G.R. No. 176579 On 28 November 1928, the Philippine Legislature enacted Act No.

3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
WILSONWILSON P. GAMBOA, and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
Petitioner, PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner
of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed
- versus - Promulgated: by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415
FINANCE SECRETARY MARGARITO B. TEVES, June 28, 2011 shares of stock of PTIC held by PHI were sequestered by the Presidential Commission
FINANCE UNDERSECRETARY JOHN P. on Good Government (PCGG). The 111,415 PTIC shares, which represent about
SEVILLA, AND COMMISSIONER RICARDO 46.125 percent of the outstanding capital stock of PTIC, were later declared by this
ABCEDE OF THE PRESIDENTIAL Court to be owned by the Republic of the Philippines.2
COMMISSION ON GOOD GOVERNMENT In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
(PCGG) IN THEIR CAPACITIES AS CHAIR AND acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
MEMBERS, RESPECTIVELY, OF THE November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
PRIVATIZATION COUNCIL, Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
CHAIRMAN ANTHONI SALIM OF FIRST of the outstanding capital stock of PTIC, through a public bidding to be conducted on
PACIFIC CO., LTD. IN HIS CAPACITY AS 4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
DIRECTOR OF METRO PACIFIC ASSET and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
HOLDINGS INC., CHAIRMAN MANUEL V. Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
PANGILINAN OF PHILIPPINE LONG DISTANCE million.
TELEPHONE COMPANY (PLDT) IN HIS Thereafter, First Pacific announced that it would exercise its right of first refusal as a
CAPACITY AS MANAGING DIRECTOR OF PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
FIRST PACIFIC CO., LTD., PRESIDENT Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
NAPOLEON L. NAZARENO OF PHILIPPINE IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
LONG DISTANCE TELEPHONE COMPANY, March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
CHAIR FE BARIN OF THE SECURITIES subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
EXCHANGE COMMISSION, and PRESIDENT 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
FRANCIS LIM OF THE PHILIPPINE STOCK the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
EXCHANGE, sale was completed on 28 February 2007.
Respondents. Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3
DECISION percent of the outstanding common shares of PLDT. With the sale, First Pacifics
CARPIO, J.: common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby
The Case increasing the common shareholdings of foreigners in PLDT to about 81.47
This is an original petition for prohibition, injunction, declaratory relief and percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which
declaration of nullity of the sale of shares of stock of Philippine Telecommunications limits foreign ownership of the capital of a public utility to not more than 40 percent. 3
Investment Corporation (PTIC) by the government of the Republic of the Philippines On the other hand, public respondents Finance Secretary Margarito B. Teves,
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
Limited (First Pacific). following relevant facts:
The Antecedents On 9 November 1967, PTIC was incorporated and had since engaged in the business
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
Distance Telephone Company (PLDT), are as follows:1 percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance and
the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-
bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine
different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP 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 the bidding results and gave First Pacific
until 1 February 2007 to exercise its right of first refusal in accordance with PTICs
Articles of Incorporation. First Pacific announced its intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then impending
sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those
who attended the public hearing. The HR Committee Report No. 2270 concluded
that: (a) the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting in First
Pacifics 100% ownership of PTIC will not violate the 40 percent constitutional limit
on foreign ownership of a public utility since PTIC holds only 13.847 percent of the
total outstanding common shares of PLDT. 5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the 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 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 PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific affiliate,
exercised its right of first refusal by matching the highest bid offered for PTIC shares
on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when
MPAH paid IPC P25,217,556,000 and the government delivered the certificates for
the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts
of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent to
37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings
in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will go up
from 30.7 percent to 37.0 percent of its common or voting- stockholdings,
x x x. Hence, the consummation of the sale will put the two largest foreign
investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds
largest wireless telecommunications firm, owning 51.56 percent of PLDT
common equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com) showed
that those foreign entities, which own at least five percent of common
equity, will collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as
Form 20-K reports x x x which PLDT submitted to the New
York Stock Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign entities
breached the constitutional limit of 40 percent ownership
as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in 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
percent of the entire subscribed common capital stock violates the constitutional
limit on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave
to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28
August 2007, the Court granted the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among
others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of
the parties, are generally beyond this Courts jurisdiction. Adhering to this well-settled
principle, the Court shall confine the resolution of the instant controversy solely on
the threshold and purely legal issue of whether the term capital in Section 11, Article
XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief, 10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition, 11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime
of rape committed by a foreign tourist against a Filipino minor and the execution of
the final judgment in the civil case for damages on the tourists dollar deposit with a
local bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or any other
order or process of any court, inapplicable due to the peculiar circumstances of the
case. The Court held that injustice would result 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 case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail. The Court
therefore required respondents Central Bank of the Philippines, the local bank, and
the accused to comply with the writ of execution issued in the civil case for damages
and to release the dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed
aside the procedural infirmity of the petition for declaratory relief and treated the
same as one for mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included
among the four employers under Presidential Decree No. 851 which are required to
pay their employees x x x a thirteenth (13th) month pay x x x ? The Constitutional
principle involved therein affected all government employees, clearly justifying a
relaxation of the technical rules of procedure, and certainly requiring the
interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term capital
in Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue
will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake 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-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.
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 Fernandez v. Cojuangco, docketed as
G.R. No. 157360.16 That case involved the same public utility (PLDT) and substantially
the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts.17 There, petitioner
Fernandez assailed on a pure question of law the Regional Trial Courts Decision of 21
February 2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources, 19 in Section 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 Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the ownership of
advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue
in this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a public right
and the object of mandamus is to obtain the enforcement of a public duty, the
people are regarded as the real parties in interest; and because it is sufficient that
petitioner is a citizen and as such is interested in the execution of the laws, he need
not show that he has any legal or special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their right to be informed on
matters of public concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the
right they sought to be enforced is a public right recognized by no less than the
fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared
that when a mandamus proceeding involves the assertion of a public right, the
requirement of personal interest is satisfied by the mere fact that petitioner is a
citizen and, therefore, part of the general public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not
have been involved under the questioned contract for the development,
management and operation of the Manila International Container Terminal, public
interest [was] definitely involved considering the important role [of the subject
contract] . . . in the economic development of the country and the magnitude of
the financial consideration involved. We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority for
upholding the petitioners standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in
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
common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the
Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
Section 5. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of the capital of which is owned
by such citizens, nor shall such franchise, certificate, or authorization be
exclusive in 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 National
Assembly when the public interest so requires. The State shall encourage
equity participation in public utilities by the general public. The participation
of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in the capital thereof. (Emphasis
supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of
the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or other entities organized under the laws
of the Philippines sixty per centum of the capital of which is owned by
 citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the public interest so requires. (Emphasis
supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities
by 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 Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security.26 The evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29
Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.
The crux of the controversy is the definition of the term capital. Does the term capital
in Section 11, Article XII of the Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and
it is through voting that control over a corporation is exercised. Petitioner posits that
the term capital in Section 11, Article XII of the Constitution refers to the ownership
of common capital stock subscribed and outstanding, which class of shares alone,
under the corporate set-up of PLDT, can vote and elect members of the board of
directors. It is undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June
1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred shares to pay for the investment
cost of installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioners arguments and adopt
petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps
mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks
to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of
the foreign common shareholders.
While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to counter
petitioners allegations is the uniform interpretation by government agencies (such
as the SEC), institutions and corporations (such as the Philippine National Oil
Company-Energy Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in controlling interest in view of testing
compliance with the 40% constitutional limitation on foreign ownership in public
utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the
alleged violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this
Courts jurisdiction over the petition; (2) petitioners lack of standing; (3) mootness of
the petition; (4) non-availability of declaratory relief; and (5) the denial of due
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 relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also without
notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the utility
company as a condition for keeping their shares in the utility company. According
to him, Section 11 does not authorize taking one persons property (the shareholders
stock in the utility company) on the basis of another partys alleged failure to satisfy
a requirement that is a condition only for that other partys retention of another piece
of property (the utility company being at least 60% Filipino-owned to keep its
franchise).36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman
Fe Barin, is likewise silent on the definition of the term capital. In its
Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the
supposed procedural defects of the 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 11, Article XII
of the Constitution. The OSG contends that the petition actually partakes of a
collateral attack on PLDTs franchise as a public utility, which in effect requires a full-
blown trial where all the parties in interest are given their day in court. 38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of
the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to
be a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:
The forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote,
i.e., common shares, considering that it is through voting that control is
being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially nationalized
activities is for Filipino nationals to be always in control of the corporation
undertaking said activities. Otherwise, if the Trial Courts ruling upholding
respondents arguments were to be given credence, it would be possible for
the ownership structure of a public utility corporation to be divided into one
percent (1%) common stocks and ninety-nine percent (99%) preferred
stocks. Following the Trial Courts ruling adopting respondents arguments,
the common shares can be owned entirely by foreigners thus creating an
absurd situation wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply
to both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case
of petitioner PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%,
and the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of
Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987
cited by the Trial Court to support the proposition that the meaning of the
word capital as used in Section 11, Article XII of the Constitution allegedly
refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified,
whether as common or preferred, cannot stand in the face of a clear
legislative policy as stated in the FIA which took effect in 1991 or way after
said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and
an opinion rendered by an administrative agency, the law indubitably
prevails. Moreover, said Opinions are merely advisory and cannot prevail
over the clear intent of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally
determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel
V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-
Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F.
