboratories in the school. No evidence was presented to
imputation is deemed malicious, nevertheless, when the discreditable prove the bases for these claims, at least in order to give semblance of
imputation is directed against a public person in his public capacity, it is good faith.
not necessarily actionable. In order that such discreditable
imputation to a public official may be actionable, it must either be As for the allegation that plaintiff is the dumping ground for misfits, and
a false allegation of fact or a comment based on a false immoral teachers, defendant[s] singled out Dean Justita Lola who is
supposition. If the comment is an expression of opinion, based on said to be so old, with zero visibility already. Dean Lola testified in court
established facts, then it is immaterial that the opinion happens to be last Jan. 21, 1991, and was found to be 75 years old. xxx Even older
mistaken, as long as it might reasonably be inferred from the facts.32 people prove to be effective teachers like Supreme Court Justices who
(Emphasis supplied) are still very much in demand as law professors in their late years.
Counsel for defendants is past 75 but is found by this court to be still
True, AMEC is a private learning institution whose business of very sharp and effective.l^vvphi1.net So is plaintiffs’ counsel.
educating students is "genuinely imbued with public interest." The
welfare of the youth in general and AMEC’s students in particular is a Dr. Lola was observed by this court not to be physically decrepit yet,
matter which the public has the right to know. Thus, similar to the nor mentally infirmed, but is still alert and docile.
newspaper articles in Borjal, the subject broadcasts dealt with matters
of public interest. However, unlike in Borjal, the questioned broadcasts
The contention that plaintiffs’ graduates become liabilities rather than
are not based on established facts. The record supports the following
assets of our society is a mere conclusion. Being from the place
findings of the trial court: himself, this court is aware that majority of the medical graduates of
plaintiffs pass the board examination easily and become prosperous
xxx Although defendants claim that they were motivated by consistent and responsible professionals.33
reports of students and parents against plaintiff, yet, defendants have
not presented in court, nor even gave name of a single student who
Had the comments been an expression of opinion based on
made the complaint to them, much less present written complaint or
established facts, it is immaterial that the opinion happens to be
petition to that effect. To accept this defense of defendants is too
mistaken, as long as it might reasonably be inferred from the facts.34
dangerous because it could easily give license to the media to malign
However, the comments of Rima and Alegre were not backed up by
people and establishments based on flimsy excuses that there were
facts. Therefore, the broadcasts are not privileged and remain libelous
reports to them although they could not satisfactorily establish it. Such
per se.
laxity would encourage careless and irresponsible broadcasting which
is inimical to public interests.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga
Brodkaster sa Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio
Secondly, there is reason to believe that defendant radio broadcasters,
Code provides:
contrary to the mandates of their duties, did not verify and analyze the
truth of the reports before they aired it, in order to prove that they are in
good faith. B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

Alegre contended that plaintiff school had no permit and is not 1. x x x


accredited to offer Physical Therapy courses. Yet, plaintiff produced a
certificate coming from DECS that as of Sept. 22, 1987 or more than 2 4. Public affairs program shall present public issues free from
years before the controversial broadcast, accreditation to offer Physical personal bias, prejudice and inaccurate and misleading information.
Therapy course had already been given the plaintiff, which certificate is x x x Furthermore, the station shall strive to present balanced
signed by no less than the Secretary of Education and Culture herself, discussion of issues. x x x.
Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have
easily known this were they careful enough to verify. And yet, xxx
defendants were very categorical and sounded too positive when they
made the erroneous report that plaintiff had no permit to offer Physical 7. The station shall be responsible at all times in the supervision of
Therapy courses which they were offering. public affairs, public issues and commentary programs so that they
conform to the provisions and standards of this code.
The allegation that plaintiff was getting tremendous aids from foreign
foundations like Mcdonald Foundation prove not to be true also. The 8. It shall be the responsibility of the newscaster, commentator, host
truth is there is no Mcdonald Foundation existing. Although a big and announcer to protect public interest, general welfare and good
building of plaintiff school was given the name Mcdonald building, that order in the presentation of public affairs and public issues.36
was only in order to honor the first missionary in Bicol of plaintiffs’ (Emphasis supplied)
religion, as explained by Dr. Lita Ago. Contrary to the claim of
defendants over the air, not a single centavo appears to be received by
The broadcasts fail to meet the standards prescribed in the Radio
plaintiff school from the aforementioned McDonald Foundation which
Code, which lays down the code of ethical conduct governing
does not exist.
practitioners in the radio broadcast industry. The Radio Code is a
voluntary code of conduct imposed by the radio broadcast industry on
Defendants did not even also bother to prove their claim, though denied its own members. The Radio Code is a public warranty by the radio
by Dra. Ago, that when medical students fail in one subject, they are broadcast industry that radio broadcast practitioners are subject to a
made to repeat all the other subject[s], even those they have already code by which their conduct are measured for lapses, liability and
sanctions. justify satisfactorily its claim for attorney’s fees. AMEC did not adduce
evidence to warrant the award of attorney’s fees. Moreover, both the
The public has a right to expect and demand that radio broadcast trial and appellate courts failed to explicitly state in their respective
practitioners live up to the code of conduct of their profession, just like decisions the rationale for the award of attorney’s fees.49 In Inter-Asia
other professionals. A professional code of conduct provides the Investment Industries, Inc. v. Court of Appeals ,50 we held that:
standards for determining whether a person has acted justly, honestly
and with good faith in the exercise of his rights and performance of his [I]t is an accepted doctrine that the award thereof as an item of
duties as required by Article 1937 of the Civil Code. A professional code damages is the exception rather than the rule, and counsel’s fees are
of conduct also provides the standards for determining whether a not to be awarded every time a party wins a suit. The power of the
person who willfully causes loss or injury to another has acted in a court to award attorney’s fees under Article 2208 of the Civil Code
manner contrary to morals or good customs under Article 2138 of the demands factual, legal and equitable justification, without which
Civil Code. the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the
II. court must explicitly state in the text of the decision, and not only in the
decretal portion thereof, the legal reason for the award of attorney’s
fees.51 (Emphasis supplied)
Whether AMEC is entitled to moral damages

While it mentioned about the award of attorney’s fees by stating that it


FBNI contends that AMEC is not entitled to moral damages because it
"lies within the discretion of the court and depends upon the
is a corporation.39
circumstances of each case," the Court of Appeals failed to point out
any circumstance to justify the award.
A juridical person is generally not entitled to moral damages because,
unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or IV.
moral shock.40 The Court of Appeals cites Mambulao Lumber Co. v.
PNB, et al.41 to justify the award of moral damages. However, the Whether FBNI is solidarily liable with Rima and Alegre for moral
Court’s statement in Mambulao that "a corporation may have a good damages, attorney’s fees and costs of suit
reputation which, if besmirched, may also be a ground for the award of
moral damages" is an obiter dictum.42 FBNI contends that it is not solidarily liable with Rima and Alegre for the
payment of damages and attorney’s fees because it exercised due
Nevertheless, AMEC’s claim for moral damages falls under item 7 of diligence in the selection and supervision of its employees, particularly
Article 221943 of the Civil Code. This provision expressly authorizes the Rima and Alegre. FBNI maintains that its broadcasters, including Rima
recovery of moral damages in cases of libel, slander or any other form and Alegre, undergo a "very regimented process" before they are
of defamation. Article 2219(7) does not qualify whether the plaintiff is a allowed to go on air. "Those who apply for broadcaster are subjected to
natural or juridical person. Therefore, a juridical person such as a interviews, examinations and an apprenticeship program."
corporation can validly complain for libel or any other form of
defamation and claim for moral damages.44 FBNI further argues that Alegre’s age and lack of training are irrelevant
to his competence as a broadcaster. FBNI points out that the "minor
Moreover, where the broadcast is libelous per se, the law implies deficiencies in the KBP accreditation of Rima and Alegre do not in any
damages.45 In such a case, evidence of an honest mistake or the want way prove that FBNI did not exercise the diligence of a good father of a
of character or reputation of the party libeled goes only in mitigation of family in selecting and supervising them." Rima’s accreditation lapsed
damages.46 Neither in such a case is the plaintiff required to introduce due to his non-payment of the KBP annual fees while Alegre’s
evidence of actual damages as a condition precedent to the recovery of accreditation card was delayed allegedly for reasons attributable to the
some damages.47 In this case, the broadcasts are libelous per se. KBP Manila Office. FBNI claims that membership in the KBP is merely
Thus, AMEC is entitled to moral damages. voluntary and not required by any law or government regulation.

However, we find the award of P300,000 moral damages FBNI’s arguments do not persuade us.
unreasonable. The record shows that even though the broadcasts were
libelous per se, AMEC has not suffered any substantial or material The basis of the present action is a tort. Joint tort feasors are jointly and
damage to its reputation. Therefore, we reduce the award of moral severally liable for the tort which they commit.52 Joint tort feasors are all
damages from P300,000 to P150,000. the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who
III. approve of it after it is done, if done for their benefit.53 Thus, AMEC
correctly anchored its cause of action against FBNI on Articles 2176
and 2180 of the Civil Code.1a\^/phi1.net
Whether the award of attorney’s fees is proper

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is


FBNI contends that since AMEC is not entitled to moral damages, there
solidarily liable to pay for damages arising from the libelous broadcasts.
is no basis for the award of attorney’s fees. FBNI adds that the instant
As stated by the Court of Appeals, "recovery for defamatory statements
case does not fall under the enumeration in Article 220848 of the Civil
published by radio or television may be had from the owner of the
Code.
station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory
The award of attorney’s fees is not proper because AMEC failed to statements."54 An employer and employee are solidarily liable for a
defamatory statement by the employee within the course and scope of PANGANIBAN, C.J.:
his or her employment, at least when the employer authorizes or ratifies
the defamation.55 In this case, Rima and Alegre were clearly performing Directors owe loyalty and fidelity to the corporation they serve and to its
their official duties as hosts of FBNI’s radio program Exposé when they creditors. When these directors sit on the board as representatives of
aired the broadcasts. FBNI neither alleged nor proved that Rima and shareholders who are also major creditors, they cannot be allowed to
Alegre went beyond the scope of their work at that time. There was use their offices to secure undue advantage for those shareholders, in
likewise no showing that FBNI did not authorize and ratify the fraud of other creditors who do not have a similar representation in the
defamatory broadcasts. board of directors.

Moreover, there is insufficient evidence on record that FBNI exercised The Case
due diligence in the selection and supervision of its employees,
particularly Rima and Alegre. FBNI merely showed that it exercised
Before us is a Petition for Review3 under Rule 45 of the Rules of Court,
diligence in the selection of its broadcasters without introducing any
assailing the September 27, 1994 Decision4 and the January 5, 1995
evidence to prove that it observed the same diligence in the
Resolution5 of the Court of Appeals (CA) in CA-GR CV No. 39385. The
supervision of Rima and Alegre. FBNI did not show how it exercised
challenged Decision disposed as follows:
diligence in supervising its broadcasters. FBNI’s alleged constant
reminder to its broadcasters to "observe truth, fairness and objectivity
and to refrain from using libelous and indecent language" is not enough "WHEREFORE, the decision of the Regional Trial Court is hereby
to prove due diligence in the supervision of its broadcasters. Adequate AFFIRMED in toto."6
training of the broadcasters on the industry’s code of conduct, sufficient
information on libel laws, and continuous evaluation of the The challenged Resolution denied reconsideration.
broadcasters’ performance are but a few of the many ways of showing
diligence in the supervision of broadcasters. The Facts

FBNI claims that it "has taken all the precaution in the selection of Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for
Rima and Alegre as broadcasters, bearing in mind their qualifications." the purpose of engaging in a steel processing business. It was later
However, no clear and convincing evidence shows that Rima and renamed Visayan Integrated Steel Corporation (VISCO).7
Alegre underwent FBNI’s "regimented process" of application.
Furthermore, FBNI admits that Rima and Alegre had deficiencies in On December 11, 1961, VISCO obtained a loan from the Development
their KBP accreditation,56 which is one of FBNI’s requirements before it Bank of the Philippines (DBP) in the amount of P836,000. This loan
hires a broadcaster. Significantly, membership in the KBP, while was secured by a duly recorded Real Estate Mortgage over VISCO's
voluntary, indicates the broadcaster’s strong commitment to observe three (3) parcels of land, including all the machineries and equipment
the broadcast industry’s rules and regulations. Clearly, these found there.8
circumstances show FBNI’s lack of diligence in selecting and
supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay
On August 15, 1963, VISCO entered into a Loan Agreement9 with
damages together with Rima and Alegre.
respondent banks (later referred to as "Consortium"10) for the amount
of US$5,776,186.71 or P21,745,707.36 (at the then prevailing
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision exchange rate) to finance its importation of various raw materials. To
of 4 January 1999 and Resolution of 26 January 2000 of the Court of secure the full and faithful performance of its obligation, VISCO
Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the executed on August 3, 1965, a second mortgage11 over the same land,
award of moral damages is reduced from P300,000 to P150,000 and machineries and equipment in favor of respondent banks. This second
the award of attorney’s fees is deleted. Costs against petitioner. mortgage remained unrecorded.12

SO ORDERED. VISCO eventually defaulted in the performance of its obligation to


respondent banks. This prompted the Consortium to file on January 26,
G.R. No. 118692 July 28, 2006 1966, Civil Case No. 1841, which was a Petition for Foreclosure of
Mortgage with Petition for Receivership.13 This case was eventually
COASTAL PACIFIC TRADING, INC., petitioner, vs. SOUTHERN dismissed for failure to prosecute.14
ROLLING MILLS, CO., INC. (now known as Visayan Integrated
Steel Corporation), FAR EAST BANK & TRUST COMPANY, Afterwards, negotiations were conducted between VISCO and
PHILIPPINE COMMERCIAL INDUSTRIAL1 BANK, EQUITABLE respondent banks for the conversion of the unpaid loan into equity in
BANKING CORPORATION, PRUDENTIAL BANK, BOARD OF the corporation.15 Vicente Garcia, vice-president of VISCO and of Far
TRUSTEES-CONSORTIUM OF BANKS-VISCO, UNITED COCONUT East Bank and Trust Company (FEBTC),16 testified that sometime in
PLANTERS BANK, CITYTRUST BANKING CORPORATION, 1966, the creditor banks were given management of and control over
ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA, VISCO.17 In time,18 in order to reorganize it, its principal creditors
INTERNATIONAL CORPORATE BANK, COMMER-CIAL BANK OF agreed to group themselves into a creditors' consortium.19 As a result
MANILA, BANK OF THE PHILIPPINE ISLANDS, NATIONAL STEEL of the reorganized corporate structure of VISCO, respondent banks
CORPORA-TION, THE PROVINCIAL SHERIFF OF BOHOL, and acquired more than 90 percent of its equity. Notwithstanding this
DEPUTY SHERIFF JOVITO DIGAL,2 respondents. conversion, it remained indebted to the Consortium in the amount of
P16,123,918.02.20
DECISION
Meanwhile from 1964 to 1965, VISCO also entered into a processing
agreement with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). "RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters
Pursuant to that agreement, petitioner delivered 3,000 metric tons of of December 14, 1973 and March 19, 1974 to purchase two (2) units of
hot rolled steel coils to VISCO for processing into block iron sheets. generator sets, including standard accessories, of VISCO is hereby
Contrary to their agreement, the latter was able to process and deliver accepted under the following terms and conditions:
to petitioner only 1,600 metric tons of those sheets. Hence, a total of
1,400 metric tons of hot rolled steel coils remained unaccounted for.21 xxx xxx xxx
The fact that petitioner was among the major creditors of VISCO was
recognized by the latter's vice-president, Vicente Garcia.22 Indeed, on
"2. The price for the two (2) generator sets is PESOS: ONE MILLION
October 9, 1970, it forwarded to petitioner a proposal for a Compromise
FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY
Agreement.23 Subsequent developments indicate, however, that the
TWO ONLY (P1,550,572) x x x and shall be payable upon signing of a
parties did not arrive at a compromise. letter-agreement and which shall be later formalized into a Deed of
Sale. The amount, however, shall be held by the depositary bank of
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, VISCO, Far East Bank and Trust Company, in escrow and shall be at
representative of FEBTC24 and director of VISCO,25 a letter that reads VISCO's disposal upon the signing of Filmag of the receipt/s of delivery
as follows: of the said two (2) generator sets.

"In the light of recent development on IISMI and Elirol which were taken xxx xxx xxx
over by the government, I suggest that we take certain precautionary
measures to protect the interests of the Consortium of Banks. One
"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE
such step may be to insure the safety of the unexpended funds of
MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED
VISCO from any contingencies in the future. As of now VISCO's
SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay the liability
account with the Far East Bank is in the name of BOARD OF
of VISCO with the Development Bank of the Philippines."37
TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to
eliminate the term VISCO and just call the account BOARD OF
TRUSTEES CONSORTIUM OF BANKS."26 The sale of the generator sets to Filmag took place and, according to
the testimony of Garcia, the proceeds were deposited with FEBTC in a
special account held in trust for the Consortium.38
According to a notation on this letter, an FEBTC assistant cashier
named Silverio duly complied with the above request.27 Indeed, events
would later reveal that the bank held a deposit account in the name of A year after, on May 22, 1975, petitioner filed with the Pasig Regional
the "Board of Trustees-Consortium of Banks."28 Trial Court (RTC) a Complaint39 for Recovery of Property and Damages
with Preliminary Injunction and Attachment.40 Petitioner's allegation
was that VISCO had fraudulently misapplied or converted the finished
On September 20, 1974, respondent banks held a luncheon meeting29
steel sheets entrusted to it.41 On June 3, 1975, Judge Pedro A. Revilla
in the FEBTC Boardroom to discuss how they would address the
issued a Writ of Preliminary Attachment over its properties that were
insistent demands of the DBP for VISCO to settle its obligations. Jose
not exempt from execution.42
B. Fernandez, Jr., VISCO's then chairman and concurrent FEBTC
President,30 expressed his apprehension that either the DBP or the
government would soon pursue extra-judicial foreclosure against In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to
VISCO. garnish the account of VISCO in FEBTC,43 which denied holding that
account. Instead, the bank admitted that what it had was a deposit
account in the name of the Board of Trustees-Consortium of Banks,
In this regard, Fernandez informed the members of the Consortium that
particularly Account No. 2479-1.44 FEBTC reported to Sheriff Bonifacio
he had received letter-offers from two corporations that were interested
that it had instructed its accounting department to hold the account,
in purchasing VISCO's generator sets.31 After deliberating on the
"subject to the prior liens or rights in favor of [FEBTC] and other
matter, the members decided to approve the sale of these two
entities."45
generator sets to Filmag (Phil.), Inc. It was also agreed that the
proceeds of the sale would be used to pay VISCO's indebtedness to
DBP and to secure the release of the first mortgage.32 The Consortium While petitioner's case was pending, VISCO's vice-president (Garcia)
agreed with Filmag on the following payment procedure: and director (Arturo Samonte) requested from FEBTC a cash advance
of P1,342,656.88 for the full settlement of VISCO's account with DBP.46
On June 29, 1976, FEBTC complied by issuing Check No. FE239249
"The payment procedure will be as follows: Filmag pays to VISCO;
for P1,342,656.88, payable to "[DBP] for [the] account of VISCO."47 On
VISCO pays the Consortium; and then the Consortium pays the DBP
even date, DBP executed a Deed of Assignment of Mortgage Rights
with the arrangement that the Consortium subrogates to the rights of
Interest and Participation48 in favor of Respondent Consortium of
the DBP as first mortgagee to the VISCO plant. The Consortium further
Banks. The deed stated that, in consideration of the payment made, all
agreed to call a meeting of the VISCO board of directors for the
of DBP's rights under the mortgage agreement with VISCO were being
purpose of considering and formally approving the proposed sale of the
transferred and conveyed to the Consortium.49 Thus did the latter
2 generators to Filmag."33 obtain DBP's recorded primary lien over the real and chattel properties
of VISCO.
Accordingly, on October 4, 1974, the VISCO board of directors had a
meeting in the FEBTC Boardroom.34 The board was asked to decide
On September 23, 1980, the Consortium filed a Petition for Extra-
how VISCO would settle its debt to DBP: whether by asking the
Judicial Foreclosure with the Office of the Provincial Sheriff of Bohol.50
Consortium to put up the necessary amount or by accepting Filmag's
The Notice of Extrajudicial Foreclosure of Mortgage, published in the
offer to purchase VISCO's generator sets.35 The latter option was
Bohol Newsweek on October 10, 1980, announced that the auction
unanimously chosen36 in a Resolution worded as follows:
sale was scheduled for November 11, 1980.51
On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which issued an Order requiring the Consortium to post a bond of P25 million
was a judgment creditor52 of VISCO, filed Civil Case No. 3383. It was a in favor of Coastal for damages that petitioner may suffer from the
Complaint53 for Declaration of Nullity of the Mortgage and Injunction to lifting of the TRO. The bond filed was then approved by the RTC in its
Restrain the Consortium from Proceeding with the Auction Sale. SIP Order of September 13, 1985.72
argued that DBP had actually been paid by VISCO with the proceeds
from the sale of the generator sets. Hence, the mortgage in favor of On December 15, 1986, Civil Case No. 21272 was finally decided by
that bank had been extinguished by the payment and could not have Judge Nicolas P. Lapena, Jr., in favor of Coastal.73 VISCO was ordered
been assigned to the Consortium.54 A temporary restraining order to pay petitioner the sum of P851,316.19 with interest at the legal rate,
against the latter was thus successfully obtained; the provincial sheriff plus attorney's fees of P50,000.00 and costs.74 Coastal filed a Motion
could not proceed with the auction sale of the mortgaged assets.55 But for Execution,75 but the judgment has remained unsatisfied to date.
SIP's victory was short-lived. On March 2, 1984, Civil Case No. 3383
was decided in favor of the Consortium.56 Judge Andrew S.
On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered
Namocatcat ruled thus:
as follows:

"The evidence of the plaintiff is only anchored on the fact that the deed
"WHEREFORE, this Court hereby renders judgment in favor of the
of assignment executed by the DBP in favor of the defendant banks is
defendants and against the plaintiff Coastal Pacific Trading, Inc. BY
an act which would defraud creditors. It is the thinking of the court that
WAY OF THE MAIN COMPLAINT, to wit:
the payment of defendant banks to DBP of VISCO's loan and the
execution of the DBP of the deed of assignment of credit and rights to
the defendant banks is in accordance with Article 1302 and 1303 of the "1. Declaring the extrajudicial foreclosure sale conducted by the sheriff
New Civil Code, and said transaction is not to defraud creditors and the corresponding certificate of sale executed by the defendant
because the defendant banks are also creditors of VISCO."57 sheriffs on March 15, 1985 relative to the real properties of the
defendant SRM/VISCO of Cortes, Bohol, Philippines, which were
registered in the Register of Deeds of Bohol, on May 22, 1985 and the
On June 14, 1985, this Decision was affirmed by the Intermediate
Transfer of Assignment to the defendant National Steel Corporation of
Appellate Court in CA-GR No. 03719. 58 any or part of the foreclosed properties arising from the extrajudicial
foreclosure sale as valid and legal;
The auction sale of VISCO's mortgaged properties took place on March
19, 1985 and the Consortium emerged as the highest bidder.59 The
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the
Certificate of Sale60 in its favor was registered on May 22, 1985.61 defendant Consortium of Banks[,] Southern Rolling Mills, Co., Inc., Far
East Bank & Trust Company, Philippine Commercial Industrial Bank,
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Equitable Banking Corporation, Prudential Bank, Board of Trustees-
Assignment of Right of Redemption62 in favor of the National Steel Consortium of Banks- [VISCO], United Coconut Planters Bank, City
Corporation (NSC), in consideration of P100,000. 63 On the same day, Trust Banking Corporation, Associated Bank, Insular Bank of Asia and
the Consortium sold the foreclosed real and personal properties of America, International Corporate Bank, Commercial Bank of Manila,
VISCO to the NSC.64 Bank of the Philippine Islands and the National Steel Corporation in the
instant case the amount of FIVE HUNDRED THOUSAND PESOS
On August 16, 1985, petitioner filed against respondents Civil Case No. (P500,000.00) representing damages;
3929, which was a Complaint for Annulment or Rescission of Sale,
Damages with Preliminary Injunction.65 Coastal alleged that, despite "3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay
the Writ of Attachment issued in its favor in the still pending Civil Case the defendants the amount of FIFTEEN THOUSAND PESOS
No. 21272, the Consortium had sold the properties to NSC. Further, (P15,000.00) representing attorney's fees;
despite the attachment of the properties, the Consortium was allegedly
able to sell and place them beyond the reach of VISCO's other
"4. Dismissing the Amended Complaint of the plaintiff;
creditors.66 Thus imputing bad faith to respondent banks' actions,
petitioner said that the sale was intended to defraud VISCO's other
creditors. "5. Ordering the plaintiff to pay the cost; AND

Petitioner further contended that the assignment in favor of the "BY WAY OF CROSS CLAIM INTERPOSED
Consortium was fraudulent, because DBP had been paid with the
proceeds from the sale of the generator sets owned by VISCO, and not "BY THE DEFENDANT National Steel Corporation against the
with the Consortium's own funds.67 Petitioner offered as proof the Consortium of Banks and SRM/VISCO, the same is dismissed for lack
minutes of the meeting68 in which the transaction was decided. of merit, without pronouncement as to cost."77
Respondent Consortium countered that the minutes would in fact
readily disclose that the intention of its members was to apply the Insisting that the trial court erred in holding that it had failed to prove its
proceeds to a partial payment to DBP.69 Respondent insisted that it case by preponderance of evidence, Coastal filed an appeal with the
used its own funds to pay the bank.70 CA. Allegedly, the purported insufficiency of proof was based on the
sole ground that petitioner did not file an objection when the properties
On August 20, 1985, a temporary restraining order (TRO)71 was issued were sold on execution. It contended that the court a quo had arrived at
by Judge Mercedes Gozo-Dadole against VISCO, enjoining it from this erroneous conclusion by relying on inapplicable jurisprudence.78
proceeding with the removal or disposal of its properties; the execution
and/or consummation of the foreclosure sale; and the sale of the Additionally, Coastal argued that the trial court had erred in not
foreclosed properties to NSC. On September 6, 1985, the trial court annulling the foreclosure proceedings and sale for being fictitious and
done to defraud petitioner as VISCO's creditor. Supposedly, the DBP right as junior encumbrancer. On the other hand, the Consortium filed a
mortgage had already been extinguished by payment; thus, the bank Petition for Extrajudicial Foreclosure as a first encumbrancer by virtue
could not have assigned the contract to the Consortium.79 of DBP's assignment in its favor.86