Del Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article
XII of the Constitution includes preferred shares since the Constitution does not
distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the corporations
capital, without distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force at the
time the present (1987) Constitution was drafted defined outstanding
capital stock as follows:
Section 137. Outstanding capital stock defined. The term outstanding
capital stock, as used in this Code, means the total shares of stock issued
under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs foreign equity only on
the basis of PLDTs outstanding common shares is without legal basis. The
 language of the Constitution should be understood in the sense it has in
common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common shares should form
the basis for computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility
of ensuring compliance with the Constitutions foreign equity restrictions as
regards nationalized activities x x x has categorically ruled that both
common and preferred shares are properly considered in determining
outstanding capital stock and the nationality composition thereof. 40
We agree with petitioner and petitioners-in-intervention. The term capital in Section
11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, 41 and not
to the total outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:
Sec. 6. Classification of shares. - The shares of stock of stock 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 incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have
a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference
in the distribution of the assets of the corporation in case of liquidation and
in the distribution of dividends, or such other preferences as may be stated
in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with
a stated par value. The Board of Directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions shall
be effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration less than the value
of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in
the certificate of stock, each share shall be equal in all respects to every
other share.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate 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 directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in
the corporation for income in the same manner as bondholders. 45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right
to vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote
in the election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to
the voting stock or controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and
2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
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-up capital stock of a
corporation? Will the Committee please enlighten me on this?
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 phrase that is
contained here which we adopted from the UP draft is 60 percent of voting
stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt the
grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by
the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.
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.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are
the minority. Let us say 40 percent of the capital is owned by them, but it
is the voting capital, whereas, the Filipinos own the nonvoting shares. So
we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is
the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word stock as stated in
the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we say
CAPITAL.
MR. AZCUNA. We should not eliminate the phrase controlling interest.
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result in, controlling interest in
the corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a citizen of the Philippines; or a
domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to
the benefit of Philippine nationals: Provided, That where a corporation and
its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (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
percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a Philippine national. (Emphasis supplied)
In explaining the definition of a Philippine national, the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by the citizens of the Philippines;
or a corporation organized under the laws of the Philippines of which at
 least sixty percent [60%] of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds
for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent [60%] of the fund
will accrue to the benefit of the Philippine nationals; Provided,that where a
corporation its non-Filipino stockholders own stocks in a Securities and
Exchange Commission [SEC] registered enterprise, at least sixty percent
[60%] of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at
least sixty percent [60%] of the members of the Board of Directors of each
of both corporation must be citizens of the Philippines, in order that the
corporation shall be considered a Philippine national. The control test shall
be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or
not, but only such stocks which are generally entitled to vote are
considered.
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, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].
Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain 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 these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and
Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
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 term capital in Section 11, Article XII
of the Constitution is also used in the same context in numerous lawsreserving
certain areas of investments to Filipino citizens.
To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is
Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares 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 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution,
as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51
On the other hand, holders of common shares are granted the exclusive right to vote
in the election of directors. PLDTs Articles of Incorporation 52 state that each holder
of Common Capital Stock shall have one vote in respect of each share of such stock
held by him on all matters voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.53
In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely, holders
of preferred shares, who have no voting rights in the election of directors, do not
have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54which is a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners
hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009, 57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares
at P70.00 per share, while the declared dividends for the preferred shares amounted
to a measly P1.00 per share.59 So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares
is P10.00 per share. In other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos
while foreigners own only a minuscule 0.56% of the preferred shares. 61 Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than
60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that [n]o franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted
except to x x xcorporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens x x x.
To repeat, (1) 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 exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred 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)
preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 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 share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the Constitution
to include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such
an interpretation certainly runs counter to the constitutional provision reserving
certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising
businesses. The Court should 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 defend and uphold
the intent and letter of the Constitution to ensure, in the words of the Constitution,
a self-reliant and independent national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these self-
executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary
to enforce a constitutional mandate, the presumption now is that all
provisions of the constitution are self-executing. If the constitutional
provisions are treated as requiring legislation instead of self-executing, the
legislature would have the power to ignore and practically nullify the
mandate of the fundamental law. This can be cataclysmic. That is why the
prevailing view is, as it has always been, that
 . . . in case of doubt, the Constitution should be considered self-executing
rather than non-self-executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution should be considered self-
executing, as a contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These provisions
would be subordinated to the will of the lawmaking body, which could make
them entirely meaningless by simply refusing to pass the needed
implementing statute. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-executing,
rather than as requiring future legislation for their enforcement. The reason
is not difficult to discern. For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with wisdom of the ages
is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate
them.
Thus, we have treated as self-executing the provisions in the Bill of Rights
on arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-
incrimination. It is recognized that legislation is unnecessary to enable
courts to effectuate constitutional provisions guaranteeing the fundamental
rights of life, liberty and the protection of property. The same treatment is
accorded to constitutional provisions forbidding the taking or damaging of
property for public use without just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a sale
by a citizen of his land to an alien, and as both the citizen and the alien have
violated the law, none of them should have a recourse 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 in such matters is a
matter of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June
27, 1956.) While the legislature has not definitely decided what policy
should be followed in cases of violations against the constitutional
prohibition, courts of justice cannot go beyond by declaring the disposition
to be null and void as violative of the Constitution. x x x (Emphasis
supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the exploitation by corporations of
mineral resources, the ownership by corporations of real estate, and the ownership
of educational institutions. All the legislatures that convened since 1935 also
miserably failed to enact legislations to implement these vital constitutional
provisions that determine who will effectively control the national economy, Filipinos
or foreigners. This Court cannot allow such an absurd interpretation of the
Constitution.
This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by mandamus
to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function
to reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in 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 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 apparently unlawfully neglected to do based on the 2010 GIS that respondent
PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or associations,
upon any of the grounds provided by law. The SEC is mandated under Section 5(d)
of the same Code with the power and function to investigate x x x the activities of
persons to ensure compliance with the laws and regulations that SEC administers or
enforces. The GIS that all corporations are required to submit to SEC annually should
put the SEC on guard against violations of the nationality requirement 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 violation of Section 11, Article XII of the Constitution in
view of the ownership structure of PLDTs voting shares, as admitted by respondents
and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra
Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc.
(Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October
1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
(Redmont), a domestic corporation organized and existing under Philippine laws,
took interest in mining and exploring certain areas of the province of Palawan. After
inquiring with the Department of Environment and Natural Resources (DENR), it
learned that the areas where it wanted to undertake exploration and mining
activities where already covered by Mineral Production Sharing Agreement (MPSA)
applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc.