Petitioner also prayed for the annulment of the sale in favor of NSC on The CA also rejected petitioner's theory of extinguishment of obligation
the ground that the latter was a party to the fraudulent foreclosure and, by merger. It observed that the merger could not have possibly taken
hence, not a buyer in good faith.80 place, because respondent banks and VISCO were not creditors and
debtors in their own right.87
Ruling of the Court of Appeals
Petitioner's Motion for Reconsideration,88 which was received by the
At the outset, the CA stressed that the validity of the Consortium's CA on November 15, 1994,89 was denied for lack of merit.
mortgage, foreclosure, and assignments had already been upheld in
CA-GR CV No. 03719, entitled Southern Industrial Projects v. United Hence, this Petition.90
Coconut Planters Bank81 Citing Valencia v. RTC of Quezon City, Br.
9082 and Vda. de Cruzo v. Carriaga,83 the CA explained that the Issues
absolute identity of parties was not necessary for the application of res
judicata. All that was required was a shared identity of interests, as
Petitioner raises the following issues for our consideration:
shown by the identity of reliefs sought by one person in a prior case
and by another in a subsequent case.
"I
While Coastal was not a party to Southern Industrial Projects, it should
nevertheless be bound by that Decision, because it had raised "Respondent Court of Appeals, seemingly to avoid the irrefutable
substantially the same claim and cause of action as SIP, according to evidence of fraud and collusion practised by [respondents] against
the appellate court. The CA held that the basic reliefs sought by [Petitioner] Coastal, erroneously sustained the trial court's holding that
Coastal and SIP were substantially the same: the nullification of the the present case is barred by res judicata because of the previous
Deed of Assignment in favor of the Consortium, the foreclosure sale, decision in the case of Southern Industrial Projects, Inc., vs. United
and the subsequent sale to NSC. Because this identity of reliefs sought Coconut Planters Bank, CA-G.R. No. 03719, considering that the
showed an identity of interests, the CA concluded that it need not rule elements that call for the application of this rule are not present in the
on those issues.84 case at bar, and the exceptions allowed by this Honorable Supreme
Court are not applicable here for variance or distinction in facts and
issues, x x x:"91
As to the issue that the DBP mortgage had been extinguished by
payment, the CA quoted its earlier Decision in Southern Industrial
Projects: "II

"The evidence shows that the proceeds of the sale of the two "Respondent Court of Appeals further erred in not annulling the Deed
generating sets were applied by defendants-appellees in the payment of Assignment of the DBP mortgage x x x, the extrajudicial foreclosure
of the outstanding obligation of VISCO. It appears that said proceeds proceedings of the two mortgages x x x, and the separate sale of the
were deposited in the bank account of the consortium of creditors to land and machineries as real and personal properties by the foreclosing
avoid it being garnished by the creditors notwithstanding the set-off, banks to NSC, as well as the assignment or waiver of SRM/Visco's
VISCO was still indebted to the defendants-appellees. legal right of redemption over the foreclosed properties, for being
fraudulently executed through collusion among the [respondents] and in
fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x x;"92
"The evidence x x x shows that upon VISCO's request for [cash]
advance, the Far East Banks (sic) and Trust Co., the manager of the
consortium of creditors, issued FEBTC check No. 239249 on June 29, Stripped of nonessentials, the two issues may be restated as follows:
1976 in the amount of P1,342,656.68 payable to the DBP to pay off its
loan to the latter. 1. Whether the present action is barred by res judicata

xxx xxx xxx 2. Whether respondents disposed of VISCO's assets in fraud of the
creditors
"x x x. A public document celebrated with all the legal formalities under
the safeguard of notarial certificate is evidence against a party, and a The Court's Ruling
high degree [of] proof is necessary to overcome the legal presumption
that the recital is true. The biased and interested testimony of one of The Petition is meritorious.
the parties to such instrument who attempts to vary or repudiate what it
purports to be, cannot overcome the evidentiary force of what is recited First Issue: Res judicata
in the document."85
The CA cited Valencia v. RTC of Quezon City93 to support the finding
The appellate court also rejected petitioner's contention that the that SIP and Coastal were substantially the same parties. We
Consortium's Petition for Extrajudicial Foreclosure was already barred distinguish.
by the earlier resort to a judicial foreclosure. The CA clarified that in
filing a Petition for Judicial Foreclosure, the Consortium had pursued its
In Valencia, the plaintiff-intervenor in the first case, Cariño, claimed Lot
4 based on an alleged purchase of Valencia's "squatter's rights" over was based on the merits; and, d) between the first and the second
the property. The trial court dismissed the claim and held that no such actions, there is an identity of parties, subject matters, and causes of
purchase ever took place.94 It also held that, on the assumption that a action.101
sale had taken place, the sale was null and void for being contrary to
the pertinent housing law. It also found that all current occupants of Lot It is axiomatic that res judicata does not require an absolute, but only a
4 were illegal squatters; thus, it ordered their ejectment. substantial, identity of parties. There is a substantial identity when there
is privity between the two parties or they are successors-in-interest by
When this first case attained finality, Carino's daughter, Catbagan, filed title subsequent to the commencement of the action, litigating for the
another suit against Valencia. Catbagan challenged the applicability of same thing, under the same title, and in the same capacity.102
the ejectment Order issued to her; as an occupant of the lot, she was Petitioner was not acting in the same capacity as SIP when it filed Civil
allegedly not a party to the first case. Her Petition was denied for lack Case No. 3383, which eventually became AC-GR CV No. 03719. It
of merit.95 brought this latter action as a creditor under a processing agreement
with VISCO; on the other hand, the latter was sued by SIP, based on
The execution of the Decision in the first case was again forestalled an alleged breach of their management contract. Very clearly, their
when Llanes, Cariño's sister-in-law who was another occupant of Lot 4, rights were entirely distinct and separate from each other. In no manner
filed another suit against the same respondent. Like Cariño, Llanes were these two creditors privies of each other.
insisted on having purchased the subject lot from Valencia.96 This Court
ruled that the suit was barred by res judicata. There was a substantial The causes of action in the two Complaints were also different. Causes
identity of parties, because the right claimed by both Cariño and Llanes of action arise from violations of rights. A single right may be violated
were based on each one's alleged purchase of Valencia's "squatter's by several acts or omissions, in which case the plaintiff has only one
rights."97 cause of action. Likewise, a single act or omission may violate several
rights at the same time, as when the act constitutes a violation of
In the first case, sales of "squatter's rights" were already categorically separate and distinct legal obligations.103 The violation of each of these
declared null and void for being contrary to law. Thus, Llanes' separate rights is a separate cause of action in itself.104 Hence,
admission that she had purchased Valencia's "squatter's rights" placed although these causes of action arise from the same state of facts, they
her in the same category as Cariño. The purchase could not be treated are distinct and independent and may be litigated separately; recovery
differently, because the final and executory Decision held that all on one is not a bar to subsequent actions on the others.105
purchases of "squatter's rights" (regardless of who the purchasers
were) were null and void.98 In the present case, the right of SIP (arising from its management
contract with VISCO) is totally distinct and separate from the right of
Further, the earlier ruling held that "the present occupants are illegal Coastal (arising from its processing contract with VISCO). SIP and
squatters." That ruling included Llanes, who was admittedly one of the Coastal are asserting distinct rights arising from different legal
occupants.99 Simply put, she and Valencia were considered identical obligations of the debtor corporation. Thus, VISCO's violation of those
parties for purposes of res judicata, because they were obviously separate rights has given rise to separate causes of action.
litigating under the same void title and capacity as vendees of
"squatter's rights" and as occupants of Lot 4. The confusion in the resolution of the issue of identity of parties
occurred, because the two creditors were assailing the same
Moreover, we held in Valencia that Llanes' suit was merely a clear transactions of VISCO on the same grounds. Since the two cases they
attempt to prevent or delay the execution of the judgment in the first filed presented similar legal issues, the appellate court held that its
case, which had become final by reason of the three affirmances by ruling in AC-GR CV No. 03719 was also applicable to the instant case.
this Court. The pattern to obstruct the execution of the first judgment
was obvious: after Cariño lost the first case, her daughter filed a Common but palpable is this misconception of the doctrine of res
second one. When the daughter lost the second, the daughter-in-law judicata. Persons do not become privies by the mere fact that they are
filed a third case. It may be observed that the three successive plaintiffs interested in the same question or in proving the same set of facts, or
were all occupants of the same property and belonged to the same that one person is interested in the result of a litigation involving the
family; this fact was also indicative of their privity. other. Hence, several creditors of one debtor cannot be considered as
identical parties for the purpose of assailing the acts of the debtor. They
Given this background, it becomes clear that the finding of a substantial have distinct credits, rights, and interests, such that the failure of one to
identity of parties in Valencia was based on its peculiar factual recover should not preclude the other creditors from also pursuing their
circumstances, which are different from those in the present case. legal remedies.

Unlike Llanes, Coastal is not asserting a right that has been Further, petitioner, which was not a party to Southern Industrial
categorically declared null and void in a prior case. In fact, its right Projects (their causes of action being separate and distinct), did not
based on the processing agreement was upheld in Civil Case No. have the opportunity to be heard in that case, much less to present its
21272. Clearly, Coastal cannot be treated in the same manner as own evidence. Thus, to bind petitioner to the Decision in that case
Llanes. would clearly violate its rights to due process. As a separate party, it
has the right to have its arguments and evidence evaluated on their
own merits.
The CA erred in applying Southern Industrial Projects v. United
Coconut Planters Bank100 as a bar by res judicata with respect to the
present case. For this principle to apply, the following elements must Second Issue: Fraud of Creditors
concur: a) the former judgment was final; b) the court that rendered it
had jurisdiction over the subject matter and the parties; c) the judgment We now come to the heart of the Petition. Coastal alleges that the
assignment of mortgage, the extrajudicial foreclosure proceedings, and Consortium of Banks." This fact alone shows an effort to hide, with the
the sale of the properties of VISCO should all be rescinded on the evident intent to keep, those funds for themselves. The letter even says
ground that they were done to defraud the latter's creditors. that, for the protection of the Consortium, the name "VISCO" should be
eliminated entirely, so that the account name would read "Board of
The CA found no merit in petitioner's arguments. It ruled that the Trustees Consortium of Banks." Clearly, this particular move was found
assignment conformed to the requirements of law; that the to be necessary to avoid a takeover by the government, which was also
consideration for the assignment had allegedly been given by FEBTC; a creditor of VISCO.113 This express intent of the latter, under the
and that, hence, the Consortium had a right to foreclose on the direction and for the benefit of the Consortium, corroborated petitioner's
mortgaged properties. contention that respondent banks had defrauded VISCO's creditors.

By focusing on the innate validity of these Contracts, the CA totally Assignment of Mortgage in Favor of the Consortium Banks
overlooked the issue of fraud as a ground for rescission. Elementary is
the principle that the validity of a contract does not preclude its The assignment of mortgage in favor of the Consortium also bears the
rescission. Under Articles 1380 and 1381 (3) of the Civil Code, earmarks of fraud. Initially, respondent banks had agreed that VISCO
contracts that are otherwise valid between the contracting parties may should sell two of its generator sets, so that the proceeds could be
nonetheless be subsequently rescinded by reason of injury to third utilized to pay DBP. This plan was direct, simple, and would extinguish
persons, like creditors.106 In fact, rescission implies that there is a the encumbrance in favor of the bank.
contract that, while initially valid, produces a lesion or pecuniary
damage to someone.107 Thus, when the CA confined itself to the issue Then, quite surprisingly, the Consortium set down the following
of the validity of these contracts, it did not at all address the heart of payment procedure: Filmag would pay VISCO; the latter would pay the
petitioner's cause of action: whether these transactions had been Consortium, which would pay DBP; and the Consortium would then
undertaken by the Consortium to defraud VISCO's other creditors. subrogate DBP to the latter's rights as first mortgagee. One is then led
to ask: if the intention was to pay DBP; from the sales proceeds of the
There is more than a preponderance of evidence showing the generator sets, why did the money have to pass through the
Consortium's deliberate plan to defraud VISCO's other creditors. Consortium?

Consortium Banks as Directors The answer lies in the nature of respondent's mortgage. It will be
recalled that this mortgage remained unrecorded and not legally
It will be recalled that Respondent Consortium took over management binding on the other creditors.114 Thus, if DBP had been directly paid by
and control of VISCO by acquiring 90 percent of the latter's equity. VISCO, the latter could have freed up its properties to the satisfaction
Thus, 9 out of the 10 directors of the corporation were all officials of the of all its other creditors. This procedure would have been fair to all, but
Consortium,108 which may thus be said to have effectively occupied it was not followed by the Consortium.
and/or controlled the board. Significantly, nowhere in the records can
we find any denial by respondent of this allegation by petitioner.109 Instead, the proceeds from the sale of the generator sets were first paid
to respondent banks, which used the money to pay DBP. The last step
As directors of VISCO, the officials of the Consortium were in a position in the payment procedure explains the reason for this preferred though
of trust; thus, they owed it a duty of loyalty. This trust relationship roundabout manner of payment. This final step entitled the Consortium
sprang from the fact that they had control and guidance over its to obtain DBP's primary lien through an assignment by allowing it to
corporate affairs and property.110 Their duty was more stringent when it pay VISCO's loan to the bank, without incurring additional expenses.
became insolvent or without sufficient assets to meet its outstanding
obligations that arose. Because they were deemed trustees of the In the end, by collecting the money from VISCO, respondent banks
creditors in those instances, they should have managed the recovered what they had ostensibly remitted to DBP. Moreover, the
corporation's assets with strict regard for the creditors' interests. When primary lien that respondent banks acquired allowed them, as
these directors became corporate creditors in their own right, they unsecured creditors of VISCO, to foreclose on the assets of the
should not have permitted themselves to secure any undue advantage corporation without regard to its inferior claims. It was a clever ruse that
over other creditors.111 In the instant case, the Consortium miserably would have worked, were it not done by creditors who were duty-
failed to observe its duty of fidelity towards VISCO and its creditors. bound, as directors, not to take clever advantage of other creditors.

Duty of the Consortium Banks to VISCO's Creditors To be sure, there was undue advantage. The payment scheme devised
by the Consortium continued the efficacy of the primary lien, this time in
Recall that as early as 1966, the Consortium, through its directors on its favor, to the detriment of the other creditors. When one considers its
the board of VISCO, had already assumed management and control knowledge that VISCO's assets might not be enough to meet its
over the latter. Hence, when VISCO recognized its outstanding liability obligations to several creditors,115 the intention to defraud the other
to petitioner in 1970 and offered a Compromise Agreement,112 creditors is even more striking. Fraud is present when the debtor knows
respondent banks were already at the helm of the debtor corporation. that its actions would cause injury.116
The members of the Consortium, therefore, cannot deny that they were
aware of those claims against the corporation. Nonetheless, they did The assignment in favor of the Consortium was a rescissible contract
not adopt any measure to protect petitioner's credit. for having been undertaken in fraud of creditors.117 Article 1385 of the
Civil Code provides for the effect of rescission, as follows:
Quite the opposite, they even took steps to hide VISCO's unexpended
funds. Garcia's 1972 letter to Samonte unmistakably reveals that they "Rescission creates the obligation to return the things which were the
kept those funds in an account named "Board of Trustees VISCO object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who ordering defendant VISCO/SRM to pay the plaintiffs the sum of
demands rescission can return whatever he may be obliged to restore. P851,316.19 with interest thereon at the legal rate from the filing of this
complaint, plus attorney's fees of P50,000.00 and to pay the costs."122
"Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who The foregoing is the judgment credit that petitioner cannot enforce
did not act in bad faith. against VISCO because of Respondent Consortium's fraudulent
disposition of the corporation's assets. In other words, the above
"In this case, indemnity for damages may be demanded from the amounts define the extent of the actual damage suffered by Coastal
person causing the loss." and the amount that respondent has to restore pursuant to Article 1385.

Indeed, mutual restitution is required in all cases involving rescission. On the basis of the finding of fraud, the award of exemplary damages is
But when it is no longer possible to return the object of the contract, an in order, to serve as a warning to other creditors not to abuse their
indemnity for damages operates as restitution. The important rights. Under Article 2229 of the Civil Code, exemplary or corrective
consideration is that the indemnity for damages should restore to the damages are imposed by way of example or correction for the public
injured party what was lost. good. By their nature, exemplary damages should be imposed in an
amount sufficient and effective to deter possible future similar acts by
respondent banks. The court finds the amount of P250,000 sufficient in
In the case at bar, it is no longer possible to order the return of VISCO's
properties. They have already been sold to the NSC, which has not the instant case.
been shown to have acted in bad faith. The party alleging bad faith
must establish it by competent proof. Sans that proof, purchasers are As a rule, a corporation is not entitled to moral damages because, not
deemed to be in good faith, and their interest in the subject property being a natural person, it cannot experience physical suffering or
must not be disturbed. Purchasers in good faith are those who buy the sentiments like wounded feelings, serious anxiety, mental anguish and
property of another without notice that some other person has a right to moral shock.123 The only exception to this rule is when the corporation
or interest in the property; and who pay the full and fair price for it at the has a good reputation that is debased, resulting in its humiliation in the
time of the purchase, or before they get notice of some other persons' business realm.124 In the present case, the records do not show any
claim of interest in the property.118 evidence that the name or reputation of petitioner has been sullied as a
result of the Consortium's fraudulent acts. Accordingly, moral damages
In the present case, petitioner failed to discharge its burden of proving are not warranted.
bad faith on the part of NSC. There is insufficient evidence on record
that the latter participated in the design to defraud VISCO's creditors. WHEREFORE, the Petition is GRANTED. The assailed Decision of the
To NSC, petitioner imputes fraud from the sole fact that the former was Court of Appeals dated September 27, 1994, and its Resolution dated
allegedly aware that its vendor, the Consortium, had taken control over January 5, 1995, are hereby REVERSED and SET ASIDE.
VISCO including the corporation's assets.119 We cannot appreciate how Respondent Consortium of Banks is ordered to PAY Petitioner Coastal
knowledge of the takeover would necessarily implicate anyone in the Pacific Trading, Inc., the sum adjudged by the Regional Trial Court of
Consortium's fraudulent designs. Besides, NSC was not shown to be Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific
privy to the information that VISCO had no other assets to satisfy other Trading, Felix de la Costa, and Aurora del Banco v. Visayan Integrated
creditors' respective claims. Corporation, to wit: "x x x the sum of P851,316.19 with interest thereon
at the legal rate from the filing of [the] [C]omplaint, plus attorney's fees
of P50,000 and x x x the costs." Respondent Consortium of Banks is
The right of an innocent purchaser for value must be respected and
further ordered to pay petitioner exemplary damages in the amount of
protected, even if its vendors obtained their title through fraud.120
Pursuant to this principle, the remedy of the defrauded creditor is to sue P250,000.
for damages against those who caused or employed the fraud. Hence,
petitioner is entitled to damages from the Consortium. SO ORDERED.

Award of Damages

It is essential that for damages to be awarded, a claimant must


satisfactorily prove during the trial that they have a factual basis, and
that the defendant's acts have a causal connection to them.121 Thus,
the question of damages should normally call for a remand of the case
to the lower court for further proceedings. Considering, however, the
length of time that petitioner's just claim has been thwarted, we find it in
the best interest of substantial justice to decide the issue of damages
now on the basis of the available records. A remand for further
proceedings would only result in a needless delay.

Going over the records of the case, we find that petitioner has a final
and executory judgment in its favor in Civil Case No. 21272. The
judgment in that case reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs


geographically or otherwise descriptive, might nevertheless have been
III. FORMATION AND ORGANIZATION OF A PRIVATE used so long and so exclusively by one producer with reference to his
CORPORATION article that, in that trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his product." The
G.R. No. 101897. March 5, 1993. question which arises, therefore, is whether or not the use by petitioner
of "Lyceum" in its corporate name has been for such length of time and
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF with such exclusivity as to have become associated or identified with
APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, the petitioner institution in the mind of the general public (or at least that
LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., portion of the general public which has to do with schools). The Court
LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF of Appeals recognized this issue and answered it in the negative:
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM "Under the doctrine of secondary meaning, a word or phrase originally
OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN incapable of exclusive appropriation with reference to an article in the
LYCEUM, INC., respondents. market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that
SYLLABUS
group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF 56). This circumstance has been referred to as the distinctiveness into
PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY which the name or phrase has evolved through the substantial and
SIMILAR TO THAT OF ANY EXISTING CORPORATION, exclusive use of the same for a considerable period of time. . . . No
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY evidence was ever presented in the hearing before the Commission
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO which sufficiently proved that the word 'Lyceum' has indeed acquired
THE WORD "LYCEUM". — The Articles of Incorporation of a secondary meaning in favor of the appellant. If there was any of this
corporation must, among other things, set out the name of the kind, the same tend to prove only that the appellant had been using the
corporation. Section 18 of the Corporation Code establishes a disputed word for a long period of time. . . . In other words, while the
restrictive rule insofar as corporate names are concerned: "Section 18. appellant may have proved that it had been using the word 'Lyceum' for
Corporate name. — No corporate name may be allowed by the a long period of time, this fact alone did not amount to mean that the
Securities an Exchange Commission if the proposed name is identical said word had acquired secondary meaning in its favor because the
or deceptively or confusingly similar to that of any existing corporation appellant failed to prove that it had been using the same word all by
or to any other name already protected by law or is patently deceptive, itself to the exclusion of others. More so, there was no evidence
confusing or contrary to existing laws. When a change in the corporate presented to prove that confusion will surely arise if the same word
name is approved, the Commission shall issue an amended certificate were to be used by other educational institutions. Consequently, the
of incorporation under the amended name." The policy underlying the allegations of the appellant in its first two assigned errors must
prohibition in Section 18 against the registration of a corporate name necessarily fail." We agree with the Court of Appeals. The number
which is "identical or deceptively or confusingly similar" to that of any alone of the private respondents in the case at bar suggests strongly
existing corporation or which is "patently deceptive" or "patently that petitioner's use of the word "Lyceum" has not been attended with
confusing" or "contrary to existing laws," is the avoidance of fraud upon the exclusivity essential for applicability of the doctrine of secondary
the public which would have occasion to deal with the entity concerned, meaning. Petitioner's use of the word "Lyceum" was not exclusive but
the evasion of legal obligations and duties, and the reduction of was in truth shared with the Western Pangasinan Lyceum and a little
difficulties of administration and supervision over corporations. We do later with other private respondent institutions which registered with the
not consider that the corporate names of private respondent institutions SEC using "Lyceum" as part of their corporation names. There may
are "identical with, or deceptively or confusingly similar" to that of the well be other schools using Lyceum or Liceo in their names, but not
petitioner institution. True enough, the corporate names of private registered with the SEC because they have not adopted the corporate
respondent entities all carry the word "Lyceum" but confusion and form of organization.
deception are effectively precluded by the appending of geographic
names to the word "Lyceum." Thus, we do not believe that the "Lyceum
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO
of Aparri" can be mistaken by the general public for the Lyceum of the
DETERMINE WHETHER THEY ARE CONFUSINGLY OR
Philippines, or that the "Lyceum of Camalaniugan" would be confused
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
with the Lyceum of the Philippines.
NAME. — petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD other institutions may use "Lyceum" as part of their corporate names.
"LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is claimed, To determine whether a given corporate name is "identical" or
however, by petitioner that the word "Lyceum" has acquired a "confusingly or deceptively similar" with another entity's corporate
secondary meaning in relation to petitioner with the result that word, name, it is not enough to ascertain the presence of "Lyceum" or "Liceo"
although originally a generic, has become appropriable by petitioner to in both names. One must evaluate corporate names in their entirety
the exclusion of other institutions like private respondents herein. The and when the name of petitioner is juxtaposed with the names of
doctrine of secondary meaning originated in the field of trademark law. private respondents, they are not reasonably regarded as "identical" or
Its application has, however, been extended to corporate names sine "confusingly or deceptively similar" with each other.
the right to use a corporate name to the exclusion of others is based
upon the same principle which underlies the right to use a particular
trademark or tradename. In Philippine Nut Industry, Inc. v. Standard DECISION
Brands, Inc., the doctrine of secondary meaning was elaborated in the
following terms: " . . . a word or phrase originally incapable of exclusive FELICIANO, J p:
appropriation with reference to an article on the market, because
Petitioner is an educational institution duly registered with the Commissioner Julio Sulit held that the corporate name of petitioner and
Securities and Exchange Commission ("SEC"). When it first registered that of the Lyceum of Baguio, Inc. were substantially identical because
with the SEC on 21 September 1950, it used the corporate name of the presence of a "dominant" word, i.e., "Lyceum," the name of the
Lyceum of the Philippines, Inc. and has used that name ever since. geographical location of the campus being the only word which
distinguished one from the other corporate name. The SEC also noted
On 24 February 1984, petitioner instituted proceedings before the SEC that petitioner had registered as a corporation ahead of the Lyceum of
to compel the private respondents, which are also educational Baguio, Inc. in point of time, 1 and ordered the latter to change its
institutions, to delete the word "Lyceum" from their corporate names name to another name "not similar or identical [with]" the names of
and permanently to enjoin them from using "Lyceum" as part of their previously registered entities.
respective names.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the
Some of the private respondents actively participated in the Supreme Court in a case docketed as G.R. No. L-46595. In a Minute
proceedings before the SEC. These are the following, the dates of their Resolution dated 14 September 1977, the Court denied the Petition for
original SEC registration being set out below opposite their respective Review for lack of merit. Entry of judgment in that case was made on
names: 21 October 1977. 2

Western Pangasinan Lyceum — 27 October 1950 Armed with the Resolution of this Court in G.R. No. L-46595, petitioner
then wrote all the educational institutions it could find using the word
"Lyceum" as part of their corporate name, and advised them to
Lyceum of Cabagan — 31 October 1962
discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before
Lyceum of Lallo, Inc. — 26 March 1972 the SEC SEC-Case No. 2579 to enforce what petitioner claims as its
proprietary right to the word "Lyceum." The SEC hearing officer
Lyceum of Aparri — 28 March 1972 rendered a decision sustaining petitioner's claim to an exclusive right to
use the word "Lyceum." The hearing officer relied upon the SEC ruling
Lyceum of Tuao, Inc. — 28 March 1972 in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that
the word "Lyceum" was capable of appropriation and that petitioner had
Lyceum of Camalaniugan — 28 March 1972 acquired an enforceable exclusive right to the use of that word.

The following private respondents were declared in default for failure to On appeal, however, by private respondents to the SEC En Banc, the
file an answer despite service of summons: decision of the hearing officer was reversed and set aside. The SEC En
Banc did not consider the word "Lyceum" to have become so identified
with petitioner as to render use thereof by other institutions as
Buhi Lyceum;
productive of confusion about the identity of the schools concerned in
the mind of the general public. Unlike its hearing officer, the SEC En
Central Lyceum of Catanduanes; Banc held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from one
Lyceum of Eastern Mindanao, Inc.; and another, especially in view of the fact that the campuses of petitioner
and those of the private respondents were physically quite remote from
Lyceum of Southern Philippines each other. 3

Petitioner's original complaint before the SEC had included three (3) Petitioner then went on appeal to the Court of Appeals. In its Decision
other entities: dated 28 June 1991, however, the Court of Appeals affirmed the
questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for
1. The Lyceum of Malacanay; reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals


2. The Lyceum of Marbel; and
committed the following errors:
3. The Lyceum of Araullo
1. The Court of Appeals erred in holding that the Resolution of the
Supreme Court in G.R. No. L-46595 did not constitute stare decisis as
The complaint was later withdrawn insofar as concerned the Lyceum of to apply to this case and in not holding that said Resolution bound
Malacanay and the Lyceum of Marbel, for failure to serve summons subsequent determinations on the right to exclusive use of the word
upon these two (2) entities. The case against the Liceum of Araullo was Lyceum.
dismissed when that school motu proprio change its corporate name to
"Pamantasan ng Araullo."
2. The Court of Appeals erred in holding that respondent Western
Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.
The background of the case at bar needs some recounting. Petitioner
had sometime before commenced in the SEC a proceeding (SEC-Case
No. 1241) against the Lyceum of Baguio, Inc. to require it to change its 3. The Court of Appeals erred in holding that the word Lyceum has not
corporate name and to adopt another name not "similar [to] or identical" acquired a secondary meaning in favor of petitioner.
with that of petitioner. In an Order dated 20 April 1977, Associate
4. The Court of Appeals erred in holding that Lyceum as a generic word
cannot be appropriated by the petitioner to the exclusion of others. 5 question of fact which we need not resolve) that the use of the word
"Lyceum" may not yet be as widespread as the use of "university," but
We will consider all the foregoing ascribed errors, though not it is clear that a not inconsiderable number of educational institutions
necessarily seriatim. We begin by noting that the Resolution of the have adopted "Lyceum" or "Liceo" as part of their corporate names.
Court in G.R. No. L-46595 does not, of course, constitute res Since "Lyceum" or "Liceo" denotes a school or institution of learning, it
adjudicata in respect of the case at bar, since there is no identity of is not unnatural to use this word to designate an entity which is
parties. Neither is stare decisis pertinent, if only because the SEC En organized and operating as an educational institution.
Banc itself has re-examined Associate Commissioner Sulit's ruling in
the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. It is claimed, however, by petitioner that the word "Lyceum" has
No. L-46595 was not a reasoned adoption of the Sulit ruling. acquired a secondary meaning in relation to petitioner with the result
that that word, although originally a generic, has become appropriable
The Articles of Incorporation of a corporation must, among other things, by petitioner to the exclusion of other institutions like private
set out the name of the corporation. 6 Section 18 of the Corporation respondents herein.
Code establishes a restrictive rule insofar as corporate names are
concerned: The doctrine of secondary meaning originated in the field of trademark
law. Its application has, however, been extended to corporate names
"SECTION 18. Corporate name. — No corporate name may be allowed sine the right to use a corporate name to the exclusion of others is
by the Securities an Exchange Commission if the proposed name is based upon the same principle which underlies the right to use a
identical or deceptively or confusingly similar to that of any existing particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v.
corporation or to any other name already protected by law or is patently Standard Brands, Inc., 11 the doctrine of secondary meaning was
deceptive, confusing or contrary to existing laws. When a change in the elaborated in the following terms:
corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name." (Emphasis " . . . a word or phrase originally incapable of exclusive appropriation
supplied) with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long and
The policy underlying the prohibition in Section 18 against the so exclusively by one producer with reference to his article that, in that
registration of a corporate name which is "identical or deceptively or trade and to that branch of the purchasing public, the word or phrase
confusingly similar" to that of any existing corporation or which is has come to mean that the article was his product." 12
"patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have The question which arises, therefore, is whether or not the use by
occasion to deal with the entity concerned, the evasion of legal petitioner of "Lyceum" in its corporate name has been for such length of
obligations and duties, and the reduction of difficulties of administration time and with such exclusivity as to have become associated or
and supervision over corporations. 7 identified with the petitioner institution in the mind of the general public
(or at least that portion of the general public which has to do with
We do not consider that the corporate names of private respondent schools). The Court of Appeals recognized this issue and answered it
institutions are "identical with, or deceptively or confusingly similar" to in the negative:
that of the petitioner institution. True enough, the corporate names of
private respondent entities all carry the word "Lyceum" but confusion "Under the doctrine of secondary meaning, a word or phrase originally
and deception are effectively precluded by the appending of geographic incapable of exclusive appropriation with reference to an article in the
names to the word "Lyceum." Thus, we do not believe that the "Lyceum market, because geographical or otherwise descriptive might
of Aparri" can be mistaken by the general public for the Lyceum of the nevertheless have been used so long and so exclusively by one
Philippines, or that the "Lyceum of Camalaniugan" would be confused producer with reference to this article that, in that trade and to that
with the Lyceum of the Philippines. group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
Etymologically, the word "Lyceum" is the Latin word for the Greek 56). This circumstance has been referred to as the distinctiveness into
lykeion which in turn referred to a locality on the river Ilissius in ancient which the name or phrase has evolved through the substantial and
Athens "comprising an enclosure dedicated to Apollo and adorned with exclusive use of the same for a considerable period of time.
fountains and buildings erected by Pisistratus, Pericles and Lycurgus Consequently, the same doctrine or principle cannot be made to apply
frequented by the youth for exercise and by the philosopher Aristotle where the evidence did not prove that the business (of the plaintiff) has
and his followers for teaching." 8 In time, the word "Lyceum" became continued for so long a time that it has become of consequence and
associated with schools and other institutions providing public lectures acquired a good will of considerable value such that its articles and
and concerts and public discussions. Thus today, the word "Lyceum" produce have acquired a well-known reputation, and confusion will
generally refers to a school or an institution of learning. While the Latin result by the use of the disputed name (by the defendant) (Ang Si Heng
word "lyceum" has been incorporated into the English language, the vs. Wellington Department Store, Inc., 92 Phil. 448).
word is also found in Spanish (liceo) and in French (lycee). As the
Court of Appeals noted in its Decision, Roman Catholic schools With the foregoing as a yardstick, [we] believe the appellant failed to
frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in satisfy the aforementioned requisites. No evidence was ever presented
Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in the hearing before the Commission which sufficiently proved that the
in fact as generic in character as the word "university." In the name of word 'Lyceum' has indeed acquired secondary meaning in favor of the
the petitioner, "Lyceum" appears to be a substitute for "university;" in appellant. If there was any of this kind, the same tend to prove only that
other places, however, "Lyceum," or "Liceo" or "Lycee" frequently the appellant had been using the disputed word for a long period of
denotes a secondary school or a college. It may be (though this is a time. Nevertheless, its (appellant) exclusive use of the word (Lyceum)
was never established or proven as in fact the evidence tend to convey entirety and when the name of petitioner is juxtaposed with the names
that the cross-claimant was already using the word 'Lyceum' seventeen of private respondents, they are not reasonably regarded as "identical"
(17) years prior to the date the appellant started using the same word in or "confusingly or deceptively similar" with each other.
its corporate name. Furthermore, educational institutions of the Roman
Catholic Church had been using the same or similar word like 'Liceo de WHEREFORE, the petitioner having failed to show any reversible error
Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' on the part of the public respondent Court of Appeals, the Petition for
'Liceo de Albay' long before appellant started using the word 'Lyceum'. Review is DENIED for lack of merit, and the Decision of the Court of
The appellant also failed to prove that the word 'Lyceum' has become Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement
so identified with its educational institution that confusion will surely as to costs.
arise in the minds of the public if the same word were to be used by
other educational institutions. SO ORDERED.

In other words, while the appellant may have proved that it had been G.R. No. 137592 December 12, 2001
using the word 'Lyceum' for a long period of time, this fact alone did not
amount to mean that the said word had acquired secondary meaning in
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS,
its favor because the appellant failed to prove that it had been using the
H.S.K. SA BANSANG PILIPINAS, INC., petitioner, vs. IGLESIA NG
same word all by itself to the exclusion of others. More so, there was no
DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
evidence presented to prove that confusion will surely arise if the same
KATOTOHANAN, respondent.
word were to be used by other educational institutions. Consequently,
the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly YNARES-SANTIAGO, J.:
supplied)
This is a petition for review assailing the Decision dated October 7,
We agree with the Court of Appeals. The number alone of the private 19971 and the Resolution dated February 16, 19992 of the Court of
respondents in the case at bar suggests strongly that petitioner's use of Appeals in CA-G.R. SP No. 40933, which affirmed the Decision of the
the word "Lyceum" has not been attended with the exclusivity essential Securities and Exchange and Commission (SEC) in SEC-AC No. 539.3
for applicability of the doctrine of secondary meaning. It may be noted
also that at least one of the private respondents, i.e., the Western Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of
years before the petitioner registered its own corporate name with the Truth),4 is a non-stock religious society or corporation registered in
SEC and began using the word "Lyceum." It follows that if any 1936. Sometime in 1976, one Eliseo Soriano and several other
institution had acquired an exclusive right to the word "Lyceum," that members of respondent corporation disassociated themselves from the
institution would have been the Western Pangasinan Lyceum, Inc. latter and succeeded in registering on March 30, 1977 a new non-stock
rather than the petitioner institution. religious society or corporation, named Iglesia ng Dios Kay Kristo
Hesus, Haligi at Saligan ng Katotohanan.
In this connection, petitioner argues that because the Western
Pangasinan Lyceum, Inc. failed to reconstruct its records before the On July 16, 1979, respondent corporation filed with the SEC a petition
SEC in accordance with the provisions of R.A. No. 62, which records to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
had been destroyed during World War II, Western Pangasinan Lyceum Katotohanan to change its corporate name, which petition was
should be deemed to have lost all rights it may have acquired by virtue docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered
of its past registration. It might be noted that the Western Pangasinan judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo
Lyceum, Inc. registered with the SEC soon after petitioner had filed its Hesus, Haligi at Saligan ng Katotohanan to change its corporate name
own registration on 21 September 1950. Whether or not Western to another name that is not similar or identical to any name already
Pangasinan Lyceum, Inc. must be deemed to have lost its rights under used by a corporation, partnership or association registered with the
its original 1933 registration, appears to us to be quite secondary in Commission.5 No appeal was taken from said decision.
importance; we refer to this earlier registration simply to underscore the
fact that petitioner's use of the word "Lyceum" was neither the first use It appears that during the pendency of SEC Case No. 1774, Soriano, et
of that term in the Philippines nor an exclusive use thereof. Petitioner's al., caused the registration on April 25, 1980 of petitioner corporation,
use of the word "Lyceum" was not exclusive but was in truth shared Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa
with the Western Pangasinan Lyceum and a little later with other Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan
private respondent institutions which registered with the SEC using ng Katotohanan.6
"Lyceum" as part of their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not registered with On March 2, 1994, respondent corporation filed before the SEC a
the SEC because they have not adopted the corporate form of petition, docketed as SEC Case No. 03-94-4704, praying that petitioner
organization. be compelled to change its corporate name and be barred from using
the same or similar name on the ground that the same causes
We conclude and so hold that petitioner institution is not entitled to a confusion among their members as well as the public.
legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of Petitioner filed a motion to dismiss on the ground of lack of cause of
their corporate names. To determine whether a given corporate name action. The motion to dismiss was denied. Thereafter, for failure to file
is "identical" or "confusingly or deceptively similar" with another entity's an answer, petitioner was declared in default and respondent was
corporate name, it is not enough to ascertain the presence of "Lyceum" allowed to present its evidence ex parte.
or "Liceo" in both names. One must evaluate corporate names in their
On November 20, 1995, the SEC rendered a decision ordering IV
petitioner to change its corporate name. The dispositive portion thereof
reads: THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY
APPRECIATE THE SCOPE OF THE CONSTITUTIONAL
PREMISES CONSIDERED, judgment is hereby rendered in favor of GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING TO
the petitioner (respondent herein). APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS.9

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), Invoking the case of Legarda v. Court of Appeals,10 petitioner insists
H.S.K. sa Bansang Pilipinas (petitioner herein) is hereby MANDATED that the decision of the Court of Appeals and the SEC should be set
to change its corporate name to another not deceptively similar or aside because the negligence of its former counsel of record, Atty.
identical to the same already used by the Petitioner, any corporation, Joaquin Garaygay, in failing to file an answer after its motion to dismiss
association, and/or partnership presently registered with the was denied by the SEC, deprived them of their day in court.
Commission.
The contention is without merit. As a general rule, the negligence of
Let a copy of this Decision be furnished the Records Division and the counsel binds the client. This is based on the rule that any act
Corporate and Legal Department [CLD] of this Commission for their performed by a lawyer within the scope of his general or implied
records, reference and/or for whatever requisite action, if any, to be authority is regarded as an act of his client.11 An exception to the
undertaken at their end. foregoing is where the reckless or gross negligence of the counsel
deprives the client of due process of law. 12 Said exception, however,
SO ORDERED.7 does not obtain in the present case.

Petitioner appealed to the SEC En Banc, where its appeal was In Legarda v. Court of Appeals, the effort of the counsel in defending
docketed as SEC-AC No. 539. In a decision dated March 4, 1996, the his client's cause consisted in filing a motion for extension of time to file
SEC En Banc affirmed the above decision, upon a finding that answer before the trial court. When his client was declared in default,
petitioner's corporate name was identical or confusingly or deceptively the counsel did nothing and allowed the judgment by default to become
similar to that of respondent's corporate name.8 final and executory. Upon the insistence of his client, the counsel filed a
petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final
Petitioner filed a petition for review with the Court of Appeals. On
and executory. This Court found the counsel grossly negligent and
October 7, 1997, the Court of Appeals rendered the assailed decision
consequently declared as null and void the decision adverse to his
affirming the decision of the SEC En Banc. Petitioner's motion for
reconsideration was denied by the Court of Appeals on February 16, client.
1992.
The factual antecedents of the case at bar are different. Atty. Garaygay
filed before the SEC a motion to dismiss on the ground of lack of cause
Hence, the instant petition for review, raising the following assignment
of action. When his client was declared in default for failure to file an
of errors:
answer, Atty. Garaygay moved for reconsideration and lifting of the
order of default.13 After judgment by default was rendered against
I petitioner corporation, Atty. Garaygay filed a motion for extension of
time to appeal/motion for reconsideration, and thereafter a motion to
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING set aside the decision.14
THAT PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO
PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF Evidently, Atty. Garaygay was only guilty of simple negligence.
APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO Although he failed to file an answer that led to the rendition of a
THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY judgment by default against petitioner, his efforts were palpably real,
INAPPLICABLE JURISPRUDENCE. albeit bereft of zeal.15

II Likewise, the issue of prescription, which petitioner raised for the first
time on appeal to the Court of Appeals, is untenable. Its failure to raise
THE HONORABLE COURT OF APPEALS ERRED IN ITS prescription before the SEC can only be construed as a waiver of that
INTERPRETATION OF THE CIVIL CODE PROVISIONS ON defense.16 At any rate, the SEC has the authority to de-register at all
EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS times and under all circumstances corporate names which in its
FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION estimation are likely to spawn confusion. It is the duty of the SEC to
TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR prevent confusion in the use of corporate names not only for the
TO ITS INSTITUTION. protection of the corporations involved but more so for the protection of
the public.17
III
Section 18 of the Corporation Code provides:
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER
AND PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY Corporate Name. — No corporate name may be allowed by the
JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF THE Securities and Exchange Commission if the proposed name is identical
CORPORATION CODE TO THE INSTANT CASE. or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change in the By the Holy Spirit, and other similar names, is of no consequence. It
corporate name is approved, the Commission shall issue an amended does not authorize the use by petitioner of the essential and
certificate of incorporation under the amended name. distinguishing feature of respondent's registered and protected
corporate name.23
Corollary thereto, the pertinent portion of the SEC Guidelines on
Corporate Names states: We need not belabor the fourth issue raised by petitioner. Certainly,
ordering petitioner to change its corporate name is not a violation of its
(d) If the proposed name contains a word similar to a word already constitutionally guaranteed right to religious freedom. In so doing, the
used as part of the firm name or style of a registered company, the SEC merely compelled petitioner to abide by one of the SEC guidelines
proposed name must contain two other words different from the name in the approval of partnership and corporate names, namely its
of the company already registered; undertaking to manifest its willingness to change its corporate name in
the event another person, firm, or entity has acquired a prior right to the
Parties organizing a corporation must choose a name at their peril; and use of the said firm name or one deceptively or confusingly similar to it.
the use of a name similar to one adopted by another corporation,
whether a business or a nonprofit organization, if misleading or likely to WHEREFORE, in view of all the foregoing, the instant petition for
injure in the exercise of its corporate functions, regardless of intent, review is DENIED. The appealed decision of the Court of Appeals is
may be prevented by the corporation having a prior right, by a suit for AFFIRMED in toto.
injunction against the new corporation to prevent the use of the name.18
SO ORDERED.
Petitioner claims that it complied with the aforecited SEC guideline by
adding not only two but eight words to their registered name, to wit: G.R. No. 104175 June 25, 1993
"Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner
argues, effectively distinguished it from respondent corporation. YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners,
vs. THE HONORABLE COURT OF APPEALS (THIRTEENTH
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, DIVISION) AND GEORGE CHIONG ROXAS, respondents.
Inc." in petitioner's name are, as correctly observed by the SEC, merely
descriptive of and also referring to the members, or kaanib, of Angara, Abello, Concepcion, Regala & Cruz for petitioners.
respondent who are likewise residing in the Philippines. These words
can hardly serve as an effective differentiating medium necessary to Antonio Nuyles for private respondent.
avoid confusion or difficulty in distinguishing petitioner from respondent.
This is especially so, since both petitioner and respondent corporations
are using the same acronym — H.S.K.;19 not to mention the fact that
both are espousing religious beliefs and operating in the same place.
Parenthetically, it is well to mention that the acronym H.S.K. used by QUIASON, J.:
petitioner stands for "Haligi at Saligan ng Katotohanan."20
Petitioners seek to set aside the decision of respondent Court of
Then, too, the records reveal that in holding out their corporate name to Appeals in CA-G.R. SP No. 25237, which reversed the Order dated
the public, petitioner highlights the dominant words "IGLESIA NG DIOS February 8, 1991 issued by the Regional Trial Court, Branch 11, Cebu
KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," City in Civil Case No. CEB 6967. The order of the trial court denied the
which is strikingly similar to respondent's corporate name, thus making motion to dismiss filed by respondent George C. Roxas of the
it even more evident that the additional words "Ang Mga Kaanib" and complaint for collection filed by petitioners.
"Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to
the members of respondent corporation.21 It appears that sometime on October 28, 1987, Young Auto Supply Co.
Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson
Significantly, the only difference between the corporate names of Garcia and Vicente Sy, sold all of their shares of stock in Consolidated
petitioner and respondent are the words SALIGAN and SUHAY. These Marketing & Development Corporation (CMDC) to Roxas. The
words are synonymous — both mean ground, foundation or support. purchase price was P8,000,000.00 payable as follows: a downpayment
Hence, this case is on all fours with Universal Mills Corporation v. of P4,000,000.00 and the balance of P4,000,000.00 in four post dated
Universal Textile Mills, Inc.,22 where the Court ruled that the corporate checks of P1,000,000.00 each.
names Universal Mills Corporation and Universal Textile Mills, Inc., are
undisputably so similar that even under the test of "reasonable care Immediately after the execution of the agreement, Roxas took full
and observation" confusion may arise. control of the four markets of CMDC. However, the vendors held on to
the stock certificates of CMDC as security pending full payment of the
Furthermore, the wholesale appropriation by petitioner of respondent's balance of the purchase price.
corporate name cannot find justification under the generic word rule.
We agree with the Court of Appeals' conclusion that a contrary ruling The first check of P4,000,000.00, representing the down-payment, was
would encourage other corporations to adopt verbatim and register an honored by the drawee bank but the four other checks representing the
existing and protected corporate name, to the detriment of the public. balance of P4,000,000.00 were dishonored. In the meantime, Roxas
sold one of the markets to a third party. Out of the proceeds of the sale,
The fact that there are other non-stock religious societies or YASCO received P600,000.00, leaving a balance of P3,400,000.00
corporations using the names Church of the Living God, Inc., Church of (Rollo, p. 176).
God Jesus Christ the Son of God the Head, Church of God in Christ &
Subsequently, Nelson Garcia and Vicente Sy assigned all their rights The petition is meritorious.
and title to the proceeds of the sale of the CMDC shares to Nemesio
Garcia. In holding that the venue was improperly laid in Cebu City, the Court of
Appeals relied on the address of YASCO, as appearing in the Deed of
On June 10, 1988, petitioners filed a complaint against Roxas in the Sale dated October 28, 1987, which is "No. 1708 Dominga Street,
Regional Trial Court, Branch 11, Cebu City, praying that Roxas be Pasay City." This was the same address written in YASCO's letters and
ordered to pay petitioners the sum of P3,400,00.00 or that full control of several commercial documents in the possession of Roxas (Decision,
the three markets be turned over to YASCO and Garcia. The complaint p. 12; Rollo, p. 48).
also prayed for the forfeiture of the partial payment of P4,600,000.00
and the payment of attorney's fees and costs (Rollo, p. 290). In the case of Garcia, the Court of Appeals said that he gave Pasay
City as his address in three letters which he sent to Roxas' brothers
Roxas filed two motions for extension of time to submit his answer. But and sisters (Decision, p. 12; Rollo, p. 47). The appellate court held that
despite said motion, he failed to do so causing petitioners to file a Roxas was led by petitioners to believe that their residence is in Pasay
motion to have him declared in default. Roxas then filed, through a new City and that he had relied upon those representations (Decision, p. 12,
counsel, a third motion for extension of time to submit a responsive Rollo, p. 47).
pleading.
The Court of Appeals erred in holding that the venue was improperly
On August 19, 1988, the trial court declared Roxas in default. The order laid in Cebu City.
of default was, however, lifted upon motion of Roxas.
In the Regional Trial Courts, all personal actions are commenced and
On August 22, 1988, Roxas filed a motion to dismiss on the grounds tried in the province or city where the defendant or any of the
that: defendants resides or may be found, or where the plaintiff or any of the
plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4,
1. The complaint did not state a cause of action due to non-joinder of Revised Rules of Court].
indispensable parties;
There are two plaintiffs in the case at bench: a natural person and a
2. The claim or demand set forth in the complaint had been waived, domestic corporation. Both plaintiffs aver in their complaint that they
abandoned or otherwise extinguished; and are residents of Cebu City, thus:

3. The venue was improperly laid (Rollo, p. 299). 1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic
corporation duly organized and existing under Philippine laws with
principal place of business at M. J. Cuenco Avenue, Cebu City. It also
After a hearing, wherein testimonial and documentary evidence were
presented by both parties, the trial court in an Order dated February 8, has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.
1991 denied Roxas' motion to dismiss. After receiving said order,
Roxas filed another motion for extension of time to submit his answer. Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and
He also filed a motion for reconsideration, which the trial court denied in with business address at Young Auto Supply Co., Inc., M. J. Cuenco
its Order dated April 10, 1991 for being pro-forma (Rollo, p. 17). Roxas Avenue, Cebu City. . . . (Complaint, p. 1; Rollo, p. 81).
was again declared in default, on the ground that his motion for
reconsideration did not toll the running of the period to file his answer. The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:

On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of THIRD That the place where the principal office of the corporation is to
Default which was not accompanied with the required affidavit or merit. be established or located is at Cebu City, Philippines (as amended on
But without waiting for the resolution of the motion, he filed a petition for December 20, 1980 and further amended on December 20, 1984)
certiorari with the Court of Appeals. (Rollo, p. 273).

The Court of Appeals sustained the findings of the trial court with A corporation has no residence in the same sense in which this term is
regard to the first two grounds raised in the motion to dismiss but applied to a natural person. But for practical purposes, a corporation is
ordered the dismissal of the complaint on the ground of improper venue in a metaphysical sense a resident of the place where its principal
(Rollo, p. 49). office is located as stated in the articles of incorporation (Cohen v.
Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio
A subsequent motion for reconsideration by petitioner was to no avail. System v. Antillon, 19 SCRA 379 [1967]). The Corporation Code
precisely requires each corporation to specify in its articles of
incorporation the "place where the principal office of the corporation is
Petitioners now come before us, alleging that the Court of
to be located which must be within the Philippines" (Sec. 14 [3]). The
Appeals erred in:
purpose of this requirement is to fix the residence of a corporation in a
definite place, instead of allowing it to be ambulatory.
1. holding the venue should be in Pasay City, and not in Cebu City
(where both petitioners/plaintiffs are residents;
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this
Court explained why actions cannot be filed against a corporation in
2. not finding that Roxas is estopped from questioning the choice of any place where the corporation maintains its branch offices. The Court
venue (Rollo, p. 19). ruled that to allow an action to be instituted in any place where the
corporation has branch offices, would create confusion and work untold each for 400 shares with a par value of P10.00 per share, or for
inconvenience to said entity. By the same token, a corporation cannot P4,000.00 each, for a total of P8,000.00. Said stock certificates were in
be allowed to file personal actions in a place other than its principal the name of private respondent Adalia F. Robes and Carlos F. Robes,
place of business unless such a place is also the residence of a co- who subsequently, however, endorsed his shares in favor of Adalia F.
plaintiff or a defendant. Robes.

If it was Roxas who sued YASCO in Pasay City and the latter Said certificates of stock bear the following terms and conditions:
questioned the venue on the ground that its principal place of business
was in Cebu City, Roxas could argue that YASCO was in estoppel The Preferred Stock shall have the following rights, preferences,
because it misled Roxas to believe that Pasay City was its principal qualifications and limitations, to wit:
place of business. But this is not the case before us.
1. Of the right to receive a quarterly dividend of One Per Centum (1%),
With the finding that the residence of YASCO for purposes of venue is cumulative and participating.
in Cebu City, where its principal place of business is located, it
becomes unnecessary to decide whether Garcia is also a resident of
xxx xxx xxx
Cebu City and whether Roxas was in estoppel from questioning the
choice of Cebu City as the venue.
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after two (2) years from the date of issue at
WHEREFORE, the petition is GRANTED. The decision of the Court of
the option of the Corporation. . . .
Appeals appealed from is SET ASIDE and the Order dated February 8,
1991 of the Regional Trial Court is REINSTATED.
On January 31, 1979, private respondents proceeded against petitioner
and filed a Complaint anchored on private respondents' alleged rights
SO ORDERED.
to collect dividends under the preferred shares in question and to have
petitioner redeem the same under the terms and conditions of the stock
G.R. No. 51765 March 3, 1997 certificates. Private respondents attached to their complaint, a letter-
demand dated January 5, 1979 which, significantly, was not formally
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. offered in evidence.
AGANA, SR., as Presiding Judge, Court of First Instance of Rizal,
Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY &
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on
DEVELOPMENT CORPORATION and ADALIA F. ROBES,
the following grounds: (1) that the trial court had no jurisdiction over the
respondents. subject-matter of the action; (2) that the action was unenforceable
under substantive law; and (3) that the action was barred by the statute
of limitations and/or laches.