(SMMI), filed an application for an MPSA and Exploration Permit (EP) with the Mines
and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of
Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782
hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and
EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao,
Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining
Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur. 2
Petitioner Narra acquired its MPSA from Alpha Resources and Development
Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which
previously filed an application for an MPSA with the MGB, Region IV-B, DENR on
January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12
covering an area of 3.277 hectares in barangays Calategas and San Isidro,
Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or
assigned its rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as
MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao
and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR
three (3) separate petitions for the denial of petitioners’ applications for MPSA
designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is a considerable
stockholder of petitioners, it was the driving force behind petitioners’ filing of the
MPSAs over the areas covered by applications since it knows that it can only
participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly
owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section
3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which
provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following
terms, whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract,
or a corporation, partnership, association, or cooperative organized or authorized for
the purpose of engaging in mining, with technical and financial capability to
undertake mineral resources development and duly registered in accordance with
law at least sixty per cent (60%) of the capital of which is owned by citizens of the
Philippines: Provided, That a legally organized foreign-owned corporation shall be
deemed a qualified person for purposes of granting an exploration permit, financial
or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because
they also applied for Financial or Technical Assistance Agreements (FTAA)
denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07
for Narra, which are granted to foreign-owned corporations. Nevertheless, they
claimed that the issue on nationality should not be raised since McArthur, Tesoro and
Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of
the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997
shares of McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997
shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of
the capital stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test," embodied in Sec. 3
of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the POA
of DENR did not have jurisdiction over the issues in Redmont’s petition since they are
not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no
personality to sue them because it has no pending claim or application over the areas
applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from
gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in
mining activities. On the other hand, [Redmont] having filed its own applications for
an EPA over the areas earlier covered by the MPSA application of respondents may
be considered if and when they are qualified under the law. The violation of the
requirements for the issuance and/or grant of permits over mining areas is clearly
established thus, there is reason to believe that the cancellation and/or revocation
of permits already issued under the premises is in order and open the areas covered
to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc.,
Tesoro Mining and Development, Inc., and Narra Nickel Mining and Development
Corp. as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral
Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled"
by MBMI, a 100% Canadian company and declared their MPSAs null and void. In the
same Resolution, it gave due course to Redmont’s EPAs. Thereafter, on February 7,
2008, the POA issued an Order7 denying the Motion for Reconsideration filed by
petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint
Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board
(MAB) while Narra separately filed its Notice of Appeal 10 and Memorandum of
Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified
persons under the law. Also, through a letter, they informed the MAB that they had
their individual MPSA applications converted to FTAAs. McArthur’s FTAA was
denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was
converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to
AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed
a Complaint15 with the Securities and Exchange Commission (SEC), seeking the
revocation of the certificates for registration of petitioners on the ground that they
are foreign-owned or controlled corporations engaged in mining in violation of
Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and
Motion to Suspend Proceeding before the MAB praying for the suspension of the
proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court
of Quezon City, Branch 92 (RTC) a Complaint 16 for injunction with application for
issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction,
docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB
proceedings pending the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for injunctive
reliefs, the MAB issued an Order on September 10, 2008, finding the appeal
meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby
REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the Panel of
Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02
and 2007-03, and its Order dated 07 February 2008 denying the Motions for
Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines
Corporation on 02 January 2007 is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s
application for a TRO and setting the case for hearing the prayer for the issuance of
a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of
the September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental
Motion for Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration, Redmont filed before the RTC a
Supplemental Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of
preliminary injunction enjoining the MAB from finally disposing of the appeals of
petitioners and from resolving Redmont’s Motion for Reconsideration and
Supplement Motion for Reconsideration of the MAB’s September 10, 2008
Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion
for Reconsideration and Supplemental Motion for Reconsideration and resolving the
appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders
issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive
of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated
September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed
and set aside. The findings of the Panel of Arbitrators of the Department of
Environment and Natural Resources that respondents McArthur, Tesoro and Narra
are foreign corporations is upheld and, therefore, the rejection of their applications
for Mineral Product Sharing Agreement should be recommended to the Secretary of
the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for
Financial or Technical Assistance Agreement (FTAA) or conversion of their MPSA
applications to FTAA, the matter for its rejection or approval is left for determination
by the Secretary of the DENR and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for
Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the
nationality of petitioners when it realized that petitioners had a common major
investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first
sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of
2005, adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the exploitation of natural resources, the
CA used the "grandfather rule" to determine the nationality of petitioners. It
provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively,
of which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be recorded as belonging to aliens.24(emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate
structures and their corresponding common shareholders. Using the grandfather
rule, the CA discovered that MBMI in effect owned majority of the common stocks of
the petitioners as well as at least 60% equity interest of other majority shareholders
of petitioners through joint venture agreements. The CA found that through a "web
of corporate layering, it is clear that one common controlling investor in all mining
corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur,
Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners
into FTAA applications suspicious in nature and, as a consequence, it recommended
the rejection of petitioners’ MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed
out that the POA has jurisdiction over them and that it also has the power to
determine the of nationality of petitioners as a prerequisite of the Constitution prior
the conferring of rights to "co-production, joint venture or production-sharing
agreements" of the state to mining rights. However, it also stated that the POA’s
jurisdiction is limited only to the resolution of the dispute and not on the approval or
rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested
with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution
which considered petitioners McArthur, Tesoro and Narra as foreign corporations.
Nevertheless, the CA determined that the POA’s declaration that the MPSAs of
McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the
President (OP) a petition dated May 7, 2010 seeking the cancellation of petitioners’
FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it canceled and
revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,]
the Small Scale Mining Law and Environmental Compliance Certificate as well as
Sections 3 and 8 of the Foreign Investment Act and E.O. 584."27 The OP, in affirming
the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order
of the POA focusing on the alleged misrepresentation and claims made by petitioners
of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the
area earlier applied for an MPSA application which was eventually transferred to
Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications
by petitioners is a clear admission that they are "not capable of conducting a large
scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation, that is why they sought the participation of MBMI
Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case
only demonstrate the violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA application conversion which
is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under
the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting operation only through
their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on
Certiorari of the OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP
No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision
and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to
this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA.
Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness
despite the fact that the subject matter of the controversy, the MPSA
Applications, have already been converted into FTAA applications and that
the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of
jurisdiction considering that the Panel of Arbitrators has no jurisdiction to
determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of
Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule" is contrary to law, particularly
the express mandate of the Foreign Investments Act of 1991, as amended,
and the FIA Rules.
V.
 The Court of Appeals erred when it applied the exceptions to the res inter
alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the
MPSA Applications into FTAA Applications were of "suspicious nature" as
the same is based on mere conjectures and surmises without any shred of
evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot
is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a
justiciable controversy by virtue of supervening events, so that a declaration thereon
would be of no practical use or value."32 Thus, the courts "generally decline
jurisdiction over the case or dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere
raising of an issue of "mootness" will not deter the courts from trying a case when
there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court
provided four instances where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest
is involved;
3.) When constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court
note that a grave violation of the Constitution, specifically Section 2 of Article XII, is
being committed by a foreign corporation right under our country’s nose through a
myriad of corporate layering under different, allegedly, Filipino corporations. The
intricate corporate layering utilized by the Canadian company, MBMI, is of
exceptional character and involves paramount public interest since it undeniably
affects the exploitation of our Country’s natural resources. The corresponding actions
of petitioners during the lifetime and existence of the instant case raise questions as
what principle is to be applied to cases with similar issues. No definite ruling on such
principle has been pronounced by the Court; hence, the disposition of the issues or
errors in the instant case will serve as a guide "to the bench, the bar and the
public."35 Finally, the instant case is capable of repetition yet evading review, since
the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations
through various schemes of corporate layering and conversion of applications to skirt
the constitutional prohibition against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by
petitioners since both involve the conversion of MPSA applications to FTAA
applications. Petitioners propound that the CA erred in ruling against them since the
questioned MPSA applications were already converted into FTAA applications; thus,
the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to correct the CA’s finding
which deemed the aforementioned conversions of applications as suspicious in
nature, since it is based on mere conjectures and surmises and not supported with
evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them
by respondent is on point. The changing of applications by petitioners from one type
to another just because a case was filed against them, in truth, would raise not a few
sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion
not stem from the case challenging their citizenship and to have the case dismissed
against them for being "moot"? It is quite obvious that it is petitioners’ strategy to
have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done
by the court or appropriate government agency: on January 2, 2007, Redmont filed
three separate petitions for denial of the MPSA applications of petitioners before the
POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to
FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change
of applications while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear
admission that the respondents are not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign entity
in their operation that is why they sought the participation of MBMI Resources, Inc.
The participation of MBMI in the corporation only proves the fact that it is the
Canadian company that will provide the finances and the resources to operate the
mining areas for the greater benefit and interest of the same and not the Filipino
stockholders who only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the
case only demonstrate the violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA application conversion which
is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under
the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting operation only through
their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition,
reversing and setting aside the September 10, 2008 and July 1, 2009 Orders of the
MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that
the herein petitioners are in fact foreign corporations thus a recommendation of the
rejection of their MPSA applications were recommended to the Secretary of the
DENR. With respect to the FTAA applications or conversion of the MPSA applications
to FTAAs, the CA deferred the matter for the determination of the Secretary of the
DENR and the President of the Republic of the Philippines. 37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for
the dismissal of the petition asserting that on April 5, 2010, then President Gloria
Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which
rendered the petition moot and academic. However, the CA, in a Resolution dated
February 15, 2011 denied their motion for being a mere "rehash of their claims and
defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners
are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to
us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of
the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this
petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of
the POA and stating that petitioners are foreign corporations since they needed the
financial strength of MBMI, Inc. in order to conduct large scale mining operations.
The OP Decision also based the cancellation on the misrepresentation of facts and
the violation of the "Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the
Court the fact of the OP’s Decision and Resolution. In their Reply, petitioners chose
to ignore the OP Decision and continued to reuse their old arguments claiming that
they were granted FTAAs and, thus, the case was moot. Petitioners filed a
Manifestation and Submission dated October 19, 2012,40 wherein they asserted that
the present petition is moot since, in a remarkable turn of events, MBMI was able to
sell/assign all its shares/interest in the "holding companies" to DMCI Mining
Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed
for being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all
its shares and interest in the petitioner "holding companies" to DMCI, only proves
that they were in fact not Filipino corporations from the start. The recent divesting
of interest by MBMI will not change the stand of this Court with respect to the
nationality of petitioners prior the suspicious change in their corporate structures.
The new documents filed by petitioners are factual evidence that this Court has no
power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that
petitioner corporations have violated several mining laws and made
misrepresentations and falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners are not beyond going
against or around the law using shifty actions and strategies. Thus, in this instance,
we can say that their claim of mootness is moot in itself because their defense of
conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality,
whether Filipino or foreign. In their previous petitions, they had been adamant in
insisting that they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012 where they stated the alleged
change of corporate ownership to reflect their Filipino ownership. Thus, there is a
need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion
No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling interests
in enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively,
of which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded
as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality," pertains to the control test
or the liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the stricter, more
stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the
application of the "control test" under RA 7042, as amended by RA 8179, otherwise
known as the Foreign Investments Act (FIA), rather than using the stricter grandfather
rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a
corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (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 percent (60%) of the members
of the Board of Directors, in order that the corporation shall be considered a
Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case
since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide
for it. They further claim that the grandfather rule "has been abandoned and is no
longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the
FIA admits the application of a "corporate layering" scheme of corporations.
Petitioners claim that the clear and unambiguous wordings of the statute preclude
the court from construing it and prevent the court’s use of discretion in applying the
law. They said that the plain, literal meaning of the statute meant the application of
the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used
to circumvent the Constitution and pertinent laws, then it becomes illegal. Further,
the pronouncement of petitioners that the grandfather rule has already been
abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora
and fauna, and other natural resources are owned by the State. With the exception
of agricultural lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be under the full
control and supervision of the State. The State may directly undertake such activities,
or it may enter into co-production, joint venture or production-sharing agreements
with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not
exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general
terms and conditions provided by law, based on real contributions to the economic
growth and general welfare of the country. In such agreements, the State shall
promote the development and use of local scientific and technical resources.
(emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different
types of agreements for the exploration, development, and utilization of natural
resources with entities who are deemed Filipino due to 60 percent ownership of
capital is pertinent to this case, since the issues are centered on the utilization of our
country’s natural resources or specifically, mining. Thus, there is a need to ascertain
the nationality of petitioners since, as the Constitution so provides, such agreements
are only allowed corporations or associations "at least 60 percent of such capital is
owned by such citizens." The deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent
national economy is freedom from undue foreign control? What is the meaning of
undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national
sovereignty and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why
not simply freedom from foreign control? I think that is the meaning of
independence, because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we
retain the 60/40 possibility in the cultivation of natural resources, 40 percent involves
some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the
Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team
from the UP Law Center who provided us with a draft. The phrase that is contained
here which we adopted from the UP draft is ‘60 percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. In this instance, specifically
pertaining to the provisions under Art. XII of the Constitution on National Economy
and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the
honorable framers of our Constitution, the grandfather rule prevails and must be
applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino
interest in a corporation for purposes, among others, of determining compliance with
nationality requirements (the ‘Investee Corporation’). Such manner of computation
is necessary since the shares in the Investee Corporation may be owned both by
individual stockholders (‘Investing Individuals’) and by corporations and partnerships
(‘Investing Corporation’). The said rules thus provide for the determination of
nationality depending on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the
nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined
by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion
in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality.’ Under the liberal Control
Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60%
Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage
of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine
nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals
in the Investing Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the
level of the Investing Corporation and added to the shares directly owned in the
Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or
the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity
Name Nationality Number of Shares
Madridejos Mining Filipino 5,997
Corporation
MBMI Resources, Inc. Canadian 3,998
Lauro L. Salazar Filipino 1 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00
ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in
other joint venture corporation which is either 60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not
in doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls
for the application of the grandfather rule since, as ruled by the POA and affirmed by
the OP, doubt prevails and persists in the corporate ownership of petitioners. Also,
as found by the CA, doubt is present in the 60-40 Filipino equity ownership of
petitioners Narra, McArthur and Tesoro, since their common investor, the 100%
Canadian corporation––MBMI, funded them. However, petitioners also claim that
there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43
The assertion of petitioners that "doubt" only exists when the stockholdings are less
than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted
in their petition, only made an example of an instance where "doubt" as to the
ownership of the corporation exists. It would be ludicrous to limit the application of
the said word only to the instances where the stockholdings of non-Filipino
stockholders are more than 40% of the total stockholdings in a corporation. The
corporations interested in circumventing our laws would clearly strive to have "60%
Filipino Ownership" at face value. It would be senseless for these applying
corporations to state in their respective articles of incorporation that they have less
than 60% Filipino stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the application of
the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed
by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind.
To determine, therefore, the actual participation, direct or indirect, of MBMI, the
grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of
petitioners’ corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which
acquired its application from SMMI. McArthur has a capital stock of ten million pesos
(PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP
1,000) per share, subscribed to by the following:44
Amount Subscribed Amount Paid
PhP 5,997,000.00 PhP 825,000.00
PhP 3,998,000.0 PhP 1,878,174.60
PhP 1,000.00
PhP 1,000.00
 Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael
similar structure and composition as McArthur. In fact, it would seem that MBMI is T. Mason (Mason) and Kenneth Cawkell (Cawkell):
also a major investor and "controls"45 MBMI and also, similar nominal shareholders Madridejos Mining Corporation
Name Nationality Number of Shares Amount Subscribed Amount Paid
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
Development
Corp.
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any
amount with respect to the number of shares they subscribed to in the corporation,
which is quite absurd since Olympic is the major stockholder in MMC. MBMI’s 2006
Annual Report sheds light on why Olympic failed to pay any amount with respect to
the number of shares it subscribed to. It states that Olympic entered into joint
venture agreements with several Philippine companies, wherein it holds directly and
indirectly a 60% effective equity interest in the Olympic Properties.46 Quoting the said
Annual report:
On September 9, 2004, the Company and Olympic Mines & Development
Corporation ("Olympic") entered into a series of agreements including a Property
Purchase and Development Agreement (the Transaction Documents) with respect to
three nickel laterite properties in Palawan, Philippines (the "Olympic Properties").
The Transaction Documents effectively establish a joint venture between the
Company and Olympic for purposes of developing the Olympic Properties. The
Company holds directly and indirectly an initial 60% interest in the joint venture.
Under certain circumstances and upon achieving certain milestones, the Company
may earn up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten
supplied) million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," PhP 1,000 per share, as demonstrated below:
company layering was utilized by MBMI to gain control over McArthur. It is apparent [[reference
that MBMI has more than 60% or more equity interest in McArthur, making the latter = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april20
a foreign corporation. 14/195580.pdf]]
Tesoro Mining and Development, Inc.
Name Nationality Number of Amount Amount Paid
Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of petitioner McArthur, down to the last centavo. All the
other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:
Sara Marie Mining, Inc.
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of Amount Amount Paid
Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development
Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

 Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence
of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven
hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns
60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to that of the first
two petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP
1,000) per share, shown as follows:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of Amount Amount Paid
Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &
Development
Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.
 Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDC’s corporate structure:
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Palawan Alpha South Resources Filipino 6,596 PhP 6,596,000.00 PhP 0
Development Corporation
MBMI Resources, Canadian 3,396 PhP 3,396,000.00 PhP
Inc. 2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
 Total
Yet again, the usual players in petitioners’ corporate structures are present. Similarly,
the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan
Alpha South Resources and Development Corp. (PASRDC), is zero.
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005
explains the reason behind the intricate corporate layering that MBMI immersed
itself in:
JOINT VENTURES The Company’s ownership interests in various mining ventures
engaged in the acquisition, exploration and development of mineral properties in the
Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and
interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Olympic Property of 60.0%. Pursuant to
a shareholders’ agreement, the Company exercises joint control over the companies
in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests
therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders’
agreement, the Company exercises joint control over the companies in the Alpha
Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners
McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived
from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
Going further and adding to the picture, MBMI’s Summary of Significant Accounting
Policies statement– –regarding the "joint venture" agreements that it entered into
with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI,
Olympic or corporations under the "Alpha" group wherein MBMI has joint venture
10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)
agreements with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or more of their capital stocks
or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the
"admission by co-partner or agent" rule and "admission by privies" under the Rules
of Court in the instant case, by pointing out that statements made by MBMI should
not be admitted in this case since it is not a party to the case and that it is not a
"partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or
agent of the party within the scope of his authority and during the existence of the
partnership or agency, may be given in evidence against such party after the
partnership or agency is shown by evidence other than such act or declaration itself.
The same rule applies to the act or declaration of a joint owner, joint debtor, or other
person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the
act, declaration, or omission of the latter, while holding the title, in relation to the
property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case,
"the partnership relation must be shown, and that proof of the fact must be made by
evidence other than the admission itself."49 Thus, petitioners assert that the CA erred
in finding that a partnership relationship exists between them and MBMI because, in
fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating
that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro
and McArthur. They challenged the conclusion of the CA which pertains to the close
characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before
this particular partnership can be formed, it should have been formally reduced into
writing since the capital involved is more than three thousand pesos (PhP 3,000).