HERMOSISIMA, JR., J.: Petitioner's Motion to Dismiss was denied by the trial court in an Order
dated March 16, 1979. 4 Petitioner then filed its Answer on May 2,
This is a petition for certiorari seeking the annulment of the Decision 1 1979. 5 Thereafter, the trial court gave the parties ten (10) days from
of the then Court of First Instance of Rizal 2 for having been rendered in July 30, 1979 to submit their respective memoranda after the
grave abuse of discretion. Private respondents Robes-Francisco Realty submission of which the case would be deemed submitted for
and Development Corporation (hereafter, "the Corporation") and Adalia resolution. 6
F. Robes filed in the court a quo, an action for specific performance to
compel petitioner to redeem 800 preferred shares of stock with a face On September 7, 1979, the trial court rendered the herein assailed
value of P8,000.00 and to pay 1% quarterly interest thereon as decision in favor of private respondents. In ordering petitioner to pay
quarterly dividend owing them under the terms and conditions of the private respondents the face value of the stock certificates as
certificates of stock. redemption price, plus 1% quarterly interest thereon until full payment,
the trial court ruled:
The court a quo rendered judgment in favor of private respondents;
hence, this instant petition. There being no issue of fact raised by either of the parties who filed
their respective memoranda delineating their respective contentions, a
Herein parties debate only legal issues, no issues of fact having been judgment on the pleadings, conformably with an earlier order of the
raised by them in the court a quo. For ready reference, however, the Court, appears to be in order.
following narration of pertinent transactions and events is in order:
From a further perusal of the pleadings, it appears that the provision of
On September 18, 1961, private respondent Corporation secured a the stock certificates in question to the effect that the plaintiffs shall
loan from petitioner in the amount of P120,000.00. As part of the have the right to receive a quarterly dividend of One Per Centum (1%),
proceeds of the loan, preferred shares of stocks were issued to private cumulative and participating, clearly and unequivocably [sic] indicates
respondent Corporation, through its officers then, private respondent that the same are "interest bearing stocks" which are stocks issued by
Adalia F. Robes and one Carlos F. Robes. In other words, instead of a corporation under an agreement to pay a certain rate of interest
giving the legal tender totaling to the full amount of the loan, which is thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled
P120,000.00, petitioner lent such amount partially in the form of money to the payment thereof as a matter of right without necessity of a prior
and partially in the form of stock certificates numbered 3204 and 3205, declaration of dividend.
On the question of the redemption by the defendant of said preferred The preferences are designed to induce persons to subscribe for
shares of stock, the very wordings of the terms and conditions in said shares of a corporation. 9 Preferred shares take a multiplicity of forms.
stock certificates clearly allows the same. The most common forms may be classified into two: (1) preferred
shares as to assets; and (2) preferred shares as to dividends. The
To allow the herein defendant not to redeem said preferred shares of former is a share which gives the holder thereof preference in the
stock and/or pay the interest due thereon despite the clear import of distribution of the assets of the corporation in case of liquidation; 10 the
said provisions by the mere invocation of alleged Central Bank latter is a share the holder of which is entitled to receive dividends on
Circulars prohibiting the same is tantamount to an impairment of the said share to the extent agreed upon before any dividends at all are
obligation of contracts enshrined in no less than the fundamental law paid to the holders of common stock. 11 There is no guaranty, however,
itself. that the share will receive any dividends. Under the old Corporation
Law in force at the time the contract between the petitioner and the
private respondents was entered into, it was provided that "no
Moreover, the herein defendant is considered in estoppel from taking
corporation shall make or declare any dividend except from the surplus
shelter behind a General Banking Act provision to the effect that it
profits arising from its business, or distribute its capital stock or property
cannot buy its own shares of stocks considering that the very terms and
other than actual profits among its members or stockholders until after
conditions in said stock certificates allowing their redemption are its
the payment of its debts and the termination of its existence by
own handiwork.
limitation or lawful dissolution." 12 Similarly, the present Corporation
Code 13 provides that the board of directors of a stock corporation may
As to the claim by the defendant that plaintiffs' cause of action is barred declare dividends only out of unrestricted retained earnings. 14 The
by prescription, suffice it to state that the running of the prescriptive Code, in Section 43, adopting the change made in accounting
period was considered interrupted by the written extrajudicial demands terminology, substituted the phrase "unrestricted retained earnings,"
made by the plaintiffs from the defendant. 7 which may be a more precise term, in place of "surplus profits arising
from its business" in the former law. Thus, the declaration of dividends
Aggrieved by the decision of the trial court, petitioner elevated the case is dependent upon the availability of surplus profit or unrestricted
before us essentially on pure questions of law. Petitioner's statement of retained earnings, as the case may be. Preferences granted to
the issues that it submits for us to adjudicate upon, is as follows: preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the corporation,
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF the right of the former being always subordinate to the latter. Dividends
DISCRETION AMOUNTING TO LACK OR EXCESS OF are thus payable only when there are profits earned by the corporation
JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT and as a general rule, even if there are existing profits, the board of
ADALIA F. ROBES THE AMOUNT OF P8213.69 AS INTERESTS directors has the discretion to determine whether or not dividends are
FROM 1961 TO 1979 ON HER PREFERRED SHARES. to be declared. 15 Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and who can
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF look only to what is left after corporate debts and liabilities are fully
DISCRETION AMOUNTING TO LACK OR EXCESS OF paid. 16
JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR Redeemable shares, on the other hand, are shares usually preferred,
P8,000.00. which by their terms are redeemable at a fixed date, or at the option of
either issuing corporation, or the stockholder, or both at a certain
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF redemption price. 17 A redemption by the corporation of its stock is, in a
DISCRETION AMOUNTING TO LACK OR EXCESS OF sense, a repurchase of it for cancellation. 18 The present Code allows
JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL redemption of shares even if there are no unrestricted retained
BANK TO PETITIONER TO DESIST FROM REDEEMING ITS earnings on the books of the corporation. This is a new provision which
PREFERRED SHARES AND FROM PAYING DIVIDENDS THEREON . in effect qualifies the general rule that the corporation cannot purchase
... its own shares except out of current retained earnings. 19 However,
while redeemable shares may be redeemed regardless of the existence
of unrestricted retained earnings, this is subject to the condition that the
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE
corporation has, after such redemption, assets in its books to cover
COMPLAINT DOES NOT STATE A CAUSE OF ACTION.
debts and liabilities inclusive of capital stock. Redemption, therefore,
may not be made where the corporation is insolvent or if such
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM redemption will cause insolvency or inability of the corporation to meet
OF RESPONDENT ADALIA F. ROBES IS BARRED BY its debts as they mature. 20
PRESCRIPTION OR LACHES. 8
We come now to the merits of the case. The petitioner argues that it
The petition is meritorious. cannot be compelled to redeem the preferred shares issued to the
private respondent. We agree. Respondent judge, in ruling that
Before passing upon the merits of this petition, it may be pertinent to petitioner must redeem the shares in question, stated that:
provide an overview on the nature of preferred shares and the
redemption thereof, considering that these issues lie at the heart of the On the question of the redemption by the defendant of said preferred
dispute. shares of stock, the very wordings of the terms and conditions in said
stock certificates clearly allows the same. 21
A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common stock. What respondent judge failed to recognize was that while the stock
certificate does allow redemption, the option to do so was clearly Art. 1144 of the New Civil Code provides that a right of action that is
vested in the petitioner bank. The redemption therefore is clearly the founded upon a written contract prescribes in ten (10) years. The letter-
type known as "optional". Thus, except as otherwise provided in the demand made by the private respondents to the petitioner was made
stock certificate, the redemption rests entirely with the corporation and only on January 5, 1979, or almost eighteen years after receipt of the
the stockholder is without right to either compel or refuse the written contract in the form of the stock certificate. As noted earlier, this
redemption of its stock. 22 Furthermore, the terms and conditions set letter-demand, significantly, was not formally offered in evidence, nor
forth therein use the word "may". It is a settled doctrine in statutory were any other evidence of demand presented. Therefore, we conclude
construction that the word "may" denotes discretion, and cannot be that the only time the private respondents saw it fit to assert their rights,
construed as having a mandatory effect. We fail to see how respondent if any, to the preferred shares of stock, was after the lapse of almost
judge can ignore what, in his words, are the "very wordings of the terms eighteen years. The same clearly indicates that the right of the private
and conditions in said stock certificates" and construe what is clearly a respondents to any relief under the law has already prescribed.
mere option to be his legal basis for compelling the petitioner to redeem Moreover, the claim of the private respondents is also barred by laches.
the shares in question. Laches has been defined as the failure or neglect, for an unreasonable
length of time, to do that which by exercising due diligence could or
The redemption of said shares cannot be allowed. As pointed out by should have been done earlier; it is negligence or omission to assert a
the petitioner, the Central Bank made a finding that said petitioner has right within a reasonable time, warranting a presumption that the party
been suffering from chronic reserve deficiency, 23 and that such finding entitled to assert it either has abandoned it or declined to assert it. 28
resulted in a directive, issued on January 31, 1973 by then Gov. G.S.
Licaros of the Central Bank, to the President and Acting Chairman of Considering that the terms and conditions set forth in the stock
the Board of the petitioner bank prohibiting the latter from redeeming certificate clearly indicate that redemption of the preferred shares may
any preferred share, on the ground that said redemption would reduce be made at any time after the lapse of two years from the date of issue,
the assets of the Bank to the prejudice of its depositors and creditors. 24 private respondents should have taken it upon themselves, after the
Redemption of preferred shares was prohibited for a just and valid lapse of the said period, to inquire from the petitioner the reason why
reason. The directive issued by the Central Bank Governor was the said shares have not been redeemed. As it is, not only two years
obviously meant to preserve the status quo, and to prevent the financial had lapsed, as agreed upon, but an additional sixteen years passed
ruin of a banking institution that would have resulted in adverse before the private respondents saw it fit to demand their right. The
repercussions, not only to its depositors and creditors, but also to the petitioner, at the time it issued said preferred shares to the private
banking industry as a whole. The directive, in limiting the exercise of a respondents in 1961, could not have known that it would be suffering
right granted by law to a corporate entity, may thus be considered as from chronic reserve deficiency twelve years later. Had the private
an exercise of police power. The respondent judge insists that the respondents been vigilant in asserting their rights, the redemption could
directive constitutes an impairment of the obligation of contracts. It has, have been effected at a time when the petitioner bank was not suffering
however, been settled that the Constitutional guaranty of non- from any financial crisis.
impairment of obligations of contract is limited by the exercise of the
police power of the state, the reason being that public welfare is WHEREFORE, the instant petition, being impressed with merit, is
superior to private rights. 25 hereby GRANTED. The challenged decision of respondent judge is set
aside and the complaint against the petitioner is dismissed.
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly dividend Costs against the private respondents.
of One Per Centum (1%) cumulative and participating, it "clearly and
unequivocably (sic) indicates that the same are "interest bearing
SO ORDERED.
stocks" or stocks issued by a corporation under an agreement to pay a
certain rate of interest thereon. As such, plaintiffs (private respondents
G.R. No. 150976 October 18, 2004
herein) become entitled to the payment thereof as a matter of right
without necessity of a prior declaration of dividend." 26 There is no legal
basis for this observation. Both Sec. 16 of the Corporation Law and CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES,
Sec. 43 of the present Corporation Code prohibit the issuance of any XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL
stock dividend without the approval of stockholders, representing not CENTER PARAÑAQUE, INC., petitioners, vs. ANGELES
less than two-thirds (2/3) of the outstanding capital stock at a regular or BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO,
special meeting duly called for the purpose. These provisions ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ,
underscore the fact that payment of dividends to a stockholder is not a ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
matter of right but a matter of consensus. Furthermore, "interest VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES,
bearing stocks", on which the corporation agrees absolutely to pay REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ,
interest before dividends are paid to common stockholders, is legal only SALVACION VILLAMORA, and HUMBERTO VILLAREAL,
when construed as requiring payment of interest as dividends from net respondents.
earnings or surplus only. 27 Clearly, the respondent judge, in compelling
the petitioner to redeem the shares in question and to pay the DECISION
corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms QUISUMBING, J.:
and conditions specified in the stock certificate, as well as the clear
mandate of the law. For review on certiorari is the Partial Judgment1 dated November 26,
2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of
Anent the issue of prescription, this Court so holds that the claim of Parañaque City, Branch 258. The trial court declared the February 9,
private respondent is already barred by prescription as well as laches. 2001, election of the board of directors of the Medical Center
Parañaque, Inc. (MCPI) valid. The Partial Judgment dismissed stockholders’ meeting and election for directors. During the course of
petitioners’ first cause of action, specifically, to annul said election for the proceedings, respondent Rustico Jimenez, citing Article VII, as
depriving petitioners their voting rights and to be voted on as members amended, and notwithstanding MCPI’s history, declared over the
of the board. objections of herein petitioners, that no Class "B" shareholder was
qualified to run or be voted upon as a director. In the past, MCPI had
The facts, as culled from records, are as follows: seen holders of Class "B" shares voted for and serve as members of
the corporate board and some Class "B" share owners were in fact
nominated for election as board members. Nonetheless, Jimenez went
Petitioners and the respondents are stockholders of MCPI, with the
on to announce that the candidates holding Class "A" shares were the
former holding Class "B" shares and the latter owning Class "A" shares.
winners of all seats in the corporate board. The petitioners protested,
claiming that Article VII was null and void for depriving them, as Class
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, "B" shareholders, of their right to vote and to be voted upon, in violation
Sucat, Parañaque City. It was organized sometime in September 1977. of the Corporation Code (Batas Pambansa Blg. 68), as amended.
At the time of its incorporation, Act No. 1459, the old Corporation Law
was still in force and effect. Article VII of MCPI’s original Articles of
On March 22, 2001, after their protest was given short shrift, herein
Incorporation, as approved by the Securities and Exchange
petitioners filed a Complaint for Injunction, Accounting and Damages,
Commission (SEC) on October 26, 1977, reads as follows:
docketed as Civil Case No. CV-01-0140 before the RTC of Parañaque
City, Branch 258. Said complaint was founded on two (2) principal
SEVENTH. That the authorized capital stock of the corporation is TWO causes of action, namely:
MILLION (P2,000,000.00) PESOS, Philippine Currency, divided into
TWO THOUSAND (2,000) SHARES at a par value of P100 each share,
a. Annulment of the declaration of directors of the MCPI made during
whereby the ONE THOUSAND SHARES issued to, and subscribed by,
the February 9, 2001 Annual Stockholders’ Meeting, and for the
the incorporating stockholders shall be classified as Class A shares
conduct of an election whereat all stockholders, irrespective of the
while the other ONE THOUSAND unissued shares shall be considered
classification of the shares they hold, should be afforded their right to
as Class B shares. Only holders of Class A shares can have the right to
vote and the right to be elected as directors or as corporate officers.2 vote and be voted for; and
(Stress supplied)
b. Stockholders’ derivative suit challenging the validity of a contract
entered into by the Board of Directors of MCPI for the operation of the
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI
ultrasound unit.5
was amended, to read thus:

Subsequently, the complaint was amended to implead MCPI as party-


SEVENTH. That the authorized capital stock of the corporation is FIVE
plaintiff for purposes only of the second cause of action.
MILLION (P5,000,000.00) PESOS, divided as follows:

Before the trial court, the herein petitioners alleged that they were
CLASS NO. OF SHARES PAR VALUE
deprived of their right to vote and to be voted on as directors at the
"A" 1,000 P1,000.00
annual stockholders’ meeting held on February 9, 2001, because
"B" 4,000 P1,000.00
respondents had erroneously relied on Article VII of the Articles of
Only holders of Class A shares have the right to vote and the right to be
Incorporation of MCPI, despite Article VII being contrary to the
elected as directors or as corporate officers.3 (Emphasis supplied)
Corporation Code, thus null and void. Additionally, respondents were in
estoppel, because in the past, petitioners were allowed to vote and to
The foregoing amendment was approved by the SEC on June 7, 1983. be elected as members of the board. They further claimed that the
While the amendment granted the right to vote and to be elected as privilege granted to the Class "A" shareholders was more in the nature
directors or corporate officers only to holders of Class "A" shares, of a right granted to founder’s shares.
holders of Class "B" stocks were granted the same rights and privileges
as holders of Class "A" stocks with respect to the payment of dividends.
In their Answer, the respondents averred that the provisions of Article
VII clearly and categorically state that only holders of Class "A" shares
On September 9, 1992, Article VII was again amended to provide as have the exclusive right to vote and be elected as directors and officers
follows: of the corporation. They denied that the exclusivity was intended only
as a privilege granted to founder’s shares, as no such proviso is found
SEVENTH: That the authorized capital stock of the corporation is in the Articles of Incorporation. The respondents further claimed that
THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows: the exclusivity of the right granted to Class "A" holders cannot be
defeated or impaired by any subsequent legislative enactment, e.g. the
CLASS NO. OF SHARES PAR VALUE New Corporation Code, as the Articles of Incorporation is an intra-
"A" 1,000 P1,000.00 corporate contract between the corporation and its members; between
"B" 31,000 1,000.00 the corporation and its stockholders; and among the stockholders. They
Except when otherwise provided by law, only holders of Class "A" submit that to allow Class "B" shareholders to vote and be elected as
shares have the right to vote and the right to be elected as directors or directors would constitute a violation of MCPI’s franchise or charter as
as corporate officers4 (Stress and underscoring supplied). granted by the State.

The SEC approved the foregoing amendment on September 22, 1993. At the pre-trial, the trial court ruled that a partial judgment could be
rendered on the first cause of action and required the parties to submit
On February 9, 2001, the shareholders of MCPI held their annual their respective position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the The respondents, in turn, maintain that the grant of exclusive voting
dispositive portion of which reads: rights to Class "A" shares is clearly provided in the Articles of
Incorporation and is in accord with Section 59 of the Corporation Law
WHEREFORE, viewed in the light of the foregoing, the election held on (Act No. 1459), which was the prevailing law when MCPI was
February 9, 2001 is VALID as the holders of CLASS "B" shares are not incorporated in 1977. They likewise submit that as the Articles of
entitled to vote and be voted for and this case based on the First Cause Incorporation of MCPI is in the nature of a contract between the
of Action is DISMISSED. corporation and its shareholders and Section 6 of the Corporation Code
could not retroactively apply to it without violating the non-impairment
clause10 of the Constitution.
SO ORDERED.6

In finding for the respondents, the trial court ruled that corporations had We find merit in the petition.
the power to classify their shares of stocks, such as "voting and non-
voting" shares, conformably with Section 67 of the Corporation Code of When Article VII of the Articles of Incorporation of MCPI was amended
the Philippines. It pointed out that Article VII of both the original and in 1992, the phrase "except when otherwise provided by law" was
amended Articles of Incorporation clearly provided that only Class "A" inserted in the provision governing the grant of voting powers to Class
shareholders could vote and be voted for to the exclusion of Class "B" "A" shareholders. This particular amendment is relevant for it speaks of
shareholders, the exception being in instances provided by law, such a law providing for exceptions to the exclusive grant of voting rights to
as those enumerated in Section 6, paragraph 6 of the Corporation Class "A" stockholders. Which law was the amendment referring to?
Code. The RTC found merit in the respondents’ theory that the Articles The determination of which law to apply is necessary. There are two
of Incorporation, which defines the rights and limitations of all its laws being cited and relied upon by the parties in this case. In this
shareholders, is a contract between MCPI and its shareholders. It is instance, the law in force at the time of the 1992 amendment was the
thus the law between the parties and should be strictly enforced as to Corporation Code (B.P. Blg. 68), not the Corporation Law (Act No.
them. It brushed aside the petitioners’ claim that the Class "A" 1459), which had been repealed by then.
shareholders were in estoppel, as the election of Class "B"
shareholders to the corporate board may be deemed as a mere act of We find and so hold that the law referred to in the amendment to Article
benevolence on the part of the officers. Finally, the court brushed aside VII refers to the Corporation Code and no other law. At the time of the
the "founder’s shares" theory of the petitioners for lack of factual basis. incorporation of MCPI in 1977, the right of a corporation to classify its
shares of stock was sanctioned by Section 5 of Act No. 1459. The law
Hence, this petition submitting the sole legal issue of whether or not the repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of
Court a quo, in rendering the Partial Judgment dated November 26, classification of stock shares to corporations, but with a significant
2001, has decided a question of substance in a way not in accord with change. Under Section 6 of B.P. Blg. 68, the requirements and
law and jurisprudence considering that: restrictions on voting rights were explicitly provided for, such that "no
share may be deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless otherwise
1. Under the Corporation Code, the exclusive voting right and right to
provided in this Code" and that "there shall always be a class or series
be voted granted by the Articles of Incorporation of the MCPI to Class A
of shares which have complete voting rights." Section 6 of the
shareholders is null and void, or already extinguished;
Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class "B"
2. Hence, the declaration of directors made during the February 9, shares of MCPI stocks are clearly categorized to be "preferred" or
2001 Annual Stockholders’ Meeting on the basis of the purported "redeemable" shares, the holders of said Class "B" shares may not be
exclusive voting rights is null and void for having been done without the deprived of their voting rights. Note that there is nothing in the Articles
benefit of an election and in violation of the rights of plaintiffs and Class of Incorporation nor an iota of evidence on record to show that Class
B shareholders; and "B" shares were categorized as either "preferred" or "redeemable"
shares. The only possible conclusion is that Class "B" shares fall under
3. Perforce, another election should be conducted to elect the directors neither category and thus, under the law, are allowed to exercise voting
of the MCPI, this time affording the holders of Class B shares full voting rights.
right and the right to be voted.8
One of the rights of a stockholder is the right to participate in the control
The issue for our resolution is whether or not holders of Class "B" and management of the corporation that is exercised through his vote.
shares of the MCPI may be deprived of the right to vote and be voted The right to vote is a right inherent in and incidental to the ownership of
for as directors in MCPI. corporate stock, and as such is a property right. The stockholder
cannot be deprived of the right to vote his stock nor may the right be
Before us, petitioners assert that Article VII of the Articles of essentially impaired, either by the legislature or by the corporation,
Incorporation of MCPI, which denied them voting rights, is null and void without his consent, through amending the charter, or the by-laws.11
for being contrary to Section 6 of the Corporation Code. They point out
that Section 6 prohibits the deprivation of voting rights except as to Neither do we find merit in respondents’ position that Section 6 of the
preferred and redeemable shares only. Hence, under the present law Corporation Code cannot apply to MCPI without running afoul of the
on corporations, all shareholders, regardless of classification, other non-impairment clause of the Bill of Rights. Section 14812 of the
than holders of preferred or redeemable shares, are entitled to vote and Corporation Code expressly provides that it shall apply to corporations
to be elected as corporate directors or officers. Since the Class "B" in existence at the time of the effectivity of the Code. Hence, the non-
shareholders are not classified as holders of either preferred or impairment clause is inapplicable in this instance. When Article VII of
redeemable shares, then it necessarily follows that they are entitled to the Articles of Incorporation of MCPI were amended in 1992, the board
vote and to be voted for as directors or officers.
of directors and stockholders must have been aware of Section 6 of the The Antecedents
Corporation Code and intended that Article VII be construed in
harmony with the Code, which was then already in force and effect. The facts, according to petitioner Wilson P. Gamboa, a stockholder of
Since Section 6 of the Corporation Code expressly prohibits the Philippine Long Distance Telephone Company (PLDT), are as follows:1
deprivation of voting rights, except as to "preferred" and "redeemable"
shares, then Article VII of the Articles of Incorporation cannot be
On 28 November 1928, the Philippine Legislature enacted Act No.
construed as granting exclusive voting rights to Class "A" shareholders,
3436 which granted PLDT a franchise and the right to engage in
to the prejudice of Class "B" shareholders, without running afoul of the
telecommunications business. In 1969, General Telephone and
letter and spirit of the Corporation Code. Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding common shares
The respondents then take the tack that the phrase "except when of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated
otherwise provided by law" found in the amended Articles is only a by several persons, including Roland Gapud and Jose Campos, Jr.
handwritten insertion and could have been inserted by anybody and Subsequently, PHI became the owner of 111,415 shares of stock of
that no board resolution was ever passed authorizing or approving said PTIC by virtue of three Deeds of Assignment executed by PTIC
amendment. stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the
Said contention is not for this Court to pass upon, involving as it does a Presidential Commission on Good Government (PCGG). The 111,415
factual question, which is not proper in this petition. In an appeal via PTIC shares, which represent about 46.125 percent of the outstanding
certiorari, only questions of law may be reviewed.13 Besides, capital stock of PTIC, were later declared by this Court to be owned by
respondents did not adduce persuasive evidence, but only bare the Republic of the Philippines.2
allegations, to support their suspicion. The presumption that in the
amendment process, the ordinary course of business has been In 1999, First Pacific, a Bermuda-registered, Hong Kong-based
followed14 and that official duty has been regularly performed15 on the investment firm, acquired the remaining 54 percent of the outstanding
part of the SEC, applies in this case. capital stock of PTIC. On 20 November 2006, the Inter-Agency
Privatization Council (IPC) of the Philippine Government announced
WHEREFORE, the petition is GRANTED. The Partial Judgment dated that it would sell the 111,415 PTIC shares, or 46.125 percent of the
November 26, 2001 of the Regional Trial Court of Parañaque City, outstanding capital stock of PTIC, through a public bidding to be
Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET conducted on 4 December 2006. Subsequently, the public bidding was
ASIDE. No pronouncement as to costs. reset to 8 December 2006, and only two bidders, Parallax Venture
Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their
SO ORDERED. bids. Parallax won with a bid of P25.6 billion or US$510 million.

G.R. No. 176579 June 28, 2011 Thereafter, First Pacific announced that it would exercise its right of first
refusal as a PTIC stockholder and buy the 111,415 PTIC shares by
WILSON P. GAMBOA, Petitioner, vs. FINANCE SECRETARY matching the bid price of Parallax. However, First Pacific failed to do so
MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. by the 1 February 2007 deadline set by IPC and instead, yielded its
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE right to PTIC itself which was then given by IPC until 2 March 2007 to
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) buy the PTIC shares. On 14 February 2007, First Pacific, through its
IN THEIR CAPACITIES AS CHAIR AND MEMBERS, subsidiary, MPAH, entered into a Conditional Sale and Purchase
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN Agreement of the 111,415 PTIC shares, or 46.125 percent of the
ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY outstanding capital stock of PTIC, with the Philippine Government for
AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., the price of P25,217,556,000 or US$510,580,189. The sale was
CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG completed on 28 February 2007.
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT Since PTIC is a stockholder of PLDT, the sale by the Philippine
NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE Government of 46.125 percent of PTIC shares is actually an indirect
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES sale of 12 million shares or about 6.3 percent of the outstanding
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE common shares of PLDT. With the sale, First Pacific’s common
PHILIPPINE STOCK EXCHANGE, Respondents. PABLITO V. shareholdings in PLDT increased from 30.7 percent to 37 percent,
SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention. thereby increasing the common shareholdings of foreigners in
PLDT to about 81.47 percent. This violates Section 11, Article XII of
DECISION the 1987 Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40 percent.3
CARPIO, J.:
On the other hand, public respondents Finance Secretary Margarito B.
Teves, Undersecretary John P. Sevilla, and PCGG Commissioner
The Case
Ricardo Abcede allege the following relevant facts:
This is an original petition for prohibition, injunction, declaratory relief
On 9 November 1967, PTIC was incorporated and had since engaged
and declaration of nullity of the sale of shares of stock of Philippine
in the business of investment holdings. PTIC held 26,034,263 PLDT
Telecommunications Investment Corporation (PTIC) by the government
common shares, or 13.847 percent of the total PLDT outstanding
of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
common shares. PHI, on the other hand, was incorporated in 1977, and
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).
became the owner of 111,415 PTIC shares or 46.125 percent of the this, combined with Japanese NTT DoCoMo’s common shareholdings
outstanding capital stock of PTIC by virtue of three Deeds of in PLDT, would result to a total foreign common shareholdings in PLDT
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In of 51.56 percent which is over the 40 percent constitutional limit.6
1986, the 111,415 PTIC shares held by PHI were sequestered by the Petitioner asserts:
PCGG, and subsequently declared by this Court as part of the ill-gotten
wealth of former President Ferdinand Marcos. The sequestered PTIC If and when the sale is completed, First Pacific’s equity in PLDT will go
shares were reconveyed to the Republic of the Philippines in up from 30.7 percent to 37.0 percent of its common – or voting-
accordance with this Court’s decision4 which became final and stockholdings, x x x. Hence, the consummation of the sale will put the
executory on 8 August 2006. two largest foreign investors in PLDT – First Pacific and Japan’s NTT
DoCoMo, which is the world’s largest wireless telecommunications firm,
The Philippine Government decided to sell the 111,415 PTIC shares, owning 51.56 percent of PLDT common equity. x x x With the
which represent 6.4 percent of the outstanding common shares of stock completion of the sale, data culled from the official website of the New
of PLDT, and designated the Inter-Agency Privatization Council (IPC), York Stock Exchange (www.nyse.com) showed that those foreign
composed of the Department of Finance and the PCGG, as the entities, which own at least five percent of common equity, will
disposing entity. An invitation to bid was published in seven different collectively own 81.47 percent of PLDT’s common equity. x x x
newspapers from 13 to 24 November 2006. On 20 November 2006, a
pre-bid conference was held, and the original deadline for bidding x x x as the annual disclosure reports, also referred to as Form 20-K
scheduled on 4 December 2006 was reset to 8 December 2006. The reports x x x which PLDT submitted to the New York Stock Exchange
extension was published in nine different newspapers. for the period 2003-2005, revealed that First Pacific and several other
foreign entities breached the constitutional limit of 40 percent
During the 8 December 2006 bidding, Parallax Capital Management LP ownership as early as 2003. x x x"7
emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of Petitioner raises the following issues: (1) whether the consummation of
the bidding results and gave First Pacific until 1 February 2007 to the then impending sale of 111,415 PTIC shares to First Pacific violates
exercise its right of first refusal in accordance with PTIC’s Articles of the constitutional limit on foreign ownership of a public utility; (2)
Incorporation. First Pacific announced its intention to match Parallax’s whether public respondents committed grave abuse of discretion in
bid. allowing the sale of the 111,415 PTIC shares to First Pacific; and (3)
whether the sale of common shares to foreigners in excess of 40
On 31 January 2007, the House of Representatives (HR) Committee on percent of the entire subscribed common capital stock violates the
Good Government conducted a public hearing on the particulars of the constitutional limit on foreign ownership of a public utility.8
then impending sale of the 111,415 PTIC shares. Respondents Teves
and Sevilla were among those who attended the public hearing. The On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a
HR Committee Report No. 2270 concluded that: (a) the auction of the Motion for Leave to Intervene and Admit Attached Petition-in-
government’s 111,415 PTIC shares bore due diligence, transparency Intervention. In the Resolution of 28 August 2007, the Court granted the
and conformity with existing legal procedures; and (b) First Pacific’s motion and noted the Petition-in-Intervention.
intended acquisition of the government’s 111,415 PTIC shares
resulting in First Pacific’s 100% ownership of PTIC will not violate
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in
the 40 percent constitutional limit on foreign ownership of a public
seeking, among others, to enjoin and/or nullify the sale by respondents
utility since PTIC holds only 13.847 percent of the total
of the 111,415 PTIC shares to First Pacific or assignee." Petitioners-in-
outstanding common shares of PLDT.5 On 28 February 2007, First
intervention claim that, as PLDT subscribers, they have a "stake in the
Pacific completed the acquisition of the 111,415 shares of stock of
outcome of the controversy x x x where the Philippine Government is
PTIC. completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions
Respondent Manuel V. Pangilinan admits the following facts: (a) the of the Philippine Constitution."
IPC conducted a public bidding for the sale of 111,415 PTIC shares or
46 percent of the outstanding capital stock of PTIC (the remaining 54
The Issue
percent of PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid amounting to
P25,217,556,000; (c) pursuant to the right of first refusal in favor of This Court is not a trier of facts. Factual questions such as those raised
PTIC and its shareholders granted in PTIC’s Articles of Incorporation, by petitioner,9 which indisputably demand a thorough examination of
MPAH, a First Pacific affiliate, exercised its right of first refusal by the evidence of the parties, are generally beyond this Court’s
matching the highest bid offered for PTIC shares on 13 February 2007; jurisdiction. Adhering to this well-settled principle, the Court shall
and (d) on 28 February 2007, the sale was consummated when MPAH confine the resolution of the instant controversy solely on the threshold
paid IPC P25,217,556,000 and the government delivered the and purely legal issue of whether the term "capital" in Section 11,
certificates for the 111,415 PTIC shares. Respondent Pangilinan Article XII of the Constitution refers to the total common shares only or
denies the other allegations of facts of petitioner. to the total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility.
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the The Ruling of the Court
111,415 PTIC shares. Petitioner claims, among others, that the sale of
the 111,415 PTIC shares would result in an increase in First Pacific’s The petition is partly meritorious.
common shareholdings in PLDT from 30.7 percent to 37 percent, and
Petition for declaratory relief treated as petition for mandamus recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as
At the outset, petitioner is faced with a procedural barrier. Among the one for mandamus.15 (Emphasis supplied)
remedies petitioner seeks, only the petition for prohibition is within the
original jurisdiction of this court, which however is not exclusive but is In the present case, petitioner seeks primarily the interpretation of the
concurrent with the Regional Trial Court and the Court of Appeals. The term "capital" in Section 11, Article XII of the Constitution. He prays that
actions for declaratory relief,10 injunction, and annulment of sale are not this Court declare that the term "capital" refers to common shares only,
embraced within the original jurisdiction of the Supreme Court. On this and that such shares constitute "the sole basis in determining foreign
ground alone, the petition could have been dismissed outright. equity in a public utility." Petitioner further asks this Court to declare
any ruling inconsistent with such interpretation unconstitutional.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing the The interpretation of the term "capital" in Section 11, Article XII of the
grounds in support of the petition for prohibition since on 28 February Constitution has far-reaching implications to the national economy. In
2007, the questioned sale was consummated when MPAH paid IPC fact, a resolution of this issue will determine whether Filipinos are
P25,217,556,000 and the government delivered the certificates for the masters, or second class citizens, in their own country. What is at stake
111,415 PTIC shares. here is whether Filipinos or foreigners will have effective control of the
national economy. Indeed, if ever there is a legal issue that has far-
However, since the threshold and purely legal issue on the definition of reaching implications to the entire nation, and to future generations of
the term "capital" in Section 11, Article XII of the Constitution has far- Filipinos, it is the threshhold legal issue presented in this case.
reaching implications to the national economy, the Court treats the
petition for declaratory relief as one for mandamus.12 The Court first encountered the issue on the definition of the term
"capital" in Section 11, Article XII of the Constitution in the case of
In Salvacion v. Central Bank of the Philippines,13 the Court treated the Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case
petition for declaratory relief as one for mandamus considering the involved the same public utility (PLDT) and substantially the same
grave injustice that would result in the interpretation of a banking law. In private respondents. Despite the importance and novelty of the
that case, which involved the crime of rape committed by a foreign constitutional issue raised therein and despite the fact that the petition
tourist against a Filipino minor and the execution of the final judgment involved a purely legal question, the Court declined to resolve the case
in the civil case for damages on the tourist’s dollar deposit with a local on the merits, and instead denied the same for disregarding the
bank, the Court declared Section 113 of Central Bank Circular No. 960, hierarchy of courts.17 There, petitioner Fernandez assailed on a pure
exempting foreign currency deposits from attachment, garnishment or question of law the Regional Trial Court’s Decision of 21 February 2003
any other order or process of any court, inapplicable due to the peculiar via a petition for review under Rule 45. The Court’s Resolution, denying
circumstances of the case. The Court held that "injustice would result the petition, became final on 21 December 2004.
especially to a citizen aggrieved by a foreign guest like accused x x x"
that would "negate Article 10 of the Civil Code which provides that ‘in The instant petition therefore presents the Court with another
case of doubt in the interpretation or application of laws, it is presumed opportunity to finally settle this purely legal issue which is of
that the lawmaking body intended right and justice to prevail.’" The transcendental importance to the national economy and a fundamental
Court therefore required respondents Central Bank of the Philippines, requirement to a faithful adherence to our Constitution. The Court must
the local bank, and the accused to comply with the writ of execution forthwith seize such opportunity, not only for the benefit of the litigants,
issued in the civil case for damages and to release the dollar deposit of but more significantly for the benefit of the entire Filipino people, to
the accused to satisfy the judgment. ensure, in the words of the Constitution, "a self-reliant and independent
national economy effectively controlled by Filipinos."18 Besides, in the
In Alliance of Government Workers v. Minister of Labor,14 the Court light of vague and confusing positions taken by government agencies
similarly brushed aside the procedural infirmity of the petition for on this purely legal issue, present and future foreign investors in this
declaratory relief and treated the same as one for mandamus. In country deserve, as a matter of basic fairness, a categorical ruling from
Alliance, the issue was whether the government unlawfully excluded this Court on the extent of their participation in the capital of public
petitioners, who were government employees, from the enjoyment of utilities and other nationalized businesses.
rights to which they were entitled under the law. Specifically, the
question was: "Are the branches, agencies, subdivisions, and Despite its far-reaching implications to the national economy, this
instrumentalities of the Government, including government owned or purely legal issue has remained unresolved for over 75 years since the
controlled corporations included among the four ‘employers’ under 1935 Constitution. There is no reason for this Court to evade this ever
Presidential Decree No. 851 which are required to pay their employees recurring fundamental issue and delay again defining the term "capital,"
x x x a thirteenth (13th) month pay x x x ?" The Constitutional principle which appears not only in Section 11, Article XII of the Constitution, but
involved therein affected all government employees, clearly justifying a also in Section 2, Article XII on co-production and joint venture
relaxation of the technical rules of procedure, and certainly requiring agreements for the development of our natural resources,19 in Section
the interpretation of the assailed presidential decree. 7, Article XII on ownership of private lands,20 in Section 10, Article XII
on the reservation of certain investments to Filipino citizens,21 in
In short, it is well-settled that this Court may treat a petition for Section 4(2), Article XIV on the ownership of educational institutions,22
declaratory relief as one for mandamus if the issue involved has far- and in Section 11(2), Article XVI on the ownership of advertising
reaching implications. As this Court held in Salvacion: companies.23

The Court has no original and exclusive jurisdiction over a petition for Petitioner has locus standi
declaratory relief. However, exceptions to this rule have been
There is no dispute that petitioner is a stockholder of PLDT. As such, associations organized under the laws of the Philippines, at least
he has the right to question the subject sale, which he claims to violate sixty per centum of whose capital is owned by such citizens; nor
the nationality requirement prescribed in Section 11, Article XII of the shall such franchise, certificate, or authorization be exclusive in
Constitution. If the sale indeed violates the Constitution, then there is a character or for a longer period than fifty years. Neither shall any such
possibility that PLDT’s franchise could be revoked, a dire consequence franchise or right be granted except under the condition that it shall be
directly affecting petitioner’s interest as a stockholder. subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity
More importantly, there is no question that the instant petition raises participation in public utilities by the general public. The participation of
matters of transcendental importance to the public. The fundamental foreign investors in the governing body of any public utility enterprise
and threshold legal issue in this case, involving the national economy shall be limited to their proportionate share in its capital, and all the
and the economic welfare of the Filipino people, far outweighs any executive and managing officers of such corporation or association
perceived impediment in the legal personality of the petitioner to bring must be citizens of the Philippines. (Emphasis supplied)
this action.
The above provision substantially reiterates Section 5, Article XIV of the
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a 1973 Constitution, thus:
suit on matters of transcendental importance to the public, thus:
Section 5. No franchise, certificate, or any other form of
In Tañada v. Tuvera, the Court asserted that when the issue authorization for the operation of a public utility shall be granted
concerns a public right and the object of mandamus is to obtain except to citizens of the Philippines or to corporations or
the enforcement of a public duty, the people are regarded as the associations organized under the laws of the Philippines at least
real parties in interest; and because it is sufficient that petitioner sixty per centum of the capital of which is owned by such citizens,
is a citizen and as such is interested in the execution of the laws, nor shall such franchise, certificate, or authorization be exclusive in
he need not show that he has any legal or special interest in the character or for a longer period than fifty years. Neither shall any such
result of the action. In the aforesaid case, the petitioners sought to franchise or right be granted except under the condition that it shall be
enforce their right to be informed on matters of public concern, a right subject to amendment, alteration, or repeal by the National Assembly
then recognized in Section 6, Article IV of the 1973 Constitution, in when the public interest so requires. The State shall encourage equity
connection with the rule that laws in order to be valid and enforceable participation in public utilities by the general public. The participation of
must be published in the Official Gazette or otherwise effectively foreign investors in the governing body of any public utility enterprise
promulgated. In ruling for the petitioners’ legal standing, the Court shall be limited to their proportionate share in the capital thereof.
declared that the right they sought to be enforced ‘is a public right (Emphasis supplied)
recognized by no less than the fundamental law of the land.’
The foregoing provision in the 1973 Constitution reproduced Section 8,
Legaspi v. Civil Service Commission, while reiterating Tañada, further Article XIV of the 1935 Constitution, viz:
declared that ‘when a mandamus proceeding involves the assertion
of a public right, the requirement of personal interest is satisfied Section 8. No franchise, certificate, or any other form of
by the mere fact that petitioner is a citizen and, therefore, part of authorization for the operation of a public utility shall be granted
the general ‘public’ which possesses the right.’ except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines sixty per
Further, in Albano v. Reyes, we said that while expenditure of public centum of the capital of which is owned by citizens of the
funds may not have been involved under the questioned contract for Philippines, nor shall such franchise, certificate, or authorization be
the development, management and operation of the Manila exclusive in character or for a longer period than fifty years. No
International Container Terminal, ‘public interest [was] definitely franchise or right shall be granted to any individual, firm, or corporation,
involved considering the important role [of the subject contract] . . except under the condition that it shall be subject to amendment,
. in the economic development of the country and the magnitude alteration, or repeal by the Congress when the public interest so
of the financial consideration involved.’ We concluded that, as a requires. (Emphasis supplied)
consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioner’s standing. Father Joaquin G. Bernas, S.J., a leading member of the 1986
(Emphasis supplied) Constitutional Commission, reminds us that the Filipinization provision
in the 1987 Constitution is one of the products of the spirit of
Clearly, since the instant petition, brought by a citizen, involves matters nationalism which gripped the 1935 Constitutional Convention.25 The
of transcendental public importance, the petitioner has the requisite 1987 Constitution "provides for the Filipinization of public utilities by
locus standi. requiring that any form of authorization for the operation of public
utilities should be granted only to ‘citizens of the Philippines or to
corporations or associations organized under the laws of the
Definition of the Term "Capital" in Section 11, Article XII of the
Philippines at least sixty per centum of whose capital is owned by such
1987 Constitution
citizens.’ The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy
Section 11, Article XII (National Economy and Patrimony) of the 1987 and for national security."26 The evident purpose of the citizenship
Constitution mandates the Filipinization of public utilities, to wit: requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.27 This specific provision
Section 11. No franchise, certificate, or any other form of explicitly reserves to Filipino citizens control of public utilities, pursuant
authorization for the operation of a public utility shall be granted to an overriding economic goal of the 1987 Constitution: to "conserve
except to citizens of the Philippines or to corporations or
and develop our patrimony"28 and ensure "a self-reliant and "controlling interest" in view of testing compliance with the 40%
independent national economy effectively controlled by Filipinos."29 constitutional limitation on foreign ownership in public utilities."35

Any citizen or juridical entity desiring to operate a public utility must Similarly, respondent Manuel V. Pangilinan does not define the term
therefore meet the minimum nationality requirement prescribed in "capital" in Section 11, Article XII of the Constitution. Neither does he
Section 11, Article XII of the Constitution. Hence, for a corporation to be refute petitioner’s claim of foreigners holding more than 40 percent of
granted authority to operate a public utility, at least 60 percent of its PLDT’s common shares. Instead, respondent Pangilinan focuses on
"capital" must be owned by Filipino citizens. the procedural flaws of the petition and the alleged violation of the due
process rights of foreigners. Respondent Pangilinan emphasizes in his
The crux of the controversy is the definition of the term "capital." Does Memorandum (1) the absence of this Court’s jurisdiction over the
the term "capital" in Section 11, Article XII of the Constitution refer to petition; (2) petitioner’s lack of standing; (3) mootness of the petition;
common shares or to the total outstanding capital stock (combined total (4) non-availability of declaratory relief; and (5) the denial of due
of common and non-voting preferred shares)? process rights. Moreover, respondent Pangilinan alleges that the issue
should be whether "owners of shares in PLDT as well as owners of
shares in companies holding shares in PLDT may be required to
Petitioner submits that the 40 percent foreign equity limitation in
relinquish their shares in PLDT and in those companies without any law
domestic public utilities refers only to common shares because such
requiring them to surrender their shares and also without notice and
shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term "capital" in trial."
Section 11, Article XII of the Constitution refers to "the ownership of
common capital stock subscribed and outstanding, which class of Respondent Pangilinan further asserts that "Section 11, [Article XII of
shares alone, under the corporate set-up of PLDT, can vote and elect the Constitution] imposes no nationality requirement on the
members of the board of directors." It is undisputed that PLDT’s non- shareholders of the utility company as a condition for keeping
voting preferred shares are held mostly by Filipino citizens.30 This arose their shares in the utility company." According to him, "Section 11
from Presidential Decree No. 217,31 issued on 16 June 1973 by then does not authorize taking one person’s property (the shareholder’s
President Ferdinand Marcos, requiring every applicant of a PLDT stock in the utility company) on the basis of another party’s alleged
telephone line to subscribe to non-voting preferred shares to pay for the failure to satisfy a requirement that is a condition only for that other
investment cost of installing the telephone line.32 party’s retention of another piece of property (the utility company being
at least 60% Filipino-owned to keep its franchise)."36
Petitioners-in-intervention basically reiterate petitioner’s arguments and
adopt petitioner’s definition of the term "capital."33 Petitioners-in- The OSG, representing public respondents Secretary Margarito Teves,
intervention allege that "the approximate foreign ownership of common Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and
capital stock of PLDT x x x already amounts to at least 63.54% of the Chairman Fe Barin, is likewise silent on the definition of the term
total outstanding common stock," which means that foreigners exercise "capital." In its Memorandum37 dated 24 September 2007, the OSG
significant control over PLDT, patently violating the 40 percent foreign also limits its discussion on the supposed procedural defects of the
equity limitation in public utilities prescribed by the Constitution. petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term "capital" in Section
Respondents, on the other hand, do not offer any definition of the term
11, Article XII of the Constitution. The OSG contends that "the petition
"capital" in Section 11, Article XII of the Constitution. More importantly,
actually partakes of a collateral attack on PLDT’s franchise as a public
private respondents Nazareno and Pangilinan of PLDT do not dispute
utility," which in effect requires a "full-blown trial where all the parties in
that more than 40 percent of the common shares of PLDT are held by
interest are given their day in court."38
foreigners.

Respondent Francisco Ed Lim, impleaded as President and Chief


In particular, respondent Nazareno’s Memorandum, consisting of 73
Executive Officer of the Philippine Stock Exchange (PSE), does not
pages, harps mainly on the procedural infirmities of the petition and the
also define the term "capital" and seeks the dismissal of the petition on
supposed violation of the due process rights of the "affected foreign
the following grounds: (1) failure to state a cause of action against Lim;
common shareholders." Respondent Nazareno does not deny
(2) the PSE allegedly implemented its rules and required all listed
petitioner’s allegation of foreigners’ dominating the common
companies, including PLDT, to make proper and timely disclosures;
shareholdings of PLDT. Nazareno stressed mainly that the petition
and (3) the reliefs prayed for in the petition would adversely impact the
"seeks to divest foreign common shareholders purportedly
exceeding 40% of the total common shareholdings in PLDT of stock market.
their ownership over their shares." Thus, "the foreign natural and
juridical PLDT shareholders must be impleaded in this suit so that they In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez
can be heard."34 Essentially, Nazareno invokes denial of due process who claimed to be a stockholder of record of PLDT, contended that the
on behalf of the foreign common shareholders. term "capital" in the 1987 Constitution refers to shares entitled to vote
or the common shares. Fernandez explained thus:
While Nazareno does not introduce any definition of the term "capital,"
he states that "among the factual assertions that need to be The forty percent (40%) foreign equity limitation in public utilities
established to counter petitioner’s allegations is the uniform prescribed by the Constitution refers to ownership of shares of stock
interpretation by government agencies (such as the SEC), entitled to vote, i.e., common shares, considering that it is through
institutions and corporations (such as the Philippine National Oil voting that control is being exercised. x x x
Company-Energy Development Corporation or PNOC-EDC) of
including both preferred shares and common shares in Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially at the time the present (1987) Constitution was drafted – defined
nationalized activities is for Filipino nationals to be always in control of outstanding capital stock as follows:
the corporation undertaking said activities. Otherwise, if the Trial
Court’s ruling upholding respondents’ arguments were to be given Section 137. Outstanding capital stock defined. – The term
credence, it would be possible for the ownership structure of a public "outstanding capital stock", as used in this Code, means the total
utility corporation to be divided into one percent (1%) common stocks shares of stock issued under binding subscription agreements to
and ninety-nine percent (99%) preferred stocks. Following the Trial subscribers or stockholders, whether or not fully or partially paid,
Court’s ruling adopting respondents’ arguments, the common shares except treasury shares.
can be owned entirely by foreigners thus creating an absurd situation
wherein foreigners, who are supposed to be minority shareholders,
Section 137 of the Corporation Code also does not distinguish between
control the public utility corporation. common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the "capital") of a
xxxx corporation. Consequently, petitioner’s suggestion to reckon PLDT’s
foreign equity only on the basis of PLDT’s outstanding common shares
Thus, the 40% foreign ownership limitation should be interpreted to is without legal basis. The language of the Constitution should be
apply to both the beneficial ownership and the controlling interest. understood in the sense it has in common use.

xxxx xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in 17. But even assuming that resort to the proceedings of the
public utilities prescribed by the Constitution refers to ownership of Constitutional Commission is necessary, there is nothing in the Record
shares of stock entitled to vote, i.e., common shares. Furthermore, of the Constitutional Commission (Vol. III) – which petitioner
ownership of record of shares will not suffice but it must be shown that misleadingly cited in the Petition x x x – which supports petitioner’s
the legal and beneficial ownership rests in the hands of Filipino citizens. view that only common shares should form the basis for computing a
Consequently, in the case of petitioner PLDT, since it is already public utility’s foreign equity.
admitted that the voting interests of foreigners which would gain entry
to petitioner PLDT by the acquisition of SMART shares through the xxxx
Questioned Transactions is equivalent to 82.99%, and the nominee
arrangements between the foreign principals and the Filipino owners is
18. In addition, the SEC – the government agency primarily responsible
likewise admitted, there is, therefore, a violation of Section 11, Article
for implementing the Corporation Code, and which also has the
XII of the Constitution. responsibility of ensuring compliance with the Constitution’s foreign
equity restrictions as regards nationalized activities x x x – has
Parenthetically, the Opinions dated February 15, 1988 and April 14, categorically ruled that both common and preferred shares are properly
1987 cited by the Trial Court to support the proposition that the considered in determining outstanding capital stock and the nationality
meaning of the word "capital" as used in Section 11, Article XII of the composition thereof.40
Constitution allegedly refers to the sum total of the shares subscribed
and paid-in by the shareholder and it allegedly is immaterial how the
We agree with petitioner and petitioners-in-intervention. The term
stock is classified, whether as common or preferred, cannot stand in
"capital" in Section 11, Article XII of the Constitution refers only to
the face of a clear legislative policy as stated in the FIA which took
shares of stock entitled to vote in the election of directors, and thus in
effect in 1991 or way after said opinions were rendered, and as clarified
the present case only to common shares,41 and not to the total
by the above-quoted Amendments. In this regard, suffice it to state that
outstanding capital stock comprising both common and non-voting
as between the law and an opinion rendered by an administrative
preferred shares.
agency, the law indubitably prevails. Moreover, said Opinions are
merely advisory and cannot prevail over the clear intent of the framers
of the Constitution. The Corporation Code of the Philippines42 classifies shares as common
or preferred, thus:
In the same vein, the SEC’s construction of Section 11, Article XII of
the Constitution is at best merely advisory for it is the courts that finally Sec. 6. Classification of shares. - The shares of stock of stock
determine what a law means.39 corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel
incorporation: Provided, That no share may be deprived of voting
V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma,
rights except those classified and issued as "preferred" or
Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
"redeemable" shares, unless otherwise provided in this Code:
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea,
Provided, further, That there shall always be a class or series of shares
argued that the term "capital" in Section 11, Article XII of the
which have complete voting rights. Any or all of the shares or series of
Constitution includes preferred shares since the Constitution does not
shares may have a par value or have no par value as may be provided
distinguish among classes of stock, thus: for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan
16. The Constitution applies its foreign ownership limitation on the associations shall not be permitted to issue no-par value shares of
corporation’s "capital," without distinction as to classes of shares. x x x stock.

In this connection, the Corporation Code – which was already in force


Preferred shares of stock issued by any corporation may be given preferred shares, preferred shares have the same voting rights as
preference in the distribution of the assets of the corporation in case of common shares. However, preferred shareholders are often excluded
liquidation and in the distribution of dividends, or such other from any control, that is, deprived of the right to vote in the election of
preferences as may be stated in the articles of incorporation which are directors and on other matters, on the theory that the preferred
not violative of the provisions of this Code: Provided, That preferred shareholders are merely investors in the corporation for income in the
shares of stock may be issued only with a stated par value. The Board same manner as bondholders.45 In fact, under the Corporation Code
of Directors, where authorized in the articles of incorporation, may fix only preferred or redeemable shares can be deprived of the right to
the terms and conditions of preferred shares of stock or any series vote.46 Common shares cannot be deprived of the right to vote in any
thereof: Provided, That such terms and conditions shall be effective corporate meeting, and any provision in the articles of incorporation
upon the filing of a certificate thereof with the Securities and Exchange restricting the right of common shareholders to vote is invalid.47
Commission.
Considering that common shares have voting rights which translate to
Shares of capital stock issued without par value shall be deemed fully control, as opposed to preferred shares which usually have no voting
paid and non-assessable and the holder of such shares shall not be rights, the term "capital" in Section 11, Article XII of the Constitution
liable to the corporation or to its creditors in respect thereto: Provided; refers only to common shares. However, if the preferred shares also
That shares without par value may not be issued for a consideration have the right to vote in the election of directors, then the term "capital"
less than the value of five (P5.00) pesos per share: Provided, further, shall include such preferred shares because the right to participate in
That the entire consideration received by the corporation for its no-par the control or management of the corporation is exercised through the
value shares shall be treated as capital and shall not be available for right to vote in the election of directors. In short, the term "capital" in
distribution as dividends. Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements. This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
Except as otherwise provided in the articles of incorporation and stated management of public utilities. As revealed in the deliberations of the
in the certificate of stock, each share shall be equal in all respects to Constitutional Commission, "capital" refers to the voting stock or
every other share. controlling interest of a corporation, to wit:

Where the articles of incorporation provide for non-voting shares in the MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or
cases allowed by this Code, the holders of such shares shall Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
nevertheless be entitled to vote on the following matters: Section 9 and 2/3-1/3 in Section 15.