Being that there is no evidence of written agreement to form a partnership between
petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute
money, property, or industry to a common fund with the intention of dividing the
profits among themselves.50 On the other hand, joint ventures have been deemed to
be "akin" to partnerships since it is difficult to distinguish between joint ventures and
partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are
so similar and closely akin to a partnership that it is ordinarily held that their rights,
duties, and liabilities are to be tested by rules which are closely analogous to and
substantially the same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the distinctions
between a partnership and a joint venture, very little law being found applicable to
one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals,
there are very few rules that differentiate one from the other; thus, joint ventures
are deemed "akin" or similar to a partnership. In fact, in joint venture agreements,
rules and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that
the relationships entered between and among petitioners and MBMI are no simple
"joint venture agreements." As a rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations enter into joint venture
agreements with other corporations or partnerships for certain transactions in order
to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners
and MBMI was executed to circumvent the legal prohibition against corporations
entering into partnerships, then the relationship created should be deemed as
"partnerships," and the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as similar to partnerships
since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are
considered to be partnerships, then the CA is justified in applying Sec. 29, Rule 130
of the Rules by stating that "by entering into a joint venture, MBMI have a joint
interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the
instant case. The POA has jurisdiction to settle disputes over rights to mining areas
which definitely involve the petitions filed by Redmont against petitioners Narra,
McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting
the right of Filipinos over mining areas in the Philippines against alleged foreign-
owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA
7942:
Within thirty (30) days, after the submission of the case by the parties for the
decision, the panel shall have exclusive and original jurisdiction to hear and decide
the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim,
protest, or opposition to an application for mineral agreement. The POA therefore
has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending
application for a mineral agreement filed with the concerned Regional Office of the
MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio
announcements, the authorized officer(s) of the concerned office(s) shall issue a
certification(s) that the publication/posting/radio announcement have been
complied with. Any adverse claim, protest, opposition shall be filed directly, within
thirty (30) calendar days from the last date of publication/posting/radio
announcement, with the concerned Regional Office or through any concerned
PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these
implementing rules and regulations. Upon final resolution of any adverse claim,
protest or opposition, the Panel of Arbitrators shall likewise issue a certification to
that effect within five (5) working days from the date of finality of resolution thereof.
Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall
likewise issue a Certification to that effect within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section
are fully complied with and any adverse claim/protest/opposition is finally resolved
by the Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the
Panel of Arbitrators as provided in Section 38 hereof, the concerned Regional
Director shall initially evaluate the Mineral Agreement applications in areas outside
Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau
for further evaluation by the Director within fifteen (15) working days from receipt
of forwarded documents. Thereafter, the Director shall endorse the same to the
secretary for consideration/approval within fifteen working days from receipt of such
endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within
fifteen (15) working days from receipt of the Certification issued by the Panel of
Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and
endorsed by the Director to the Secretary for consideration/approval within fifteen
days from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes
relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining
right application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which
read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition
specified in said sections may also be filed directly with the Panel of Arbitrators within
the concerned periods for filing such claim, protest or opposition as specified in said
Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of
the application on the bulletin boards of the Bureau, concerned Regional office(s)
and in the concerned province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two (2) consecutive
weeks in a language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse claim,
protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no
adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed
within forty-five (45) days from the last date of publication/posting, with the Regional
Offices concerned, or through the Department’s Community Environment and
Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section
are fully complied with and any opposition/adverse claim is dealt with in writing by
the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes
relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining
right application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which
reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition
specified in said sections may also be filed directly with the Panel of Arbitrators within
the concerned periods for filing such claim, protest or opposition as specified in said
Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of
the application on the bulletin boards of the Bureau, concerned Regional office(s)
and in the concerned province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two (2) consecutive
weeks in a language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse claim,
protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no
adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed
within forty-five (45) days from the last date of publication/posting, with the Regional
offices concerned, or through the Department’s Community Environment and
Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However, previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section
are fully complied with and any opposition/adverse claim is dealt with in writing by
the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any
adverse claim, opposition, or protest relative to mining rights under Sec. 77(a) of RA
7942 is confined only to adverse claims, conflicts and oppositions relating to
applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power
is vested in the DENR Secretary upon recommendation of the MGB Director. Clearly,
POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do
with the cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction
to resolve disputes over MPSA applications subject of Redmont’s petitions. However,
said jurisdiction does not include either the approval or rejection of the MPSA
applications, which is vested only upon the Secretary of the DENR. Thus, the finding
of the POA, with respect to the rejection of petitioners’ MPSA applications being that
they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular
courts, not the POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the
time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive
original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary
estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.— owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to
x x x Within thirty (30) days, after the submission of the case by the parties enter into FTAAs with the State is a non-issue in this case.
for the decision, the panel shall have exclusive and original jurisdiction to In ending, the "control test" is still the prevailing mode of determining whether or
hear and decide the following: not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the
(c) Disputes involving rights to mining areas 1987 Constitution, entitled to undertake the exploration, development and
(d) Disputes involving mineral agreements or permits utilization of the natural resources of the Philippines. When in the mind of the Court
It is clear that POA has exclusive and original jurisdiction over any and all disputes there is doubt, based on the attendant facts and circumstances of the case, in the 60-
involving rights to mining areas. One such dispute is an MPSA application to which an 40 Filipino-equity ownership in the corporation, then it may apply the "grandfather
adverse claim, protest or opposition is filed by another interested rule."
applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court
applications where petitioners are asserting their rights to mining areas subject of of Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011
their respective MPSA applications. Since respondent filed 3 separate petitions for are hereby AFFIRMED.
the denial of said applications, then a controversy has developed between the parties SO ORDERED.
and it is POA’s jurisdiction to resolve said disputes. PRESBITERO J. VELASCO, JR.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners Associate Justice
filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA
applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine
of primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination
requires the expertise, specialized training and knowledge of an administrative body,
relief must first be obtained in an administrative proceeding before resort to the
courts is had even if the matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via
a resort to the CA and to this Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated October 19, 2012
would want us to declare the instant petition moot and academic due to the transfer
and conveyance of all the shareholdings and interests of MBMI to DMCI, a
corporation duly organized and existing under Philippine laws and is at least 60%
Philippine-owned.56 Petitioners reasoned that they now cannot be considered as
foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter into an FTAA
with the State."57Petitioners stress that there should no longer be any issue left as
regards their qualification to enter into FTAA contracts since they are qualified to
engage in mining activities in the Philippines. Thus, whether the "grandfather rule"
or the "control test" is used, the nationalities of petitioners cannot be doubted since
it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant
case and said fact should be disregarded. The manifestation can no longer be
considered by us since it is being tackled in G.R. No. 202877 pending before this
Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-
G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC
ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by
(1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan
(Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and
Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration
on behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently
filed a Consolidated Comment on behalf of the State, 6declaring expressly that it
agrees with the Court's definition of the term "capital" in Section 11, Article XII of the
Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its
position consistent with the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the
term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine
whether Filipinos are masters, or second-class citizens, in their own country. What is
at stake here is whether Filipinos or foreigners will have effective control of the
Philippine national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshold legal issue presented in this case.
Contrary to Pangilinan’s narrow view, the serious economic consequences resulting
in the interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the far-
reaching implications of this issue justify the treatment of the petition as one for
mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and
expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly
had already committed a breach of the Public Service Act in relation to the Anti-
Dummy Law since it had been employing non- American aliens long before the
decision in a prior similar case. However, the main issue in Luzon Stevedoring was 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 Constitution and the statutes. Moreover, the same
issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the
guidance of all concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural
defect of the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful
adherence to the Constitution, we opted to resolve this case for the guidance of the
public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution
has long been settled and defined to refer to the total outstanding shares of stock,
whether voting or non-voting. In fact, movants claim that the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership requirement in favor
of Filipino citizens in the Constitution and various statutes, has consistently adopted
this particular definition in its numerous opinions. Movants point out that with the
28 June 2011 Decision, the Court in effect introduced a "new" definition or
"midstream redefinition"9 of the term "capital" in Section 11, Article XII of the
Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973
and 1987 Constitutions. There has never been a judicial precedent interpreting the
term "capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is
patently wrong and utterly baseless to claim that the Court in defining the term
"capital" in its 28 June 2011 Decision modified, reversed, or set aside the purported
long-standing definition of the term "capital," which supposedly refers to the total
outstanding shares of stock, whether voting or non-voting. To repeat, until the
present case there has never been a Court ruling categorically defining the term
"capital" found in the various economic provisions of the 1935, 1973 and 1987
Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place, conflicting
and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ
have consistently and uniformly adopted a definition of the term "capital" contrary
to the definition that this Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term
"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether
the term "capital" includes "both preferred and common stocks." The issue was
raised in relation to a stock-swap transaction between a Filipino and a Japanese
corporation, both stockholders of a domestic corporation that owned lands in the
Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting
ownership structure of the corporation would be unconstitutional because 60% of
the voting stock would be owned by Japanese while Filipinos would own only 40% of
the voting stock, although when the non-voting stock is added, Filipinos would own
60% of the combined voting and non-voting stock. This ownership structure is
remarkably similar to the current ownership structure of PLDT. Minister Mendoza
ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of
the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses the
word "capital," which is construed "to include both preferred and common shares"
and "that where the law does not distinguish, the courts shall not distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap
transaction in question may not be constitutionally upheld. While it may be ordinary
corporate practice to classify corporate shares into common voting shares and
preferred non-voting shares, any arrangement which attempts to defeat the
constitutional purpose should be eschewed. Thus, the resultant equity arrangement
which would place ownership of 60%11 of the common (voting) shares in the
Japanese group, while retaining 60% of the total percentage of common and
preferred shares in Filipino hands would amount to circumvention of the principle
of control by Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital"
in Section 9, Article XIV of the 1973 Constitution includes "both preferred and
common stocks" treated as the same class of shares regardless of differences in
voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution is not complied with
unless the corporation "satisfies the criterion of beneficial ownership" and that in
applying the same "the primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco
applied the Voting Control Test, that is, using only the voting stock to determine
whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine
national because: (1) sixty percent (60%) of its outstanding capital stock entitled to
vote is owned by a Philippine 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 Control Test, MLRC’s investment in 60% of BFDC’s outstanding capital
stock entitled to vote shall be deemed as of Philippine nationality, thereby
qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee,
in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their
respective board of directors are Filipino citizens. (Boldfacing and italicization
supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation
of the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. At the same time, these opinions
highlight the conflicting, contradictory, 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.