1. Amendment of the articles of incorporation; MR. VILLEGAS. That is right.

2. Adoption and amendment of by-laws; MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
up capital stock of a corporation"? Will the Committee please enlighten
substantially all of the corporate property;
me on this?
4. Incurring, creating or increasing bonded indebtedness;
MR. VILLEGAS. We have just had a long discussion with the members
of the team from the UP Law Center who provided us a draft. The
5. Increase or decrease of capital stock; phrase that is contained here which we adopted from the UP draft
is "60 percent of voting stock."
6. Merger or consolidation of the corporation with another corporation
or other corporations; MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
7. Investment of corporate funds in another corporation or business in entitled to vote.
accordance with this Code; and
MR. VILLEGAS. That is right.
8. Dissolution of the corporation.
MR. NOLLEDO. Thank you.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this With respect to an investment by one corporation in another
Code shall be deemed to refer only to stocks with voting rights. corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does
Indisputably, one of the rights of a stockholder is the right to participate the Committee adopt the grandfather rule?
in the control or management of the corporation.43 This is exercised
through his vote in the election of directors because it is the board of MR. VILLEGAS. Yes, that is the understanding of the Committee.
directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48 nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission
xxxx (SEC) registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations must
be owned and held by citizens of the Philippines and at least sixty
MR. AZCUNA. May I be clarified as to that portion that was accepted
percent (60%) of the members of the Board of Directors of each of both
by the Committee.
corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Emphasis
MR. VILLEGAS. The portion accepted by the Committee is the deletion supplied)
of the phrase "voting stock or controlling interest."
In explaining the definition of a "Philippine national," the Implementing
MR. AZCUNA. Hence, without the Davide amendment, the committee Rules and Regulations of the Foreign Investments Act of 1991 provide:
report would read: "corporations or associations at least sixty percent of
whose CAPITAL is owned by such citizens."
b. "Philippine national" shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by the citizens of the
MR. VILLEGAS. Yes. Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with stock outstanding and entitled to vote is owned and held by
60 percent of the capital to be owned by citizens. citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
MR. VILLEGAS. That is right. Philippine national and at least sixty percent [60%] of the fund will
accrue to the benefit of the Philippine nationals; Provided, that where a
MR. AZCUNA. But the control can be with the foreigners even if corporation its non-Filipino stockholders own stocks in a Securities and
they are the minority. Let us say 40 percent of the capital is owned Exchange Commission [SEC] registered enterprise, at least sixty
by them, but it is the voting capital, whereas, the Filipinos own the percent [60%] of the capital stock outstanding and entitled to vote of
nonvoting shares. So we can have a situation where the both corporations must be owned and held by citizens of the
corporation is controlled by foreigners despite being the minority Philippines and at least sixty percent [60%] of the members of the
because they have the voting capital. That is the anomaly that Board of Directors of each of both corporation must be citizens of the
would result here. Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.
MR. BENGZON. No, the reason we eliminated the word "stock" as
stated in the 1973 and 1935 Constitutions is that according to Compliance with the required Filipino ownership of a corporation
Commissioner Rodrigo, there are associations that do not have shall be determined on the basis of outstanding capital stock
stocks. That is why we say "CAPITAL." whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.
MR. AZCUNA. We should not eliminate the phrase "controlling
interest." For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
MR. BENGZON. In the case of stock corporations, it is assumed.49
coupled with appropriate voting rights is essential. Thus, stocks,
(Emphasis supplied)
the voting rights of which have been assigned or transferred to
aliens cannot be considered held by Philippine citizens or
Thus, 60 percent of the "capital" assumes, or should result in, Philippine nationals.
"controlling interest" in the corporation. Reinforcing this interpretation
of the term "capital," as referring to controlling interest or shares
Individuals or juridical entities not meeting the aforementioned
entitled to vote, is the definition of a "Philippine national" in the Foreign
qualifications are considered as non-Philippine nationals.
Investments Act of 1991,50 to wit:
(Emphasis supplied)

SEC. 3. Definitions. - As used in this Act:


Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of 60
a. The term "Philippine national" shall mean a citizen of the Philippines; percent of the outstanding capital stock, coupled with 60 percent of the
or a domestic partnership or association wholly owned by citizens of voting rights, is required. The legal and beneficial ownership of 60
the Philippines; or a corporation organized under the laws of the percent of the outstanding capital stock must rest in the hands of
Philippines of which at least sixty percent (60%) of the capital Filipino nationals in accordance with the constitutional mandate.
stock outstanding and entitled to vote is owned and held by Otherwise, the corporation is "considered as non-Philippine national[s]."
citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation
Under Section 10, Article XII of the Constitution, Congress may
Code of which one hundred percent (100%) of the capital stock
"reserve to citizens of the Philippines or to corporations or associations
outstanding and entitled to vote is wholly owned by Filipinos or a
at least sixty per centum of whose capital is owned by such citizens, or
trustee of funds for pension or other employee retirement or separation
such higher percentage as Congress may prescribe, certain areas of
benefits, where the trustee is a Philippine national and at least sixty
investments." Thus, in numerous laws Congress has reserved certain
percent (60%) of the fund will accrue to the benefit of Philippine
areas of investments to Filipino citizens or to corporations at least sixty
percent of the "capital" of which is owned by Filipino citizens. Some of directors, meaning only common shareholders exercise control over
these laws are: (1) Regulation of Award of Government Contracts or PLDT. Conversely, holders of preferred shares, who have no voting
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; rights in the election of directors, do not have any control over PLDT. In
(3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. fact, under PLDT’s Articles of Incorporation, holders of common shares
6977; (4) Philippine Overseas Shipping Development Act or R.A. No. have voting rights for all purposes, while holders of preferred shares
7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. have no voting right for any purpose whatsoever.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the It must be stressed, and respondents do not dispute, that foreigners
term "capital" in Section 11, Article XII of the Constitution is also used hold a majority of the common shares of PLDT. In fact, based on
in the same context in numerous laws reserving certain areas of PLDT’s 2010 General Information Sheet (GIS),54 which is a document
investments to Filipino citizens. required to be submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT
To construe broadly the term "capital" as the total outstanding capital whereas Filipinos hold only 66,750,622 common shares.56 In other
stock, including both common and non-voting preferred shares, grossly words, foreigners hold 64.27% of the total number of PLDT’s common
contravenes the intent and letter of the Constitution that the "State shall shares, while Filipinos hold only 35.73%. Since holding a majority of the
develop a self-reliant and independent national economy effectively common shares equates to control, it is clear that foreigners exercise
controlled by Filipinos." A broad definition unjustifiably disregards who control over PLDT. Such amount of control unmistakably exceeds the
owns the all-important voting stock, which necessarily equates to allowable 40 percent limit on foreign ownership of public utilities
control of the public utility. expressly mandated in Section 11, Article XII of the Constitution.

We shall illustrate the glaring anomaly in giving a broad definition to the Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted
term "capital." Let us assume that a corporation has 100 common to the SEC, shows that per share the SIP58 preferred shares earn a
shares owned by foreigners and 1,000,000 non-voting preferred shares pittance in dividends compared to the common shares. PLDT declared
owned by Filipinos, with both classes of share having a par value of dividends for the common shares at P70.00 per share, while the
one peso (P1.00) per share. Under the broad definition of the term declared dividends for the preferred shares amounted to a measly
"capital," such corporation would be considered compliant with the 40 P1.00 per share.59 So the preferred shares not only cannot vote in the
percent constitutional limit on foreign equity of public utilities since the election of directors, they also have very little and obviously negligible
overwhelming majority, or more than 99.999 percent, of the total dividend earning capacity compared to common shares.
outstanding capital stock is Filipino owned. This is obviously absurd.
As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par
In the example given, only the foreigners holding the common shares value of PLDT common shares is P5.00 per share, whereas the par
have voting rights in the election of directors, even if they hold only 100 value of preferred shares is P10.00 per share. In other words, preferred
shares. The foreigners, with a minuscule equity of less than 0.001 shares have twice the par value of common shares but cannot elect
percent, exercise control over the public utility. On the other hand, the directors and have only 1/70 of the dividends of common shares.
Filipinos, holding more than 99.999 percent of the equity, cannot vote in Moreover, 99.44% of the preferred shares are owned by Filipinos while
the election of directors and hence, have no control over the public foreigners own only a minuscule 0.56% of the preferred shares.61
utility. This starkly circumvents the intent of the framers of the Worse, preferred shares constitute 77.85% of the authorized capital
Constitution, as well as the clear language of the Constitution, to place stock of PLDT while common shares constitute only 22.15%.62 This
the control of public utilities in the hands of Filipinos. It also renders undeniably shows that beneficial interest in PLDT is not with the non-
illusory the State policy of an independent national economy voting preferred shares but with the common shares, blatantly violating
effectively controlled by Filipinos. the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
The example given is not theoretical but can be found in the real world,
and in fact exists in the present case. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipinos in accordance with the
Holders of PLDT preferred shares are explicitly denied of the right to constitutional mandate. Full beneficial ownership of 60 percent of the
vote in the election of directors. PLDT’s Articles of Incorporation outstanding capital stock, coupled with 60 percent of the voting rights,
expressly state that "the holders of Serial Preferred Stock shall not is constitutionally required for the State’s grant of authority to operate a
be entitled to vote at any meeting of the stockholders for the public utility. The undisputed fact that the PLDT preferred shares,
election of directors or for any other purpose or otherwise 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
participate in any action taken by the corporation or its stockholders, or dividends that PLDT common shares earn, grossly violates the
to receive notice of any meeting of stockholders."51 constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.
On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDT’s Articles of In short, Filipinos hold less than 60 percent of the voting stock,
Incorporation52 state that "each holder of Common Capital Stock shall and earn less than 60 percent of the dividends, of PLDT. This
have one vote in respect of each share of such stock held by him on all directly contravenes the express command in Section 11, Article XII of
matters voted upon by the stockholders, and the holders of Common the Constitution that "[n]o franchise, certificate, or any other form of
Capital Stock shall have the exclusive right to vote for the election authorization for the operation of a public utility shall be granted except
of directors and for all other purposes."53 to x x x corporations x x x organized under the laws of the Philippines,
at least sixty per centum of whose capital is owned by such
In short, only holders of common shares can vote in the election of citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, supplied)
which class of shares exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only In Manila Prince Hotel, even the Dissenting Opinion of then Associate
35.73% of PLDT’s common shares, constituting a minority of the voting Justice Reynato S. Puno, later Chief Justice, agreed that constitutional
stock, and thus do not exercise control over PLDT; (3) preferred provisions are presumed to be self-executing. Justice Puno stated:
shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn;63 (5)
Courts as a rule consider the provisions of the Constitution as self-
preferred shares have twice the par value of common shares; and (6)
executing, rather than as requiring future legislation for their
preferred shares constitute 77.85% of the authorized capital stock of
enforcement. The reason is not difficult to discern. For if they are not
PLDT and common shares only 22.15%. This kind of ownership and
treated as self-executing, the mandate of the fundamental law
control of a public utility is a mockery of the Constitution. ratified by the sovereign people can be easily ignored and nullified
by Congress. Suffused with wisdom of the ages is the unyielding
Incidentally, the fact that PLDT common shares with a par value of rule that legislative actions may give breath to constitutional
P5.00 have a current stock market value of P2,328.00 per share,64 rights but congressional inaction should not suffocate them.
while PLDT preferred shares with a par value of P10.00 per share have
a current stock market value ranging from only P10.92 to P11.06 per
Thus, we have treated as self-executing the provisions in the Bill of
share,65 is a glaring confirmation by the market that control and
Rights on arrests, searches and seizures, the rights of a person under
beneficial ownership of PLDT rest with the common shares, not with
custodial investigation, the rights of an accused, and the privilege
the preferred shares. against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions
Indisputably, construing the term "capital" in Section 11, Article XII of guaranteeing the fundamental rights of life, liberty and the protection of
the Constitution to include both voting and non-voting shares will result property. The same treatment is accorded to constitutional provisions
in the abject surrender of our telecommunications industry to forbidding the taking or damaging of property for public use without just
foreigners, amounting to a clear abdication of the State’s constitutional compensation. (Emphasis supplied)
duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision
Thus, in numerous cases,67 this Court, even in the absence of
reserving certain areas of investment to Filipino citizens, such as the
implementing legislation, applied directly the provisions of the 1935,
exploitation of natural resources as well as the ownership of land,
1973 and 1987 Constitutions limiting land ownership to Filipinos. In
educational institutions and advertising businesses. The Court should
Soriano v. Ong Hoo,68 this Court ruled:
never open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the Constitution and
of the national interest. The Court must perform its solemn duty to x x x As the Constitution is silent as to the effects or consequences of a
defend and uphold the intent and letter of the Constitution to ensure, in sale by a citizen of his land to an alien, and as both the citizen and the
the words of the Constitution, "a self-reliant and independent national alien have violated the law, none of them should have a recourse
economy effectively controlled by Filipinos." against the other, and it should only be the State that should be allowed
to intervene and determine what is to be done with the property subject
of the violation. We have said that what the State should do or could do
Section 11, Article XII of the Constitution, like other provisions of the
in such matters is a matter of public policy, entirely beyond the scope of
Constitution expressly reserving to Filipinos specific areas of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No.
investment, such as the development of natural resources and
L-5996, June 27, 1956.) While the legislature has not definitely
ownership of land, educational institutions and advertising business, is
decided what policy should be followed in cases of violations
self-executing. There is no need for legislation to implement these
against the constitutional prohibition, courts of justice cannot go
self-executing provisions of the Constitution. The rationale why these
beyond by declaring the disposition to be null and void as
constitutional provisions are self-executing was explained in Manila
violative of the Constitution. x x x (Emphasis supplied)
Prince Hotel v. GSIS,66 thus:
To treat Section 11, Article XII of the Constitution as not self-executing
x x x Hence, unless it is expressly provided that a legislative act is
would mean that since the 1935 Constitution, or over the last 75 years,
necessary to enforce a constitutional mandate, the presumption now is
not one of the constitutional provisions expressly reserving specific
that all provisions of the constitution are self-executing. If the
areas of investments to corporations, at least 60 percent of the "capital"
constitutional provisions are treated as requiring legislation instead of
of which is owned by Filipinos, was enforceable. In short, the framers of
self-executing, the legislature would have the power to ignore and
the 1935, 1973 and 1987 Constitutions miserably failed to effectively
practically nullify the mandate of the fundamental law. This can be
reserve to Filipinos specific areas of investment, like the operation by
cataclysmic. That is why the prevailing view is, as it has always been,
corporations of public utilities, the exploitation by corporations of
that — mineral resources, the ownership by corporations of real estate, and
the ownership of educational institutions. All the legislatures that
. . . in case of doubt, the Constitution should be considered self- convened since 1935 also miserably failed to enact legislations to
executing rather than non-self-executing. . . . Unless the contrary is implement these vital constitutional provisions that determine who will
clearly intended, the provisions of the Constitution should be effectively control the national economy, Filipinos or foreigners. This
considered self-executing, as a contrary rule would give the Court cannot allow such an absurd interpretation of the Constitution.
legislature discretion to determine when, or whether, they shall be
effective. These provisions would be subordinated to the will of the
This Court has held that the SEC "has both regulatory and adjudicative
lawmaking body, which could make them entirely meaningless by
functions."69 Under its regulatory functions, the SEC can be compelled
simply refusing to pass the needed implementing statute. (Emphasis
by mandamus to perform its statutory duty when it unlawfully neglects
to perform the same. Under its adjudicative or quasi-judicial functions, PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN
the SEC can be also be compelled by mandamus to hear and decide a HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO.,
possible violation of any law it administers or enforces when it is LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE
mandated by law to investigate such violation.1awphi1 LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF
THE SECURITIES AND EXCHANGE COMMISSION, and
Under Section 17(4)70 of the Corporation Code, the SEC has the PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
regulatory function to reject or disapprove the Articles of Incorporation EXCHANGE, Respondents.
of any corporation where "the required percentage of ownership of
the capital stock to be owned by citizens of the Philippines has PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-
not been complied with as required by existing laws or the Intervention.
Constitution." Thus, the SEC is the government agency tasked with
the statutory duty to enforce the nationality requirement prescribed in RESOLUTION
Section 11, Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is treated as a CARPIO, J.:
petition for mandamus as in the present case, can direct the SEC to
perform its statutory duty under the law, a duty that the SEC has
This resolves the motions for reconsideration of the 28 June 2011
apparently unlawfully neglected to do based on the 2010 GIS that
Decision filed by (1) the Philippine Stock Exchange's (PSE) President, 1
respondent PLDT submitted to the SEC. (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno
(Nazareno ),3 and ( 4) the Securities and Exchange Commission
Under Section 5(m) of the Securities Regulation Code,71 the SEC is (SEC)4 (collectively, movants ).
vested with the "power and function" to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of
The Office of the Solicitor General (OSG) initially filed a motion for
registration of corporations, partnerships or associations, upon
reconsideration on behalfofthe SEC,5 assailing the 28 June 2011
any of the grounds provided by law." The SEC is mandated under
Decision. However, it subsequently filed a Consolidated Comment on
Section 5(d) of the same Code with the "power and function" to
behalf of the State,6 declaring expressly that it agrees with the Court's
"investigate x x x the activities of persons to ensure compliance"
definition of the term "capital" in Section 11, Article XII of the
with the laws and regulations that SEC administers or enforces. The
Constitution. During the Oral Arguments on 26 June 2012, the OSG
GIS that all corporations are required to submit to SEC annually should
reiterated its position consistent with the Court's 28 June 2011
put the SEC on guard against violations of the nationality requirement
Decision.
prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition
for mandamus as in the present case, to hear and decide a possible We deny the motions for reconsideration.
violation of Section 11, Article XII of the Constitution in view of the
ownership structure of PLDT’s voting shares, as admitted by I. Far-reaching implications of the legal issue justify treatment of
respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to petition for declaratory relief as one for mandamus.
SEC.
As we emphatically stated in the 28 June 2011 Decision, the
WHEREFORE, we PARTLY GRANT the petition and rule that the term interpretation of the term "capital" in Section 11, Article XII of the
"capital" in Section 11, Article XII of the 1987 Constitution refers only to Constitution has far-reaching implications to the national economy. In
shares of stock entitled to vote in the election of directors, and thus in fact, a resolution of this issue will determine whether Filipinos are
the present case only to common shares, and not to the total masters, or second-class citizens, in their own country. What is at stake
outstanding capital stock (common and non-voting preferred shares). here is whether Filipinos or foreigners will have effective control of the
Respondent Chairperson of the Securities and Exchange Commission Philippine national economy. Indeed, if ever there is a legal issue that
is DIRECTED to apply this definition of the term "capital" in determining has far-reaching implications to the entire nation, and to future
the extent of allowable foreign ownership in respondent Philippine Long generations of Filipinos, it is the threshold legal issue presented in this
Distance Telephone Company, and if there is a violation of Section 11, case.
Article XII of the Constitution, to impose the appropriate sanctions
under the law. Contrary to Pangilinan’s narrow view, the serious economic
consequences resulting in the interpretation of the term "capital" in
SO ORDERED. Section 11, Article XII of the Constitution undoubtedly demand an
immediate adjudication of this issue. Simply put, the far-reaching
G.R. No. 176579 October 9, 2012 implications of this issue justify the treatment of the petition as
one for mandamus.7
HEIRS OF WILSON P. GAMBOA,* Petitioners, vs. FINANCE
SECRETARYMARGARITO B. TEVES, FINANCE In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it
UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER wise and expedient to resolve the case although the petition for
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON declaratory relief could be outrightly dismissed for being procedurally
GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR defective. There, appellant admittedly had already committed a breach
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION of the Public Service Act in relation to the Anti-Dummy Law since it had
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., been employing non- American aliens long before the decision in a
LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET prior similar case. However, the main issue in Luzon Stevedoring was
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF of transcendental importance, involving the exercise or enjoyment of
rights, franchises, privileges, properties and businesses which only
Filipinos and qualified corporations could exercise or enjoy under the Japanese while Filipinos would own only 40% of the voting stock,
Constitution and the statutes. Moreover, the same issue could be although when the non-voting stock is added, Filipinos would own 60%
raised by appellant in an appropriate action. Thus, in Luzon of the combined voting and non-voting stock. This ownership
Stevedoring the Court deemed it necessary to finally dispose of the structure is remarkably similar to the current ownership structure
case for the guidance of all concerned, despite the apparent procedural of PLDT. Minister Mendoza ruled:
flaw in the petition.
xxxx
The circumstances surrounding the present case, such as the
supposed procedural defect of the petition and the pivotal legal issue Thus, the Filipino group still owns sixty (60%) of the entire subscribed
involved, resemble those in Luzon Stevedoring. Consequently, in the capital stock (common and preferred) while the Japanese investors
interest of substantial justice and faithful adherence to the Constitution, control sixty percent (60%) of the common (voting) shares.
we opted to resolve this case for the guidance of the public and all
concerned parties. It is your position that x x x since Section 9, Article XIV of the
Constitution uses the word "capital," which is construed "to
II. No change of any long-standing rule; thus, no redefinition of the include both preferred and common shares" and "that where the
term "capital." law does not distinguish, the courts shall not distinguish."

Movants contend that the term "capital" in Section 11, Article XII of the xxxx
Constitution has long been settled and defined to refer to the total
outstanding shares of stock, whether voting or non-voting. In fact,
In light of the foregoing jurisprudence, it is my opinion that the stock-
movants claim that the SEC, which is the administrative agency tasked
swap transaction in question may not be constitutionally upheld.
to enforce the 60-40 ownership requirement in favor of Filipino citizens
While it may be ordinary corporate practice to classify corporate shares
in the Constitution and various statutes, has consistently adopted this
into common voting shares and preferred non-voting shares, any
particular definition in its numerous opinions. Movants point out that
arrangement which attempts to defeat the constitutional purpose should
with the 28 June 2011 Decision, the Court in effect introduced a "new"
be eschewed. Thus, the resultant equity arrangement which would
definition or "midstream redefinition"9 of the term "capital" in Section 11,
place ownership of 60%11 of the common (voting) shares in the
Article XII of the Constitution. Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to
This is egregious error. circumvention of the principle of control by Philippine
stockholders that is implicit in the 60% Philippine nationality
For more than 75 years since the 1935 Constitution, the Court has not requirement in the Constitution. (Emphasis supplied)
interpreted or defined the term "capital" found in various economic
provisions of the 1935, 1973 and 1987 Constitutions. There has never In short, Minister Mendoza categorically rejected the theory that the
been a judicial precedent interpreting the term "capital" in the 1935, term "capital" in Section 9, Article XIV of the 1973 Constitution includes
1973 and 1987 Constitutions, until now. Hence, it is patently wrong and "both preferred and common stocks" treated as the same class of
utterly baseless to claim that the Court in defining the term "capital" in shares regardless of differences in voting rights and privileges. Minister
its 28 June 2011 Decision modified, reversed, or set aside the Mendoza stressed that the 60-40 ownership requirement in favor of
purported long-standing definition of the term "capital," which Filipino citizens in the Constitution is not complied with unless the
supposedly refers to the total outstanding shares of stock, whether corporation "satisfies the criterion of beneficial ownership" and that
voting or non-voting. To repeat, until the present case there has never in applying the same "the primordial consideration is situs of
been a Court ruling categorically defining the term "capital" found in the control."
various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions. On the other hand, in Opinion No. 23-10 dated 18 August 2010,
addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC
The opinions of the SEC, as well as of the Department of Justice General Counsel Vernette G. Umali-Paco applied the Voting Control
(DOJ), on the definition of the term "capital" as referring to both voting Test, that is, using only the voting stock to determine whether a
and non-voting shares (combined total of common and preferred corporation is a Philippine national. The Opinion states:
shares) are, in the first place, conflicting and inconsistent. There is no
basis whatsoever to the claim that the SEC and the DOJ have
Applying the foregoing, particularly the Control Test, MLRC is
consistently and uniformly adopted a definition of the term "capital"
deemed as a Philippine national because: (1) sixty percent (60%) of its
contrary to the definition that this Court adopted in its 28 June 2011
outstanding capital stock entitled to vote is owned by a Philippine
Decision. national, the Trustee; and (2) at least sixty percent (60%) of the ERF
will accrue to the benefit of Philippine nationals. Still pursuant to the
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of Control Test, MLRC’s investment in 60% of BFDC’s outstanding
the term "capital" in Section 9, Article XIV of the 1973 Constitution was capital stock entitled to vote shall be deemed as of Philippine
raised, that is, whether the term "capital" includes "both preferred and nationality, thereby qualifying BFDC to own private land.
common stocks." The issue was raised in relation to a stock-swap
transaction between a Filipino and a Japanese corporation, both
Further, under, and for purposes of, the FIA, MLRC and BFDC are both
stockholders of a domestic corporation that owned lands in the
Philippine nationals, considering that: (1) sixty percent (60%) of their
Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the
respective outstanding capital stock entitled to vote is owned by a
resulting ownership structure of the corporation would be
Philippine national (i.e., by the Trustee, in the case of MLRC; and by
unconstitutional because 60% of the voting stock would be owned by
MLRC, in the case of BFDC); and (2) at least 60% of their respective
board of directors are Filipino citizens. (Boldfacing and italicization JUSTICE CARPIO:
supplied)
So, under the law, it is the Commission En Banc that can issue an
Clearly, these DOJ and SEC opinions are compatible with the Court’s
interpretation of the 60-40 ownership requirement in favor of Filipino SEC Opinion, correct?
citizens mandated by the Constitution for certain economic activities. At
the same time, these opinions highlight the conflicting, contradictory,
COMMISSIONER GAITE:13
and inconsistent positions taken by the DOJ and the SEC on the
definition of the term "capital" found in the economic provisions of the
Constitution. That’s correct, Your Honor.

The opinions issued by SEC legal officers do not have the force and JUSTICE CARPIO:
effect of SEC rules and regulations because only the SEC en banc can
adopt rules and regulations. As expressly provided in Section 4.6 of the Can the Commission En Banc delegate this function to an SEC officer?
Securities Regulation Code,12 the SEC cannot delegate to any of its
individual Commissioner or staff the power to adopt any rule or COMMISSIONER GAITE:
regulation. Further, under Section 5.1 of the same Code, it is the
SEC as a collegial body, and not any of its legal officers, that is Yes, Your Honor, we have delegated it to the General Counsel.
empowered to issue opinions and approve rules and regulations.
Thus:
JUSTICE CARPIO:
4.6. The Commission may, for purposes of efficiency, delegate any of
It can be delegated. What cannot be delegated by the Commission En
its functions to any department or office of the Commission, an
Banc to a commissioner or an individual employee of the Commission?
individual Commissioner or staff member of the Commission except its
review or appellate authority and its power to adopt, alter and
supplement any rule or regulation. COMMISSIONER GAITE:

The Commission may review upon its own initiative or upon the petition Novel opinions that [have] to be decided by the En Banc...
of any interested party any action of any department or office, individual
Commissioner, or staff member of the Commission. JUSTICE CARPIO:

SEC. 5. Powers and Functions of the Commission.- 5.1. The What cannot be delegated, among others, is the power to adopt or
Commission shall act with transparency and shall have the powers and amend rules and regulations, correct?
functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing COMMISSIONER GAITE:
Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and
That’s correct, Your Honor.
functions:
JUSTICE CARPIO:
xxxx
So, you combine the two (2), the SEC officer, if delegated that
(g) Prepare, approve, amend or repeal rules, regulations and power, can issue an opinion but that opinion does not constitute a
orders, and issue opinions and provide guidance on and
rule or regulation, correct?
supervise compliance with such rules, regulations and orders;
COMMISSIONER GAITE:
x x x x (Emphasis supplied)
Correct, Your Honor.
Thus, the act of the individual Commissioners or legal officers of the
SEC in issuing opinions that have the effect of SEC rules or regulations
is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC JUSTICE CARPIO:
en banc can "issue opinions" that have the force and effect of rules or
regulations. Section 4.6 of the Code bars the SEC en banc from So, all of these opinions that you mentioned they are not rules and
delegating to any individual Commissioner or staff the power to adopt regulations, correct?
rules or regulations. In short, any opinion of individual
Commissioners or SEC legal officers does not constitute a rule or COMMISSIONER GAITE:
regulation of the SEC.
They are not rules and regulations.
The SEC admits during the Oral Arguments that only the SEC en banc,
and not any of its individual commissioners or legal staff, is empowered JUSTICE CARPIO:
to issue opinions which have the same binding effect as SEC rules and
regulations, thus:
If they are not rules and regulations, they apply only to that particular
situation and will not constitute a precedent, correct? entitled to vote.