The opinions issued by SEC legal officers do not have the force and 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 Securities Regulation Code,12 the SEC cannot
delegate to any of its individual Commissioner or staff the power to adopt any rule
or 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 empowered to issue opinions and
approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to
any department or office of the Commission, an 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.
The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or
staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing If they are not rules and regulations, they apply only to that
opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections particular situation and will not constitute a precedent, correct?
4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the COMMISSIONER GAITE:
force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en Yes, Your Honor.14 (Emphasis supplied)
banc from delegating to any individual Commissioner or staff the power to adopt Significantly, the SEC en banc, which is the collegial body statutorily empowered to
rules or regulations. In short, any opinion of individual Commissioners or SEC legal issue rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule
officers does not constitute a rule or regulation of the SEC. in determining compliance with the 60-40 ownership requirement in favor of Filipino
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of citizens mandated by the Constitution for certain economic activities. This prevailing
its individual commissioners or legal staff, is empowered to issue opinions which have SEC ruling, which the SEC correctly adopted to thwart any circumvention of the
the same binding effect as SEC rules and regulations, thus: required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en
JUSTICE CARPIO: banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to
So, under the law, it is the Commission En Banc that can issue an wit:
SEC Opinion, correct? The avowed purpose of the Constitution is to place in the hands of Filipinos the
COMMISSIONER GAITE:13 exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
That’s correct, Your Honor. the constitutional provision should not diminish that right through the legal fiction
JUSTICE CARPIO: of corporate ownership and control. But the constitutional provision, as interpreted
Can the Commission En Banc delegate this function to an SEC and practiced via the 1967 SEC Rules, has favored foreigners contrary to the
officer? command of the Constitution. Hence, the Grandfather Rule must be applied to
COMMISSIONER GAITE: accurately determine the actual participation, both direct and indirect, of
Yes, Your Honor, we have delegated it to the General Counsel. foreigners in a corporation engaged in a nationalized activity or business.
JUSTICE CARPIO: Compliance with the constitutional limitation(s) on engaging in nationalized activities
It can be delegated. What cannot be delegated by the Commission must be determined by ascertaining if 60% of the investing corporation’s outstanding
En Banc to a commissioner or an individual employee of the capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual
Commission? Filipino citizens. If such investing corporation is in turn owned to some extent by
COMMISSIONER GAITE: another investing corporation, the same process must be observed. One must not
Novel opinions that [have] to be decided by the En Banc... stop until the citizenships of the individual or natural stockholders of layer after layer
JUSTICE CARPIO: of investing corporations have been established, the very essence of the Grandfather
What cannot be delegated, among others, is the power to adopt or Rule.
amend rules and regulations, correct? Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
COMMISSIONER GAITE: Grandfather Rule. In one of the discussions on what is now Article XII of the present
That’s correct, Your Honor. Constitution, the framers made the following exchange:
JUSTICE CARPIO: MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
So, you combine the two (2), the SEC officer, if delegated that and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
power, can issue an opinion but that opinion does not constitute Section 15.
a rule or regulation, correct? MR. VILLEGAS. That is right.
COMMISSIONER GAITE: MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we
Correct, Your Honor. base the equity requirement, is it on the authorized capital stock, on the subscribed
JUSTICE CARPIO: capital stock, or on the paid-up capital stock of a corporation’? Will the Committee
So, all of these opinions that you mentioned they are not rules please enlighten me on this?
and regulations, correct? MR. VILLEGAS. We have just had a long discussion with the members of the team
COMMISSIONER GAITE: from the UP Law Center who provided us a draft. The phrase that is contained here
They are not rules and regulations. which we adopted from the UP draft is ‘60 percent of voting stock.’
JUSTICE CARPIO: MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in
another corporation, say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the Committee adopt
the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the
original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage in
certain economic activities applies not only to voting control of the corporation,
but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011
Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in
various opinions which respondents relied upon, is merely preliminary and an
opinion only of such officers. To repeat, any such opinion does not constitute an SEC
rule or regulation. In fact, many of these opinions contain a disclaimer which
expressly states: "x x x the 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 Commission in other cases
whether of similar or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one, not even on the
SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law
are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
doctrine that any interpretation of the law that administrative or quasi-judicial
agencies make is only preliminary, never conclusive on the Court. The power to make
a final 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 other government
entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals 17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that
the Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications
v. Court of Appeals20 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission,21 the Court did not define the term "capital" as
found in Section 11, Article XII of the 1987 Constitution. In fact, these two cases
never mentioned, discussed or cited Section 11, Article XII of the Constitution or
any of its economic provisions, and thus cannot serve as precedent in the
interpretation of Section 11, Article XII of the Constitution. These two cases dealt
solely with the determination of the correct regulatory fees under Section 40(e) and
(f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the 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 no shares have been issued, of the capital invested, or of the
property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred
pesos or fraction thereof, of the increased capital. (Emphasis supplied)
The Court’s interpretation in these two cases of the terms "capital stock subscribed
or paid," "capital stock" and "capital" does not pertain to, and cannot control, the
definition of the term "capital" as used in Section 11, Article XII of the Constitution,
or any of the economic provisions of the Constitution where the term "capital" is
found. The definition of the term "capital" found in the Constitution must not be
taken out of context. A careful reading of these two cases reveals that the terms
"capital stock subscribed or paid," "capital stock" and "capital" were defined solely
to determine the basis for computing the supervision and regulation fees under
Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the
land, embodies the ideals that the Constitution intends to achieve. 22 The Preamble
reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build
a just and humane society, and establish a Government that shall embody our ideals
and aspirations, promote the common good, conserve and develop our patrimony,
and secure to ourselves and our posterity, the blessings of independence and
democracy under the rule of law and a regime of truth, justice, freedom, love,
equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares
as State policy the development of a national economy "effectively controlled" by
Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or
to corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation
and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities. 23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain 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 these laws are: (1) Regulation of Award of Government Contracts
or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna
Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in 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
common good so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any
form of authorization for the operation of public utilities shall be granted only to
"citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such
citizens." "The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national security."24
The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In the
case of corporations or associations, at least 60 percent of their "capital" must be
owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987
Constitution, to own and operate a public utility a corporation’s capital must at
least be 60 percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA),
as amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized abroad and registered
as doing business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (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 percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall
be considered a "Philippine national." (Boldfacing, italicization and underscoring
supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine
citizen, or a domestic corporation at least "60% of the capital stock outstanding
and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such
term as provided in its predecessor statute, Executive Order No. 226 or the Omnibus
Investments Code of 1987,25 which was issued by then President Corazon C. Aquino.
Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty per
cent (60%) of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent (60%) 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 sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)
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 business
x x x in the Philippines x x x without first securing from the Board of Investments a
written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a
public utility. This means, of course, that only a "Philippine national" can own and
operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as provided
in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty per
cent (60%) of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent (60%) 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 sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no 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 certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution
or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only
a "Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or
the Investment Incentives Act, which took effect on 16 September 1967, contained a
similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or
association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines;
or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine National and at least sixty per cent of the
fund will accrue to the benefit of Philippine Nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent 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
sixty per cent of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a
Philippine National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act,
which took effect on 30 September 1968, if the investment in a domestic enterprise
by non-Philippine nationals exceeds 30% of its outstanding capital stock, such
enterprise must obtain prior approval from the Board of Investments before
accepting such investment. Such approval shall not be granted if the investment
"would conflict with existing constitutional provisions and laws regulating the degree
of required ownership by Philippine nationals in the enterprise."31 A "non-Philippine
national" cannot own and operate a reserved economic activity like a public utility.