COMMISSIONER GAITE: MR. VILLEGAS. That is right.

Yes, Your Honor.14 (Emphasis supplied) MR. NOLLEDO. Thank you. With respect to an investment by one
corporation in another corporation, say, a corporation with 60-40
Significantly, the SEC en banc, which is the collegial body statutorily percent equity invests in another corporation which is permitted by the
empowered to issue rules and opinions on behalf of the SEC, has Corporation Code, does the Committee adopt the grandfather rule?
adopted even the Grandfather Rule in determining compliance with the
60-40 ownership requirement in favor of Filipino citizens mandated by MR. VILLEGAS. Yes, that is the understanding of the Committee.
the Constitution for certain economic activities. This prevailing SEC
ruling, which the SEC correctly adopted to thwart any circumvention of MR. NOLLEDO. Therefore, we need additional Filipino capital?
the required Filipino "ownership and control," is laid down in the 25
March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp.
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied;
v. McArthur Mining, Inc., et al.,15 to wit:
italicization in the original)

The avowed purpose of the Constitution is to place in the hands of


This SEC en banc ruling conforms to our 28 June 2011 Decision that
Filipinos the exploitation of our natural resources. Necessarily,
the 60-40 ownership requirement in favor of Filipino citizens in the
therefore, the Rule interpreting the constitutional provision should
Constitution to engage in certain economic activities applies not only to
not diminish that right through the legal fiction of corporate
voting control of the corporation, but also to the beneficial ownership
ownership and control. But the constitutional provision, as interpreted
of the corporation. Thus, in our 28 June 2011 Decision we stated:
and practiced via the 1967 SEC Rules, has favored foreigners contrary
to the command of the Constitution. Hence, the Grandfather Rule
must be applied to accurately determine the actual participation, Mere legal title is insufficient to meet the 60 percent Filipinoowned
both direct and indirect, of foreigners in a corporation engaged in "capital" required in the Constitution. Full beneficial ownership of 60
a nationalized activity or business. percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of
Compliance with the constitutional limitation(s) on engaging in
Filipino nationals in accordance with the constitutional mandate.
nationalized activities must be determined by ascertaining if 60% of the
Otherwise, the corporation is "considered as non-Philippine national[s]."
investing corporation’s outstanding capital stock is owned by "Filipino
(Emphasis supplied)
citizens", or as interpreted, by natural or individual Filipino citizens. If
such investing corporation is in turn owned to some extent by another
investing corporation, the same process must be observed. One must Both the Voting Control Test and the Beneficial Ownership Test must
not stop until the citizenships of the individual or natural stockholders of be applied to determine whether a corporation is a "Philippine national."
layer after layer of investing corporations have been established, the
very essence of the Grandfather Rule. The interpretation by legal officers of the SEC of the term "capital,"
embodied in various opinions which respondents relied upon, is merely
Lastly, it was the intent of the framers of the 1987 Constitution to preliminary and an opinion only of such officers. To repeat, any such
adopt the Grandfather Rule. In one of the discussions on what is now opinion does not constitute an SEC rule or regulation. In fact, many of
Article XII of the present Constitution, the framers made the following these opinions contain a disclaimer which expressly states: "x x x the
exchange: foregoing opinion is based solely on facts disclosed in your query and
relevant only to the particular issue raised therein and shall not be
used in the nature of a standing rule binding upon the
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or
Commission in other cases whether of similar or dissimilar
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
circumstances."16 Thus, the opinions clearly make a caveat that they
Section 9, and 2/3-1/3 in Section 15.
do not constitute binding precedents on any one, not even on the SEC
itself.
MR. VILLEGAS. That is right.
Likewise, the opinions of the SEC en banc, as well as of the DOJ,
MR. NOLLEDO. In teaching law, we are always faced with the interpreting the law are neither conclusive nor controlling and thus, do
question: ‘Where do we base the equity requirement, is it on the not bind the Court. It is hornbook doctrine that any interpretation of the
authorized capital stock, on the subscribed capital stock, or on the paid- law that administrative or quasi-judicial agencies make is only
up capital stock of a corporation’? Will the Committee please enlighten preliminary, never conclusive on the Court. The power to make a final
me on this? interpretation of the law, in this case the term "capital" in Section 11,
Article XII of the 1987 Constitution, lies with this Court, not with any
MR. VILLEGAS. We have just had a long discussion with the members other government entity.
of the team from the UP Law Center who provided us a draft. The
phrase that is contained here which we adopted from the UP draft is ‘60 In his motion for reconsideration, the PSE President cites the cases of
percent of voting stock.’ National Telecommunications Commission v. Court of Appeals17 and
Philippine Long Distance Telephone Company v. National
MR. NOLLEDO. That must be based on the subscribed capital stock, Telecommunications Commission18 in arguing that the Court has
because unless declared delinquent, unpaid capital stock shall be already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19 Section 10. The Congress shall, upon recommendation of the
economic and planning agency, when the national interest dictates,
The PSE President is grossly mistaken. In both cases of National reserve to citizens of the Philippines or to corporations or associations
Telecommunications v. Court of Appeals20 and Philippine Long at least sixty per centum of whose capital is owned by such citizens, or
Distance Telephone Company v. National Telecommunications such higher percentage as Congress may prescribe, certain areas of
Commission,21 the Court did not define the term "capital" as found in investments. The Congress shall enact measures that will encourage
Section 11, Article XII of the 1987 Constitution. In fact, these two the formation and operation of enterprises whose capital is wholly
cases never mentioned, discussed or cited Section 11, Article XII owned by Filipinos.
of the Constitution or any of its economic provisions, and thus
cannot serve as precedent in the interpretation of Section 11, In the grant of rights, privileges, and concessions covering the national
Article XII of the Constitution. These two cases dealt solely with the economy and patrimony, the State shall give preference to qualified
determination of the correct regulatory fees under Section 40(e) and (f) Filipinos.
of the Public Service Act, to wit:
The State shall regulate and exercise authority over foreign
(e) For annual reimbursement of the expenses incurred by the investments within its national jurisdiction and in accordance with its
Commission in the supervision of other public services and/or in the national goals and priorities.23
regulation or fixing of their rates, twenty centavos for each one hundred
pesos or fraction thereof, of the capital stock subscribed or paid, or if Under Section 10, Article XII of the 1987 Constitution, Congress may
no shares have been issued, of the capital invested, or of the property "reserve to citizens of the Philippines or to corporations or associations
and equipment whichever is higher. at least sixty per centum of whose capital is owned by such citizens, or
such higher percentage as Congress may prescribe, certain areas of
(f) For the issue or increase of capital stock, twenty centavos for each investments." Thus, in numerous laws Congress has reserved certain
one hundred pesos or fraction thereof, of the increased capital. areas of investments to Filipino citizens or to corporations at least sixty
(Emphasis supplied) percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or
The Court’s interpretation in these two cases of the terms "capital stock R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850;
subscribed or paid," "capital stock" and "capital" does not pertain to, (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
and cannot control, the definition of the term "capital" as used in 6977; (4) Philippine Overseas Shipping Development Act or R.A. No.
Section 11, Article XII of the Constitution, or any of the economic 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
provisions of the Constitution where the term "capital" is found. The 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
definition of the term "capital" found in the Constitution must not be 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
taken out of context. A careful reading of these two cases reveals that
the terms "capital stock subscribed or paid," "capital stock" and With respect to public utilities, the 1987 Constitution specifically
"capital" were defined solely to determine the basis for computing the ordains:
supervision and regulation fees under Section 40(e) and (f) of the
Public Service Act. Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
III. Filipinization of Public Utilities except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
The Preamble of the 1987 Constitution, as the prologue of the supreme sixty per centum of whose capital is owned by such citizens; nor
law of the land, embodies the ideals that the Constitution intends to shall such franchise, certificate, or authorization be exclusive in
achieve.22 The Preamble reads: character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the
We, the sovereign Filipino people, imploring the aid of Almighty God, in
common good so requires. The State shall encourage equity
order to build a just and humane society, and establish a Government
participation in public utilities by the general public. The participation of
that shall embody our ideals and aspirations, promote the common
foreign investors in the governing body of any public utility enterprise
good, conserve and develop our patrimony, and secure to ourselves
shall be limited to their proportionate share in its capital, and all the
and our posterity, the blessings of independence and democracy under
executive and managing officers of such corporation or association
the rule of law and a regime of truth, justice, freedom, love, equality,
must be citizens of the Philippines. (Emphasis supplied)
and peace, do ordain and promulgate this Constitution. (Emphasis
supplied)
This provision, which mandates the Filipinization of public utilities,
requires that any form of authorization for the operation of public
Consistent with these ideals, Section 19, Article II of the 1987
utilities shall be granted only to "citizens of the Philippines or to
Constitution declares as State policy the development of a national
corporations or associations organized under the laws of the
economy "effectively controlled" by Filipinos:
Philippines at least sixty per centum of whose capital is owned by such
citizens." "The provision is [an express] recognition of the
Section 19. The State shall develop a self-reliant and independent sensitive and vital position of public utilities both in the national
national economy effectively controlled by Filipinos. economy and for national security."24

Fortifying the State policy of a Filipino-controlled economy, the The 1987 Constitution reserves the ownership and operation of public
Constitution decrees: utilities exclusively to (1) Filipino citizens, or (2) corporations or
associations at least 60 percent of whose "capital" is owned by Filipino and entitled to vote of both corporations must be owned and held by
citizens. Hence, in the case of individuals, only Filipino citizens can the citizens of the Philippines and at least sixty per cent (60%) of the
validly own and operate a public utility. In the case of corporations or members of the Board of Directors of both corporations must be
associations, at least 60 percent of their "capital" must be owned by citizens of the Philippines in order that the corporation shall be
Filipino citizens. In other words, under Section 11, Article XII of the considered a Philippine national. (Boldfacing, italicization and
1987 Constitution, to own and operate a public utility a underscoring supplied)
corporation’s capital must at least be 60 percent owned by
Philippine nationals. Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no
corporation x x x which is not a ‘Philippine national’ x x x shall do
IV. Definition of "Philippine National" business

Pursuant to the express mandate of Section 11, Article XII of the 1987 x x x in the Philippines x x x without first securing from the Board of
Constitution, Congress enacted Republic Act No. 7042 or the Foreign Investments a written certificate to the effect that such business or
Investments Act of 1991 (FIA), as amended, which defined a economic activity x x x would not conflict with the Constitution or laws
"Philippine national" as follows: of the Philippines."27 Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. This means, of
SEC. 3. Definitions. - As used in this Act: course, that only a "Philippine national" can own and operate a public
utility.
a. The term "Philippine national" shall mean a citizen of the Philippines;
or a domestic partnership or association wholly owned by citizens of In turn, the definition of a "Philippine national" under Article 15 of the
the Philippines; or a corporation organized under the laws of the Omnibus Investments Code of 1987 was a reiteration of the meaning of
Philippines of which at least sixty percent (60%) of the capital such term as provided in Article 14 of the Omnibus Investments Code
stock outstanding and entitled to vote is owned and held by of 1981,28 to wit:
citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Article 14. "Philippine national" shall mean a citizen of the Philippines;
Code of which one hundred percent (100%) of the capital stock or a domestic partnership or association wholly owned by citizens of
outstanding and entitled to vote is wholly owned by Filipinos or a the Philippines; or a corporation organized under the laws of the
trustee of funds for pension or other employee retirement or separation Philippines of which at least sixty per cent (60%) of the capital
benefits, where the trustee is a Philippine national and at least sixty stock outstanding and entitled to vote is owned and held by
percent (60%) of the fund will accrue to the benefit of Philippine citizens of the Philippines; or a trustee of funds for pension or other
nationals: Provided, That where a corporation and its non-Filipino employee retirement or separation benefits, where the trustee is a
stockholders own stocks in a Securities and Exchange Commission Philippine national and at least sixty per cent (60%) of the fund will
(SEC) registered enterprise, at least sixty percent (60%) of the capital accrue to the benefit of Philippine nationals: Provided, That where a
stock outstanding and entitled to vote of each of both corporations must corporation and its non-Filipino stockholders own stock in a registered
be owned and held by citizens of the Philippines and at least sixty enterprise, at least sixty per cent (60%) of the capital stock outstanding
percent (60%) of the members of the Board of Directors of each of both and entitled to vote of both corporations must be owned and held by
corporations must be citizens of the Philippines, in order that the the citizens of the Philippines and at least sixty per cent (60%) of the
corporation, shall be considered a "Philippine national." (Boldfacing, members of the Board of Directors of both corporations must be
italicization and underscoring supplied) citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and
Thus, the FIA clearly and unequivocally defines a "Philippine national" underscoring supplied)
as a Philippine citizen, or a domestic corporation at least "60% of the
capital stock outstanding and entitled to vote" is owned by Under Article 69(3) of the Omnibus Investments Code of 1981, "no
Philippine citizens. corporation x x x which is not a ‘Philippine national’ x x x shall do
business x x x in the Philippines x x x without first securing a written
The definition of a "Philippine national" in the FIA reiterated the certificate from the Board of Investments to the effect that such
meaning of such term as provided in its predecessor statute, Executive business or economic activity x x x would not conflict with the
Order No. 226 or the Omnibus Investments Code of 1987,25 which was Constitution or laws of the Philippines."29 Thus, a "non-Philippine
issued by then President Corazon C. Aquino. Article 15 of this Code national" cannot own and operate a reserved economic activity like a
states: public utility. Again, this means that only a "Philippine national" can own
and operate a public utility.
Article 15. "Philippine national" shall mean a citizen of the Philippines or
a diplomatic partnership or association wholly-owned by citizens of the Prior to the Omnibus Investments Code of 1981, Republic Act No.
Philippines; or a corporation organized under the laws of the 518630 or the Investment Incentives Act, which took effect on 16
Philippines of which at least sixty per cent (60%) of the capital September 1967, contained a similar definition of a "Philippine
stock outstanding and entitled to vote is owned and held by national," to wit:
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a (f) "Philippine National" shall mean a citizen of the Philippines; or a
Philippine national and at least sixty per cent (60%) of the fund will partnership or association wholly owned by citizens of the Philippines;
accrue to the benefit of Philippine nationals: Provided, That where a or a corporation organized under the laws of the Philippines of
corporation and its non-Filipino stockholders own stock in a registered which at least sixty per cent of the capital stock outstanding and
enterprise, at least sixty per cent (60%) of the capital stock outstanding entitled to vote is owned and held by citizens of the Philippines; or
a trustee of funds for pension or other employee retirement or 2. which have implications on public health and morals, such as the
separation benefits, where the trustee is a Philippine National and at manufacture and distribution of dangerous drugs; all forms of gambling;
least sixty per cent of the fund will accrue to the benefit of Philippine nightclubs, bars, beer houses, dance halls, sauna and steam
Nationals: Provided, That where a corporation and its non-Filipino bathhouses and massage clinics. (Boldfacing, underscoring and
stockholders own stock in a registered enterprise, at least sixty per cent italicization supplied)
of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at least Section 8 of the FIA enumerates the investment areas "reserved to
sixty per cent of the members of the Board of Directors of both Philippine nationals." Foreign Investment Negative List A consists
corporations must be citizens of the Philippines in order that the of "areas of activities reserved to Philippine nationals by mandate
corporation shall be considered a Philippine National. (Boldfacing, of the Constitution and specific laws," where foreign equity
italicization and underscoring supplied) participation in any enterprise shall be limited to the maximum
percentage expressly prescribed by the Constitution and other
Under Section 3 of Republic Act No. 5455 or the Foreign Business specific laws. In short, to own and operate a public utility in the
Regulations Act, which took effect on 30 September 1968, if the Philippines one must be a "Philippine national" as defined in the
investment in a domestic enterprise by non-Philippine nationals FIA. The FIA is abundant notice to foreign investors to what extent
exceeds 30% of its outstanding capital stock, such enterprise must they can invest in public utilities in the Philippines.
obtain prior approval from the Board of Investments before accepting
such investment. Such approval shall not be granted if the investment To repeat, among the areas of investment covered by the Foreign
"would conflict with existing constitutional provisions and laws Investment Negative List A is the ownership and operation of public
regulating the degree of required ownership by Philippine nationals in utilities, which the Constitution expressly reserves to Filipino citizens
the enterprise."31 A "non-Philippine national" cannot own and operate a and to corporations at least 60% owned by Filipino citizens. In other
reserved economic activity like a public utility. Again, this means that words, Negative List A of the FIA reserves the ownership and
only a "Philippine national" can own and operate a public utility. operation of public utilities only to "Philippine nationals," defined
in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or
The FIA, like all its predecessor statutes, clearly defines a (3) a corporation organized under the laws of the Philippines of
"Philippine national" as a Filipino citizen, or a domestic corporation which at least sixty percent (60%) of the capital stock outstanding
"at least sixty percent (60%) of the capital stock outstanding and and entitled to vote is owned and held by citizens of the
entitled to vote" is owned by Filipino citizens. A domestic corporation Philippines; or (4) a corporation organized abroad and registered as
is a "Philippine national" only if at least 60% of its voting stock is doing business in the Philippines under the Corporation Code of which
owned by Filipino citizens. This definition of a "Philippine national" is one hundred percent (100%) of the capital stock outstanding and
crucial in the present case because the FIA reiterates and clarifies entitled to vote is wholly owned by Filipinos or a trustee of funds for
Section 11, Article XII of the 1987 Constitution, which limits the pension or other employee retirement or separation benefits, where the
ownership and operation of public utilities to Filipino citizens or to trustee is a Philippine national and at least sixty percent (60%) of the
corporations or associations at least 60% Filipino-owned. fund will accrue to the benefit of Philippine nationals."

The FIA is the basic law governing foreign investments in the Clearly, from the effectivity of the Investment Incentives Act of 1967 to
Philippines, irrespective of the nature of business and area of the adoption of the Omnibus Investments Code of 1981, to the
investment. The FIA spells out the procedures by which non-Philippine enactment of the Omnibus Investments Code of 1987, and to the
nationals can invest in the Philippines. Among the key features of this passage of the present Foreign Investments Act of 1991, or for more
law is the concept of a negative list or the Foreign Investments than four decades, the statutory definition of the term "Philippine
Negative List.32 Section 8 of the law states: national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock
SEC. 8. List of Investment Areas Reserved to Philippine Nationals is owned by Filipinos. Likewise, these same statutes have
[Foreign Investment Negative List]. - The Foreign Investment Negative uniformly and consistently required that only "Philippine
List shall have two 2 component lists: A and B: nationals" could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments is
a. List A shall enumerate the areas of activities reserved to revealing:
Philippine nationals by mandate of the Constitution and specific
laws. JUSTICE CARPIO:

b. List B shall contain the areas of activities and enterprises regulated Counsel, I have some questions. You are aware of the Foreign
pursuant to law: Investments Act of 1991, x x x? And the FIA of 1991 took effect in
1991, correct? That’s over twenty (20) years ago, correct?
1. which are defense-related activities, requiring prior clearance and
authorization from the Department of National Defense [DND] to COMMISSIONER GAITE:
engage in such activity, such as the manufacture, repair, storage
and/or distribution of firearms, ammunition, lethal weapons, military Correct, Your Honor.
ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a JUSTICE CARPIO:
substantial export component, to a non-Philippine national by the
Secretary of National Defense; or And Section 8 of the Foreign Investments Act of 1991 states that []only
Philippine nationals can own and operate public utilities[], correct?
COMMISSIONER GAITE: Correct, Your Honor.33 (Emphasis supplied)

Yes, Your Honor. Government agencies like the SEC cannot simply ignore Sections 3(a)
and 8 of the FIA which categorically prescribe that certain economic
JUSTICE CARPIO: activities, like the ownership and operation of public utilities, are
reserved to corporations "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of
And the same Foreign Investments Act of 1991 defines a "Philippine
the Philippines." Foreign Investment Negative List A refers to "activities
national" either as a citizen of the Philippines, or if it is a corporation at
reserved to Philippine nationals by mandate of the Constitution and
least sixty percent (60%) of the voting stock is owned by citizens of the
specific laws." The FIA is the basic statute regulating foreign
Philippines, correct?
investments in the Philippines. Government agencies tasked with
regulating or monitoring foreign investments, as well as counsels of
COMMISSIONER GAITE: foreign investors, should start with the FIA in determining to what extent
a particular foreign investment is allowed in the Philippines. Foreign
Correct, Your Honor. investors and their counsels who ignore the FIA do so at their own peril.
Foreign investors and their counsels who rely on opinions of SEC legal
JUSTICE CARPIO: officers that obviously contradict the FIA do so also at their own peril.

And, you are also aware that under the predecessor law of the Foreign Occasional opinions of SEC legal officers that obviously contradict the
Investments Act of 1991, the Omnibus Investments Act of 1987, the FIA should immediately raise a red flag. There are already numerous
same provisions apply: x x x only Philippine nationals can own and opinions of SEC legal officers that cite the definition of a "Philippine
operate a public utility and the Philippine national, if it is a corporation, x national" in Section 3(a) of the FIA in determining whether a particular
x x sixty percent (60%) of the capital stock of that corporation must be corporation is qualified to own and operate a nationalized or partially
owned by citizens of the Philippines, correct? nationalized business in the Philippines. This shows that SEC legal
officers are not only aware of, but also rely on and invoke, the
COMMISSIONER GAITE: provisions of the FIA in ascertaining the eligibility of a corporation to
engage in partially nationalized industries. The following are some of
such opinions:
Correct, Your Honor.
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
JUSTICE CARPIO:
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of
And even prior to the Omnibus Investments Act of 1987, under the
the Philippine Overseas Employment Administration;
Omnibus Investments Act of 1981, the same rules apply: x x x only a
Philippine national can own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%) of its x x x voting 3. Opinion of 23 November 1993, addressed to Messrs. Dominador
stock, must be owned by citizens of the Philippines, correct? Almeda and Renato S. Calma;

COMMISSIONER GAITE: 4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan


Migallos & Jardeleza;
Correct, Your Honor.
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta
Buenaventura Sayoc & De Los Angeles;
JUSTICE CARPIO:
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David;
And even prior to that, under [the]1967 Investments Incentives Act and
and
the Foreign Company Act of 1968, the same rules applied, correct?
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J.
COMMISSIONER GAITE:
Yusi and Rudyard S. Arbolado.

Correct, Your Honor.


The SEC legal officers’ occasional but blatant disregard of the definition
of the term "Philippine national" in the FIA signifies their lack of integrity
JUSTICE CARPIO: and competence in resolving issues on the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
So, for the last four (4) decades, x x x, the law has been very Constitution.
consistent – only a Philippine national can own and operate a
public utility, and a Philippine national, if it is a corporation, x x x The PSE President argues that the term "Philippine national" defined in
at least sixty percent (60%) of the voting stock must be owned by the FIA should be limited and interpreted to refer to corporations
citizens of the Philippines, correct? seeking to avail of tax and fiscal incentives under investment incentives
laws and cannot be equated with the term "capital" in Section 11,
COMMISSIONER GAITE: Article XII of the 1987 Constitution. Pangilinan similarly contends that
the FIA and its predecessor statutes do not apply to "companies which
have not registered and obtained special incentives under the schemes owned and held by Philippine citizens or Philippine nationals, mere
established by those laws." legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate
Both are desperately grasping at straws. The FIA does not grant tax or voting rights, is essential."
fiscal incentives to any enterprise. Tax and fiscal incentives to
investments are granted separately under the Omnibus Investments Since the constitutional requirement of at least 60 percent Filipino
Code of 1987, not under the FIA. In fact, the FIA expressly repealed ownership applies not only to voting control of the corporation but also
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, to the beneficial ownership of the corporation, it is therefore imperative
which articles previously regulated foreign investments in nationalized that such requirement apply uniformly and across the board to all
or partially nationalized industries. classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the Corporation Code,
The FIA is the applicable law regulating foreign investments in capital stock35 consists of all classes of shares issued to stockholders,
nationalized or partially nationalized industries. There is nothing in the that is, common shares as well as preferred shares, which may have
FIA, or even in the Omnibus Investments Code of 1987 or its different rights, privileges or restrictions as stated in the articles of
predecessor statutes, that states, expressly or impliedly, that the FIA or incorporation.36
its predecessor statutes do not apply to enterprises not availing of tax
and fiscal incentives under the Code. The FIA and its predecessor The Corporation Code allows denial of the right to vote to preferred and
statutes apply to investments in all domestic enterprises, whether or not redeemable shares, but disallows denial of the right to vote in specific
such enterprises enjoy tax and fiscal incentives under the Omnibus corporate matters. Thus, common shares have the right to vote in the
Investments Code of 1987 or its predecessor statutes. The reason is election of directors, while preferred shares may be denied such right.
quite obvious – mere non-availment of tax and fiscal incentives by Nonetheless, preferred shares, even if denied the right to vote in the
a non-Philippine national cannot exempt it from Section 11, Article election of directors, are entitled to vote on the following corporate
XII of the Constitution regulating foreign investments in public matters: (1) amendment of articles of incorporation; (2) increase and
utilities. In fact, the Board of Investments’ Primer on Investment decrease of capital stock; (3) incurring, creating or increasing bonded
Policies in the Philippines,34 which is given out to foreign investors, indebtedness; (4) sale, lease, mortgage or other disposition of
provides: substantially all corporate assets; (5) investment of funds in another
business or corporation or for a purpose other than the primary purpose
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES for which the corporation was organized; (6) adoption, amendment and
repeal of by-laws; (7) merger and consolidation; and (8) dissolution of
Investors who do not seek incentives and/or whose chosen activities do corporation.37
not qualify for incentives, (i.e., the activity is not listed in the IPP, and
they are not exporting at least 70% of their production) may go ahead Since a specific class of shares may have rights and privileges or
and make the investments without seeking incentives. They only have restrictions different from the rest of the shares in a corporation, the 60-
to be guided by the Foreign Investments Negative List (FINL). 40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with voting
rights but also to shares without voting rights. Preferred shares, denied
The FINL clearly defines investment areas requiring at least 60%
the right to vote in the election of directors, are anyway still entitled to
Filipino ownership. All other areas outside of this list are fully open to
vote on the eight specific corporate matters mentioned above. Thus, if
foreign investors. (Emphasis supplied)
a corporation, engaged in a partially nationalized industry, issues
a mixture of common and preferred non-voting shares, at least 60
V. Right to elect directors, coupled with beneficial percent of the common shares and at least 60 percent of the
ownership, translates to effective control. preferred non-voting shares must be owned by Filipinos. Of
course, if a corporation issues only a single class of shares, at least 60
The 28 June 2011 Decision declares that the 60 percent Filipino percent of such shares must necessarily be owned by Filipinos. In
ownership required by the Constitution to engage in certain economic short, the 60-40 ownership requirement in favor of Filipino citizens
activities applies not only to voting control of the corporation, but also must apply separately to each class of shares, whether common,
to the beneficial ownership of the corporation. To repeat, we held: preferred non-voting, preferred voting or any other class of
shares. This uniform application of the 60-40 ownership requirement in
Mere legal title is insufficient to meet the 60 percent Filipino-owned favor of Filipino citizens clearly breathes life to the constitutional
"capital" required in the Constitution. Full beneficial ownership of 60 command that the ownership and operation of public utilities shall be
percent of the outstanding capital stock, coupled with 60 percent reserved exclusively to corporations at least 60 percent of whose
of the voting rights, is required. The legal and beneficial ownership capital is Filipino-owned. Applying uniformly the 60-40 ownership
of 60 percent of the outstanding capital stock must rest in the hands of requirement in favor of Filipino citizens to each class of shares,
Filipino nationals in accordance with the constitutional mandate. regardless of differences in voting rights, privileges and restrictions,
Otherwise, the corporation is "considered as non-Philippine national[s]." guarantees effective Filipino control of public utilities, as mandated by
(Emphasis supplied) the Constitution.