Again, this means that only a "Philippine national" can own and operate a public
utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is owned
by Filipino citizens. This definition of a "Philippine national" is crucial in the present
case because the FIA reiterates and clarifies Section 11, Article XII of the 1987
Constitution, which limits the ownership and operation of public utilities to Filipino
citizens or to corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective
of the nature of business and area of investment. The FIA spells out the procedures
by which non-Philippine nationals can invest in the Philippines. Among the key
features of this law is the concept of a negative list or the Foreign Investments
Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign
Investment Negative List]. - The Foreign Investment Negative List shall have
two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to
law:
1. which are defense-related activities, requiring prior clearance and authorization
from the Department of National Defense [DND] to engage in such activity, such as
the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinance, explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense;
or
2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing,
underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of activities
reserved to Philippine nationals by mandate of the Constitution and specific laws,"
where foreign equity participation in any enterprise shall be limited to the
maximum percentage expressly prescribed by the Constitution and other specific
laws. In short, to own and operate a public utility in the Philippines one must be a
"Philippine national" as defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment
Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least 60%
owned by Filipino citizens. In other words, Negative List A of the FIA reserves the
ownership and 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 (3) a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines; or (4) a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned
by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption
of the Omnibus Investments Code of 1981, to the enactment of the Omnibus
Investments Code of 1987, and to the passage of the present Foreign Investments
Act of 1991, or for more than four decades, the statutory definition of the term
"Philippine national" has been uniform and consistent: it means a Filipino citizen,
or a domestic corporation at least 60% of the voting stock is owned by Filipinos.
Likewise, these same statutes have uniformly and consistently required that only
"Philippine nationals" could own and operate public utilities in the Philippines. The
following exchange during the Oral Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign
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?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states that
[]only Philippine nationals can own and operate public utilities[],
correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine
national" either as a citizen of the Philippines, or if it is a
corporation at least sixty percent (60%) of the voting stock is
owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the
Foreign Investments Act of 1991, the Omnibus Investments Act of
1987, the same provisions apply: x x x only Philippine nationals can
own and operate a public utility and the Philippine national, if it is
a corporation, x x x sixty percent (60%) of the capital stock of that
corporation must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the
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 stock, must be owned by citizens of the Philippines,
correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives Act
and the Foreign Company Act of 1968, the same rules applied,
correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very
consistent – only a Philippine national can own and operate a
public utility, and a Philippine national, if it is a corporation, x x x
at least sixty percent (60%) of the voting stock must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA
which categorically prescribe that certain economic 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
the Philippines." Foreign Investment Negative List A refers to "activities reserved to
Philippine nationals by mandate of the Constitution and specific laws." The FIA is the
basic statute regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as well as
counsels of foreign investors, should start with the FIA in determining to what extent
a particular foreign investment is allowed in the Philippines. Foreign 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 officers that obviously contradict the FIA
do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in
determining whether a particular corporation is qualified to own and operate a
nationalized or partially nationalized business in the Philippines. This shows that SEC
legal officers are not only aware of, but also rely on and invoke, the provisions of the
FIA in ascertaining the eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the
Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda
and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos
& Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura
Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and
Rudyard S. Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should
be limited and interpreted to refer to corporations seeking to avail of tax and fiscal
incentives under investment incentives laws and cannot be equated with the term
"capital" in Section 11, 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 established
by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives
to any enterprise. Tax and fiscal incentives to investments are granted separately
under the Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA
expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of
1987, which articles previously regulated foreign investments in nationalized or
partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or
partially nationalized industries. There is nothing in the FIA, or even in the Omnibus
Investments Code of 1987 or its predecessor statutes, that states, expressly or
impliedly, that the FIA or its predecessor statutes do not apply to enterprises not
availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of
1987 or its predecessor statutes. The reason is quite obvious – mere non-availment
of tax and fiscal incentives by a non-Philippine national cannot exempt it from
Section 11, Article XII of the Constitution regulating foreign investments in public
utilities. In fact, the Board of Investments’ Primer on Investment Policies in the
Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do 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 and make the investments without
seeking incentives. They only have to be guided by the Foreign Investments
Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino ownership.
All other areas outside of this list are fully open to foreign investors. (Emphasis
supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required
by the Constitution to engage in certain economic activities applies not only to voting
control of the corporation, but also to the beneficial ownership of the corporation.
To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is required.
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
(Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is held by "a trustee of funds for pension or other employee retirement
or separation benefits," the trustee is a Philippine national if "at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section
1(b) of the Implementing Rules of the FIA provides that "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,
coupled with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of
the corporation, it is therefore imperative that such requirement apply uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the Corporation Code, capital
stock35 consists of all classes of shares issued to stockholders, that is, common shares
as well as preferred shares, which may have different rights, privileges or restrictions
as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred
shares may be denied such right. Nonetheless, preferred shares, even if denied the
right to vote in the election of directors, are entitled to vote on the following
corporate matters: (1) amendment of articles of incorporation; (2) increase and
decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness;
(4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other than
the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution
of corporation.37
Since a specific class of shares may have rights and privileges or restrictions different
from the rest of the shares in a corporation, the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not
only to shares with voting rights but also to shares without voting rights. Preferred
shares, denied the right to vote in the election of directors, are anyway still entitled
to vote on the eight specific corporate matters mentioned above. Thus, if a
corporation, engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred non-voting shares must be owned
by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply separately to each
class of shares, whether common, preferred non-voting, preferred voting or any
other class of shares. This uniform application of the 60-40 ownership requirement
in favor of Filipino citizens clearly breathes life to the constitutional command that
the ownership and operation of public utilities shall be reserved exclusively to
corporations at least 60 percent of whose capital is Filipino-owned. Applying
uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class
of shares, regardless of differences in voting rights, privileges and restrictions,
guarantees effective Filipino control of public utilities, as mandated by the
Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino citizens. This
addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the
non-voting shares, will exercise greater control over fundamental corporate matters
requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations
of the Constitutional Commission to support his claim that the term "capital" refers
to the total outstanding shares of stock, whether voting or non-voting, the following
excerpts of the deliberations reveal otherwise. It is clear from the following exchange
that the term "capital" refers to controlling interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in
Section 15.
MR. VILLEGAS. That is right.
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-up capital stock of a corporation"? Will the
Committee please enlighten me on this?
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 phrase that is contained here
which we adopted from the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."
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."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation
where the corporation is controlled by foreigners despite being the minority
because they have the voting capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the
1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and
underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest"
in the corporation.
The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-
40 ownership requirement in favor of Filipino citizens prescribed in Section 11, Article
XII of the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest"
in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the
battle-cry of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities. 42 This is 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 industries.
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 Comment, the OSG explains
that the deletion of the phrase "controlling interest" and replacement of the word
"stock" with the term "capital" were intended specifically to extend the scope of the
entities qualified to operate public utilities to include associations without stocks.
The framers’ omission of the phrase "controlling interest" did not mean the inclusion
of all shares of stock, whether voting or non-voting. The OSG reiterated essentially
the Court’s declaration that the Constitution reserved exclusively to Philippine
nationals the ownership and operation of public utilities consistent with the State’s
policy to "develop a self-reliant and independent national economy effectively
controlled by Filipinos."
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 the intent and letter of the Constitution
that the "State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital
stock of a corporation, treated as a single class of shares regardless of the actual
classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the
term "capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is
Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares 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 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution,
as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the 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 members so elected by such foreign shareholders
is highly doubtful. As the OSG pointed out, quoting Justice George Sutherland’s words
in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds his office
only during the pleasure of another cannot be depended upon to maintain an
attitude of independence against the latter’s will." Allowing foreign shareholders to
elect a controlling majority of the board, even if all the directors are Filipinos, grossly
circumvents the letter and intent of the Constitution and defeats the very purpose of
our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens
of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on
the intent of the framers of the Constitution to limit foreign ownership, and assure
majority Filipino ownership and control of public utilities. The OSG argued, "while the
delegates disagreed as to the percentage threshold to adopt, x x x the records show
they clearly understood that Filipino control of the public utility corporation can only
be and is obtained only through the election of a majority of the members of the
board."
Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to
delete the phrase "two thirds of whose voting stock or controlling interest," and
instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the
sentence will read: "No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines at least
SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40
percent for foreigners. It is only in this Section 15 with respect to public utilities that
the committee proposal was increased to two-thirds. I think it would be better to
harmonize this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions
I have had with representatives of the Filipino majority owners of the international
record carriers, and the subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control
of a corporation is vested in the board of 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 the equity, the Filipino majority stockholders undeniably control the
board. Only on important corporate acts can the 40-percent foreign equity exercise
a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on
why they would like to maintain the present equity, I am referring to the 66 2/3. They
would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the
proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of
Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it
is clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the
inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or association must
be citizens of the Philippines." In other words, the last sentence of Section 11, Article
XII of the Constitution mandates 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
or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens specifically
to prevent management contracts, which were designed primarily to circumvent the
Filipinization of public utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by
adding a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION
OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the Philippines,
which Commissioner Romulo mentioned – Philippine Global Communications,
Eastern Telecommunications, Globe Mackay Cable – are 40-percent owned by
foreign multinational companies and 60-percent owned by their respective Filipino
partners. All three, however, also have management contracts with these foreign
companies – Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with
ITT. Up to the present time, the general managers of these carriers are foreigners.