This is consistent with Section 3 of the FIA which provides that where Moreover, such uniform application to each class of shares insures that
100% of the capital stock is held by "a trustee of funds for pension or the "controlling interest" in public utilities always lies in the hands of
other employee retirement or separation benefits," the trustee is a Filipino citizens. This addresses and extinguishes Pangilinan’s worry
Philippine national if "at least sixty percent (60%) of the fund will accrue that foreigners, owning most of the non-voting shares, will exercise
to the benefit of Philippine nationals." Likewise, Section 1(b) of the greater control over fundamental corporate matters requiring two-thirds
Implementing Rules of the FIA provides that "for stocks to be deemed or majority vote of all shareholders.
VI. Intent of the framers of the Constitution 60 percent of the capital to be owned by citizens.

While Justice Velasco quoted in his Dissenting Opinion38 a portion of MR. VILLEGAS. That is right.
the deliberations of the Constitutional Commission to support his claim
that the term "capital" refers to the total outstanding shares of stock, MR. AZCUNA. But the control can be with the foreigners even if
whether voting or non-voting, the following excerpts of the deliberations they are the minority. Let us say 40 percent of the capital is owned
reveal otherwise. It is clear from the following exchange that the term by them, but it is the voting capital, whereas, the Filipinos own the
"capital" refers to controlling interest of a corporation, thus: nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the minority
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or because they have the voting capital. That is the anomaly that
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in would result here.
Section 9 and 2/3-1/3 in Section 15.
MR. BENGZON. No, the reason we eliminated the word "stock" as
MR. VILLEGAS. That is right. stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have
MR. NOLLEDO. In teaching law, we are always faced with this stocks. That is why we say "CAPITAL."
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid- MR. AZCUNA. We should not eliminate the phrase "controlling
up capital stock of a corporation"? Will the Committee please enlighten interest."
me on this?
MR. BENGZON. In the case of stock corporations, it is assumed.40
MR. VILLEGAS. We have just had a long discussion with the members (Boldfacing and underscoring supplied)
of the team from the UP Law Center who provided us a draft. The
phrase that is contained here which we adopted from the UP draft Thus, 60 percent of the "capital" assumes, or should result in, a
is "60 percent of voting stock." "controlling interest" in the corporation.

MR. NOLLEDO. That must be based on the subscribed capital stock, The use of the term "capital" was intended to replace the word "stock"
because unless declared delinquent, unpaid capital stock shall be because associations without stocks can operate public utilities as long
entitled to vote. as they meet the 60-40 ownership requirement in favor of Filipino
citizens prescribed in Section 11, Article XII of the Constitution.
MR. VILLEGAS. That is right. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the
MR. NOLLEDO. Thank you. "controlling interest" in public utilities.

With respect to an investment by one corporation in another During the drafting of the 1935 Constitution, economic protectionism
corporation, say, a corporation with 60-40 percent equity invests in was "the battle-cry of the nationalists in the Convention."41 The same
another corporation which is permitted by the Corporation Code, does battle-cry resulted in the nationalization of the public utilities.42 This is
the Committee adopt the grandfather rule? also the same intent of the framers of the 1987 Constitution who
adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized
MR. VILLEGAS. Yes, that is the understanding of the Committee.
industries.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
The OSG, in its own behalf and as counsel for the State,43 agrees fully
with the Court’s interpretation of the term "capital." In its Consolidated
MR. VILLEGAS. Yes.39 Comment, the OSG explains that the deletion of the phrase "controlling
interest" and replacement of the word "stock" with the term "capital"
xxxx were intended specifically to extend the scope of the entities qualified
to operate public utilities to include associations without stocks. The
MR. AZCUNA. May I be clarified as to that portion that was accepted framers’ omission of the phrase "controlling interest" did not mean the
by the Committee. inclusion of all shares of stock, whether voting or non-voting. The OSG
reiterated essentially the Court’s declaration that the Constitution
MR. VILLEGAS. The portion accepted by the Committee is the deletion reserved exclusively to Philippine nationals the ownership and
of the phrase "voting stock or controlling interest." operation of public utilities consistent with the State’s policy to "develop
a self-reliant and independent national economy effectively controlled
by Filipinos."
MR. AZCUNA. Hence, without the Davide amendment, the committee
report would read: "corporations or associations at least sixty percent of
whose CAPITAL is owned by such citizens." As we held in our 28 June 2011 Decision, to construe broadly the term
"capital" as the total outstanding capital stock, treated as a single class
regardless of the actual classification of shares, grossly contravenes
MR. VILLEGAS. Yes.
the intent and letter of the Constitution that the "State shall develop a
self-reliant and independent national economy effectively controlled
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with
by Filipinos." We illustrated the glaring anomaly which would result in THE PRESIDENT. Commissioner Jamir is recognized.
defining the term "capital" as the total outstanding capital stock of a
corporation, treated as a single class of shares regardless of the actual MR. JAMIR. Madam President, my proposed amendment on lines 20
classification of shares, to wit: and 21 is to delete the phrase "two thirds of whose voting stock or
controlling interest," and instead substitute the words "SIXTY
Let us assume that a corporation has 100 common shares owned by PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No
foreigners and 1,000,000 non-voting preferred shares owned by franchise, certificate, or any other form of authorization for the
Filipinos, with both classes of share having a par value of one peso (P operation of a public utility shall be granted except to citizens of the
1.00) per share. Under the broad definition of the term "capital," such Philippines or to corporations or associations organized under the laws
corporation would be considered compliant with the 40 percent of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is
constitutional limit on foreign equity of public utilities since the owned by such citizens."
overwhelming majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously absurd. xxxx

In the example given, only the foreigners holding the common shares THE PRESIDENT: Will Commissioner Jamir first explain?
have voting rights in the election of directors, even if they hold only 100
shares. The foreigners, with a minuscule equity of less than 0.001
MR. JAMIR. Yes, in this Article on National Economy and Patrimony,
percent, exercise control over the public utility. On the other hand, the
there were two previous sections in which we fixed the Filipino equity to
Filipinos, holding more than 99.999 percent of the equity, cannot vote in
60 percent as against 40 percent for foreigners. It is only in this Section
the election of directors and hence, have no control over the public
15 with respect to public utilities that the committee proposal was
utility. This starkly circumvents the intent of the framers of the
increased to two-thirds. I think it would be better to harmonize this
Constitution, as well as the clear language of the Constitution, to place
provision by providing that even in the case of public utilities, the
the control of public utilities in the hands of Filipinos. x x x
minimum equity for Filipino citizens should be 60 percent.

Further, even if foreigners who own more than forty percent of the
MR. ROMULO. Madam President.
voting shares elect an all-Filipino board of directors, this situation does
not guarantee Filipino control and does not in any way cure the
violation of the Constitution. The independence of the Filipino board THE PRESIDENT. Commissioner Romulo is recognized.
members so elected by such foreign shareholders is highly doubtful. As
the OSG pointed out, quoting Justice George Sutherland’s words in MR. ROMULO. My reason for supporting the amendment is based on
Humphrey’s Executor v. US,44 "x x x it is quite evident that one who the discussions I have had with representatives of the Filipino majority
holds his office only during the pleasure of another cannot be owners of the international record carriers, and the subsequent
depended upon to maintain an attitude of independence against the memoranda they submitted to me. x x x
latter’s will." Allowing foreign shareholders to elect a controlling majority
of the board, even if all the directors are Filipinos, grossly circumvents Their second point is that under the Corporation Code, the
the letter and intent of the Constitution and defeats the very purpose of management and control of a corporation is vested in the board of
our nationalization laws. directors, not in the officers but in the board of directors. The officers
are only agents of the board. And they believe that with 60 percent of
VII. Last sentence of Section 11, Article XII of the Constitution the equity, the Filipino majority stockholders undeniably control the
board. Only on important corporate acts can the 40-percent foreign
The last sentence of Section 11, Article XII of the 1987 Constitution equity exercise a veto, x x x.
reads:
x x x x45
The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its MS. ROSARIO BRAID. Madam President.
capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. THE PRESIDENT. Commissioner Rosario Braid is recognized.

During the Oral Arguments, the OSG emphasized that there was never MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also
a question on the intent of the framers of the Constitution to limit foreign read from a memorandum by the spokesman of the Philippine
ownership, and assure majority Filipino ownership and control of public Chamber of Communications on why they would like to maintain the
utilities. The OSG argued, "while the delegates disagreed as to the present equity, I am referring to the 66 2/3. They would prefer to have a
percentage threshold to adopt, x x x the records show they clearly 75-25 ratio but would settle for 66 2/3. x x x
understood that Filipino control of the public utility corporation can only
be and is obtained only through the election of a majority of the xxxx
members of the board."
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid
Indeed, the only point of contention during the deliberations of the support the proposal of two-thirds rather than the 60 percent?
Constitutional Commission on 23 August 1986 was the extent of
majority Filipino control of public utilities. This is evident from the
MS. ROSARIO BRAID. I have added a clause that will put
following exchange:
management in the hands of Filipino citizens.
x x x x46 MR. VILLEGAS. Yes, Madam President.

While they had differing views on the percentage of Filipino ownership xxxx
of capital, it is clear that the framers of the Constitution intended public
utilities to be majority Filipino-owned and controlled. To ensure that MS. ROSARIO BRAID. Madam President, I propose a new section to
Filipinos control public utilities, the framers of the Constitution read: ‘THE MANAGEMENT BODY OF EVERY CORPORATION OR
approved, as additional safeguard, the inclusion of the last sentence of ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
Section 11, Article XII of the Constitution commanding that "[t]he CITIZENS OF THE PHILIPPINES."
participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its
This will prevent management contracts and assure control by
capital, and all the executive and managing officers of such corporation
Filipino citizens. Will the committee assure us that this amendment
or association must be citizens of the Philippines." In other words, the
will insure that past activities such as management contracts will no
last sentence of Section 11, Article XII of the Constitution mandates
longer be possible under this amendment?
that (1) the participation of foreign investors in the governing body of
the corporation or association shall be limited to their proportionate
share in the capital of such entity; and (2) all officers of the corporation xxxx
or association must be Filipino citizens.
FR. BERNAS. Madam President.
Commissioner Rosario Braid proposed the inclusion of the phrase
requiring the managing officers of the corporation or association to be THE PRESIDENT. Commissioner Bernas is recognized.
Filipino citizens specifically to prevent management contracts, which
were designed primarily to circumvent the Filipinization of public FR. BERNAS. Will the committee accept a reformulation of the first
utilities, and to assure Filipino control of public utilities, thus: part?

MS. ROSARIO BRAID. x x x They also like to suggest that we amend MR. BENGZON. Let us hear it.
this provision by adding a phrase which states: "THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL FR. BERNAS. The reformulation will be essentially the formula of the
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I 1973 Constitution which reads: "THE PARTICIPATION OF FOREIGN
have with me their position paper. INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
THE PRESIDENT. The Commissioner may proceed. SHARE IN THE CAPITAL THEREOF AND..."

MS. ROSARIO BRAID. The three major international record carriers in MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS
the Philippines, which Commissioner Romulo mentioned – Philippine OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE
Global Communications, Eastern Telecommunications, Globe Mackay CITIZENS OF THE PHILIPPINES."
Cable – are 40-percent owned by foreign multinational companies and
60-percent owned by their respective Filipino partners. All three, MR. BENGZON. Will Commissioner Bernas read the whole thing
however, also have management contracts with these foreign again?
companies – Philcom with RCA, ETPI with Cable and Wireless PLC,
and GMCR with ITT. Up to the present time, the general managers of
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN
these carriers are foreigners. While the foreigners in these common
THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
carriers are only minority owners, the foreign multinationals are the
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE
ones managing and controlling their operations by virtue of their
CAPITAL THEREOF..." I do not have the rest of the copy.
management contracts and by virtue of their strength in the governing
bodies of these carriers.47
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST
xxxx
BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. OPLE. I think a number of us have agreed to ask Commissioner
MR. VILLEGAS. Yes.
Rosario Braid to propose an amendment with respect to the operating
management of public utilities, and in this amendment, we are
associated with Fr. Bernas, Commissioners Nieva and Rodrigo. MR. BENGZON. Madam President, I think that was said in a more
Commissioner Rosario Braid will state this amendment now. elegant language. We accept the amendment. Is that all right with
Commissioner Rosario Braid?
Thank you.
MS. ROSARIO BRAID. Yes.
MS. ROSARIO BRAID. Madam President.
xxxx
THE PRESIDENT. This is still on Section 15.
MR. DE LOS REYES. The governing body refers to the board of
directors and trustees.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. That is right. sentence of Section 5, Article XIV of the 1973 Constitution,49 signifying
its importance in reserving ownership and control of public utilities to
MR. BENGZON. Yes, the governing body refers to the board of Filipino citizens.
directors.
VIII. The undisputed facts
MR. REGALADO. It is accepted.
There is no dispute, and respondents do not claim the contrary, that (1)
MR. RAMA. The body is now ready to vote, Madam President. foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and
thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s
VOTING
common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by
xxxx Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of
the dividends that common shares earn;50 (5) preferred shares have
The results show 29 votes in favor and none against; so the proposed twice the par value of common shares; and (6) preferred shares
amendment is approved. constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%.
xxxx
Despite the foregoing facts, the Court did not decide, and in fact
THE PRESIDENT. All right. Can we proceed now to vote on Section refrained from ruling on the question of whether PLDT violated the 60-
15? 40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the 1987 Constitution. Such question indisputably calls for
MR. RAMA. Yes, Madam President. a presentation and determination of evidence through a hearing, which
is generally outside the province of the Court’s jurisdiction, but well
within the SEC’s statutory powers. Thus, for obvious reasons, the Court
THE PRESIDENT. Will the chairman of the committee please read
limited its decision on the purely legal and threshold issue on the
Section 15?
definition of the term "capital" in Section 11, Article XII of the
Constitution and directed the SEC to apply such definition in
MR. VILLEGAS. The entire Section 15, as amended, reads: "No determining the exact percentage of foreign ownership in PLDT.
franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
IX. PLDT is not an indispensable party; SEC is impleaded in this
Philippines or to corporations or associations organized under the laws
case.
of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is
owned by such citizens." May I request Commissioner Bengzon to
please continue reading. In his petition, Gamboa prays, among others:

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS xxxx


IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE 5. For the Honorable Court to issue a declaratory relief that ownership
CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING of common or voting shares is the sole basis in determining foreign
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST equity in a public utility and that any other government rulings, opinions,
BE CITIZENS OF THE PHILIPPINES." and regulations inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the 1987
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR Constitution;
AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A
PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR 6. For the Honorable Court to declare null and void all sales of common
NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such stocks to foreigners in excess of 40 percent of the total subscribed
franchise or right be granted except under the condition that it shall be common shareholdings; and
subject to amendment, alteration, or repeal by Congress when the
common good so requires. The State shall encourage equity 7. For the Honorable Court to direct the Securities and Exchange
participation in public utilities by the general public." Commission and Philippine Stock Exchange to require PLDT to
make a public disclosure of all of its foreign shareholdings and
VOTING their actual and real beneficial owners.

xxxx Other relief(s) just and equitable are likewise prayed for. (Emphasis
supplied)
The results show 29 votes in favor and 4 against; Section 15, as
amended, is approved.48 (Emphasis supplied) As can be gleaned from his prayer, Gamboa clearly asks this Court to
compel the SEC to perform its statutory duty to investigate whether "the
The last sentence of Section 11, Article XII of the 1987 Constitution, required percentage of ownership of the capital stock to be owned by
particularly the provision on the limited participation of foreign investors citizens of the Philippines has been complied with [by PLDT] as
in the governing body of public utilities, is a reiteration of the last required by x x x the Constitution."51 Such plea clearly negates SEC’s
argument that it was not impleaded. and thus are clearly within the jurisdiction of the SEC. In short, PLDT
must be impleaded, and must necessarily be heard, in the proceedings
Granting that only the SEC Chairman was impleaded in this case, the before the SEC where the factual issues will be thoroughly threshed out
Court has ample powers to order the SEC’s compliance with its and resolved.
directive contained in the 28 June 2011 Decision in view of the far-
reaching implications of this case. In Domingo v. Scheer,52 the Court Notably, the foregoing issues were left untouched by the Court.
dispensed with the amendment of the pleadings to implead the Bureau The Court did not rule on the factual issues raised by Gamboa, except
of Customs considering (1) the unique backdrop of the case; (2) the the single and purely legal issue on the definition of the term "capital" in
utmost need to avoid further delays; and (3) the issue of public interest Section 11, Article XII of the Constitution. The Court confined the
involved. The Court held: resolution of the instant case to this threshold legal issue in deference
to the fact-finding power of the SEC.
The Court may be curing the defect in this case by adding the BOC as
party-petitioner. The petition should not be dismissed because the Needless to state, the Court can validly, properly, and fully dispose of
second action would only be a repetition of the first. In Salvador, et al., the fundamental legal issue in this case even without the participation
v. Court of Appeals, et al., we held that this Court has full powers, apart of PLDT since defining the term "capital" in Section 11, Article XII of the
from that power and authority which is inherent, to amend the Constitution does not, in any way, depend on whether PLDT was
processes, pleadings, proceedings and decisions by substituting as impleaded. Simply put, PLDT is not indispensable for a complete
party-plaintiff the real party-in-interest. The Court has the power to resolution of the purely legal question in this case.55 In fact, the Court,
avoid delay in the disposition of this case, to order its amendment by treating the petition as one for mandamus,56 merely directed the
as to implead the BOC as party-respondent. Indeed, it may no SEC to apply the Court’s definition of the term "capital" in Section 11,
longer be necessary to do so taking into account the unique Article XII of the Constitution in determining whether PLDT committed
backdrop in this case, involving as it does an issue of public any violation of the said constitutional provision. The dispositive
interest. After all, the Office of the Solicitor General has represented portion of the Court’s ruling is addressed not to PLDT but solely
the petitioner in the instant proceedings, as well as in the appellate to the SEC, which is the administrative agency tasked to enforce
court, and maintained the validity of the deportation order and of the the 60-40 ownership requirement in favor of Filipino citizens in
BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State Section 11, Article XII of the Constitution.
that the BOC was not afforded its day in court, simply because only the
petitioner, the Chairperson of the BOC, was the respondent in the CA, Since the Court limited its resolution on the purely legal issue on the
and the petitioner in the instant recourse. In Alonso v. Villamor, we had definition of the term "capital" in Section 11, Article XII of the 1987
the occasion to state: Constitution, and directed the SEC to investigate any violation by PLDT
of the 60-40 ownership requirement in favor of Filipino citizens under
There is nothing sacred about processes or pleadings, their forms the Constitution,57 there is no deprivation of PLDT’s property or denial
or contents. Their sole purpose is to facilitate the application of of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s
justice to the rival claims of contending parties. They were created, misimpression. Due process will be afforded to PLDT when it presents
not to hinder and delay, but to facilitate and promote, the administration proof to the SEC that it complies, as it claims here, with Section 11,
of justice. They do not constitute the thing itself, which courts are Article XII of the Constitution.
always striving to secure to litigants. They are designed as the means
best adapted to obtain that thing. In other words, they are a means to X. Foreign Investments in the Philippines
an end. When they lose the character of the one and become the other,
the administration of justice is at fault and courts are correspondingly
Movants fear that the 28 June 2011 Decision would spell disaster to our
remiss in the performance of their obvious duty.53 (Emphasis supplied) economy, as it may result in a sudden flight of existing foreign investors
to "friendlier" countries and simultaneously deterring new foreign
In any event, the SEC has expressly manifested54 that it will abide investors to our country. In particular, the PSE claims that the 28 June
by the Court’s decision and defer to the Court’s definition of the 2011 Decision may result in the following: (1) loss of more than P 630
term "capital" in Section 11, Article XII of the Constitution. Further, billion in foreign investments in PSE-listed shares; (2) massive
the SEC entered its special appearance in this case and argued decrease in foreign trading transactions; (3) lower PSE Composite
during the Oral Arguments, indicating its submission to the Index; and (4) local investors not investing in PSE-listed shares.58
Court’s jurisdiction. It is clear, therefore, that there exists no legal
impediment against the proper and immediate implementation of
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral
the Court’s directive to the SEC. Arguments, shared movants’ apprehension. Without providing specific
details, he pointed out the depressing state of the Philippine economy
PLDT is an indispensable party only insofar as the other issues, compared to our neighboring countries which boast of growing
particularly the factual questions, are concerned. In other words, PLDT economies. Further, Dr. Villegas explained that the solution to our
must be impleaded in order to fully resolve the issues on (1) whether economic woes is for the government to "take-over" strategic
the sale of 111,415 PTIC shares to First Pacific violates the industries, such as the public utilities sector, thus:
constitutional limit on foreign ownership of PLDT; (2) whether the sale
of common shares to foreigners exceeded the 40 percent limit on
JUSTICE CARPIO:
foreign equity in PLDT; and (3) whether the total percentage of the
PLDT common shares with voting rights complies with the 60-40
ownership requirement in favor of Filipino citizens under the I would like also to get from you Dr. Villegas if you have additional
Constitution for the ownership and operation of PLDT. These issues information on whether this high FDI59 countries in East Asia have
indisputably call for an examination of the parties’ respective evidence, allowed foreigners x x x control [of] their public utilities, so that we can
compare apples with apples.
DR. VILLEGAS: The Constitution expressly declares as State policy the development of
an economy "effectively controlled" by Filipinos. Consistent with such
Correct, but let me just make a comment. When these neighbors of State policy, the Constitution explicitly reserves the ownership and
ours find an industry strategic, their solution is not to "Filipinize" or operation of public utilities to Philippine nationals, who are defined in
"Vietnamize" or "Singaporize." Their solution is to make sure that the Foreign Investments Act of 1991 as Filipino citizens, or corporations
those industries are in the hands of state enterprises. So, in these or associations at least 60 percent of whose capital with voting rights
countries, nationalization means the government takes over. And belongs to Filipinos. The FIA’s implementing rules explain that "[f]or
because their governments are competent and honest enough to stocks to be deemed owned and held by Philippine citizens or
the public, that is the solution. x x x 60 (Emphasis supplied) Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights is essential." In effect, the FIA
If government ownership of public utilities is the solution, then foreign
clarifies, reiterates and confirms the interpretation that the term "capital"
investments in our public utilities serve no purpose. Obviously, there
in Section 11, Article XII of the 1987 Constitution refers to shares with
can never be foreign investments in public utilities if, as Dr. Villegas
voting rights, as well as with full beneficial ownership. This is
claims, the "solution is to make sure that those industries are in the
precisely because the right to vote in the election of directors, coupled
hands of state enterprises." Dr. Villegas’s argument that foreign
with full beneficial ownership of stocks, translates to effective control of
investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the a corporation.
solution is for government to take over these companies. Dr. Villegas is
barking up the wrong tree since State ownership of public utilities and Any other construction of the term "capital" in Section 11, Article XII of
foreign investments in such industries are diametrically opposed the Constitution contravenes the letter and intent of the Constitution.
concepts, which cannot possibly be reconciled. Any other meaning of the term "capital" openly invites alien domination
of economic activities reserved exclusively to Philippine nationals.
Therefore, respondents’ interpretation will ultimately result in handing
In any event, the experience of our neighboring countries cannot be
over effective control of our national economy to foreigners in patent
used as argument to decide the present case differently for two
violation of the Constitution, making Filipinos second-class citizens in
reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their their own country.
strategic public utilities like the telecommunications industry. Second,
our Constitution has specific provisions limiting foreign ownership in Filipinos have only to remind themselves of how this country was
public utilities which the Court is sworn to uphold regardless of the exploited under the Parity Amendment, which gave Americans the
experience of our neighboring countries. same rights as Filipinos in the exploitation of natural resources, and in
the ownership and control of public utilities, in the Philippines. To do
this the 1935 Constitution, which contained the same 60 percent
In our jurisdiction, the Constitution expressly reserves the ownership
Filipino ownership and control requirement as the present 1987
and operation of public utilities to Filipino citizens, or corporations or
Constitution, had to be amended to give Americans parity rights with
associations at least 60 percent of whose capital belongs to Filipinos.
Filipinos. There was bitter opposition to the Parity Amendment62 and
Following Dr. Villegas’s claim, the Philippines appears to be more
many Filipinos eagerly awaited its expiration. In late 1968, PLDT was
liberal in allowing foreign investors to own 40 percent of public utilities,
one of the American-controlled public utilities that became Filipino-
unlike in other Asian countries whose governments own and operate
controlled when the controlling American stockholders divested in
such industries.
anticipation of the expiration of the Parity Amendment on 3 July 1974.63
No economic suicide happened when control of public utilities and
XI. Prospective Application of Sanctions mining corporations passed to Filipinos’ hands upon expiration of the
Parity Amendment.
In its Motion for Partial Reconsideration, the SEC sought to clarify the
reckoning period of the application and imposition of appropriate Movants’ interpretation of the term "capital" would bring us back to the
sanctions against PLDT if found violating Section 11, Article XII of the same evils spawned by the Parity Amendment, effectively giving
Constitution.1avvphi1 foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants’
As discussed, the Court has directed the SEC to investigate and interpretation opens up our national economy to effective control not
determine whether PLDT violated Section 11, Article XII of the only by Americans but also by all foreigners, be they Indonesians,
Constitution. Thus, there is no dispute that it is only after the SEC has Malaysians or Chinese, even in the absence of reciprocal treaty
determined PLDT’s violation, if any exists at the time of the arrangements. At least the Parity Amendment, as implemented by the
commencement of the administrative case or investigation, that the Laurel-Langley Agreement, gave the capital-starved Filipinos
SEC may impose the statutory sanctions against PLDT. In other words, theoretical parity – the same rights as Americans to exploit natural
once the 28 June 2011 Decision becomes final, the SEC shall impose resources, and to own and control public utilities, in the United States of
the appropriate sanctions only if it finds after due hearing that, at the America. Here, movants’ interpretation would effectively mean a
start of the administrative case or investigation, there is an existing unilateral opening up of our national economy to all foreigners,
violation of Section 11, Article XII of the Constitution. Under prevailing without any reciprocal arrangements. That would mean that
jurisprudence, public utilities that fail to comply with the nationality Indonesians, Malaysians and Chinese nationals could effectively
requirement under Section 11, Article XII and the FIA can cure their control our mining companies and public utilities while Filipinos, even if
deficiencies prior to the start of the administrative case or they have the capital, could not control similar corporations in these
investigation.61 countries.

XII. Final Word The 1935, 1973 and 1987 Constitutions have the same 60 percent
Filipino ownership and control requirement for public utilities like PLOT.
Any deviation from this requirement necessitates an amendment to the
Constitution as exemplified by the Parity Amendment. This Court has
no power to amend the Constitution for its power and duty is only to
faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH


FINALITY. No further pleadings shall be entertained.

SO ORDERED.