While the foreigners in these common carriers are only minority owners, the foreign
multinationals are the ones managing and controlling their operations by virtue of
their management contracts and by virtue of their strength in the governing bodies
of these carriers.47
xxxx
MR. OPLE. I think a number of us have agreed to ask Commissioner 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. Commissioner Rosario Braid will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES
BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will
the committee assure us that this amendment will insure that past activities such as
management contracts will no longer be possible under this amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973
Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY
OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language.
We accept the amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is
approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned
by such citizens." May I request Commissioner Bengzon to please continue reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING
BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE
EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE 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 Congress when the common good so requires.
The State shall encourage equity participation in public utilities by the general
public."
VOTING
xxxx
The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of
public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public
utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1) 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 common shares, constituting a minority of
the voting stock, and thus Filipinos do not control PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn;50 (5) preferred shares have twice the par value
of common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling
on the question of whether PLDT violated the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question
indisputably calls for 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 limited its
decision on the purely legal and threshold issue on the definition of the term "capital"
in Section 11, Article XII of the Constitution and directed the SEC to apply such
definition in determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit
of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (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 required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has been
complied with [by PLDT] as required by x x x the Constitution."51 Such plea clearly
negates SEC’s argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has ample
powers to order the SEC’s compliance with its 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 dispensed with the amendment of the pleadings to implead the
Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost
need to avoid further delays; and (3) the issue of public interest involved. The Court
held:
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 second action would only be a
repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that this
Court has full powers, apart from that power and authority which is inherent, to
amend the processes, pleadings, proceedings and decisions by substituting as party-
plaintiff the real party-in-interest. The Court has the power to avoid delay in the
disposition of this case, to order its amendment as to implead the BOC as party-
respondent. Indeed, it may no longer be necessary to do so taking into account the
unique backdrop in this case, involving as it does an issue of public interest. After
all, the Office of the Solicitor General has represented the petitioner in the instant
proceedings, as well as in the appellate court, and maintained the validity of the
deportation order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed
by the State 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, and the
petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents. Their
sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which
courts are 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 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 remiss in the performance of their obvious
duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested 54 that it will abide by the Court’s
decision and defer to the Court’s definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered its special appearance in
this case and argued during the Oral Arguments, indicating its submission to the
Court’s jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Court’s directive to the
SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully
resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale
of common shares to foreigners exceeded the 40 percent limit on 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 Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties’ respective evidence, and thus are
clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must
necessarily be heard, in the proceedings before the SEC where the factual issues will
be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did not
rule on the factual issues raised by Gamboa, except the single and purely legal issue
on the definition of the term "capital" in Section 11, Article XII of the Constitution.
The Court confined the resolution of the instant case to this threshold legal issue in
deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the
fundamental legal issue in this case even without the participation of PLDT since
defining the term "capital" in Section 11, Article XII of the Constitution does not, in
any way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this case. 55 In
fact, the Court, by treating the petition as one for mandamus, 56 merely directed the
SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of
the Constitution in determining whether PLDT committed any violation of the said
constitutional provision. The dispositive portion of the Court’s ruling is addressed
not to PLDT but solely to the SEC, which is the administrative agency tasked to
enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC
to investigate any violation by PLDT of the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property
or denial of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s
misimpression. Due process will be afforded to PLDT when it presents proof to the
SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as
it may result in a sudden flight of existing foreign investors to "friendlier" countries
and simultaneously deterring new foreign investors to our country. In particular, the
PSE claims that the 28 June 2011 Decision may result in the following: (1) loss of more
than ₱ 630 billion in foreign investments in PSE-listed shares; (2) massive decrease in
foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors
not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared
movants’ apprehension. Without providing specific details, he pointed out the
depressing state of the Philippine economy compared to our neighboring countries
which boast of growing economies. Further, Dr. Villegas explained that the solution
to our economic woes is for the government to "take-over" strategic industries, such
as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on
whether this high FDI59 countries in East Asia have allowed foreigners x x x control
[of] their public utilities, so that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an
industry strategic, their solution is not to "Filipinize" or "Vietnamize" or
"Singaporize." Their solution is to make sure that those industries are in the hands
of state enterprises. So, in these countries, nationalization means the government
takes over. And because their governments are competent and honest enough to
the public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments
in our public utilities serve no purpose. Obviously, there can never be foreign
investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure
that those industries are in the hands of state enterprises." Dr. Villegas’s argument
that foreign investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the wrong tree
since State ownership of public utilities and foreign investments in such industries
are diametrically opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as
argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions
limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation
of public utilities to Filipino citizens, or corporations or associations at least 60
percent of whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the
Philippines appears to be more liberal in allowing foreign investors to own 40 percent
of public utilities, unlike in other Asian countries whose governments own and
operate such industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning
period of the application and imposition of appropriate sanctions against PLDT if
found violating Section 11, Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether
PLDT violated Section 11, Article XII of the Constitution. Thus, there is no dispute that
it is only after the SEC has determined PLDT’s violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose
the statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision
becomes final, the SEC shall impose the appropriate sanctions only if it finds after
due hearing that, at the start of the administrative case or investigation, there is an
existing violation of Section 11, Article XII of the Constitution. Under prevailing
jurisprudence, public utilities that fail to comply with the nationality requirement
under Section 11, Article XII and the FIA can cure their deficiencies prior to the start
of the administrative case or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the
Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as
Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain
that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that
the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial ownership. This is precisely because
the right to vote in the election of directors, coupled with full beneficial ownership ANTONIO T. CARPIO
of stocks, translates to effective control of a corporation. Associate Justice
Any other construction of the term "capital" in Section 11, Article XII of the
Constitution contravenes the letter and intent of the Constitution. 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 over effective control of our national economy to
foreigners in patent violation of the Constitution, making Filipinos second-class
citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under
the Parity Amendment, which gave Americans the 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 Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos. There
was bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited
its expiration. In late 1968, PLDT was one of the American-controlled public utilities
that became Filipino-controlled when the controlling American stockholders divested
in anticipation of the expiration of the Parity Amendment on 3 July 1974. 63 No
economic suicide happened when control of public utilities and mining corporations
passed to Filipinos’ hands upon expiration of the Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present Constitution.
Worse, movants’ interpretation opens up our national economy to effective
control not only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At
least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave
the capital-starved Filipinos theoretical parity – the same rights as Americans to
exploit natural resources, and to own and control public utilities, in the United States
of America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any
reciprocal arrangements. That would mean that Indonesians, Malaysians and
Chinese nationals could effectively control our mining companies and public utilities
while Filipinos, even if they have the capital, could not control similar corporations in
these countries.
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.
G.R. No. 195580 January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
RESOLUTION
VELASCO, JR., J.:
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision,
which denied the Petition for Review on Certiorari under Rule 45 jointly interposed
by petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining
and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed
the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of
Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that
petitioners, being foreign corporations, are not entitled to Mineral Production
Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with
approval the appellate court's finding that there was doubt as to petitioners'
nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),
effectively owns 60% of the common stocks of the petitioners by owning equity
interest of petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-
movants argued, in the main, that the Court's Decision was not in accord with law
and logic. In its September 2, 2014 Comment, on the other hand, respondent
Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion
for reconsideration is nothing but a rehash of their arguments and should, thus, be
denied outright for being pro-forma. Petitioners have interposed on September 30,
2014 their Reply to the respondent’s Comment.
After considering the parties’ positions, as articulated in their respective submissions,
We resolve to deny the motion for reconsideration.
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a substantive
issue, which,as argued, has supposedly been rendered moot by the fact that
petitioners’ applications for MPSAs had already been converted to an application for
a Financial Technical Assistance Agreement (FTAA), as petitioners have in fact been
granted an FTAA. Further, the nationality issue, so petitioners presently claim, had
been rendered moribund by the fact that MBMI had already divested itself and sold
all its shareholdings in the petitioners, as well as in their corporate stockholders, to a
Filipino corporation—DMCI Mining Corporation (DMCI).
As a counterpoint, respondent Redmontavers that the present case has not been
rendered moot by the supposed issuance of an FTAA in petitioners’ favor as this FTAA
was subsequently revoked by the Office of the President (OP) and is currently a
subject of a petition pending in the Court’s First Division. Redmont likewise contends
that the supposed sale of MBMI’s interest in the petitioners and in their "holding
companies" is a question of fact that is outside the Court’s province to verify in a Rule
45 certiorari proceedings. In any case, assuming that the controversy has been
rendered moot, Redmont claims that its resolution on the merits is still justified by
the fact that petitioners have violated a constitutional provision, the violation is
capable of repetition yet evading review, and the present case involves a matter of
public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application
to one for FTAAs and the issuance by the OP of an FTAA in petitioners’ favor are
irrelevant. The OP itself has already cancelled and revoked the FTAA thusissued to
petitioners. Petitioners curiously have omitted this critical factin their motion for
reconsideration. Furthermore, the supposed sale by MBMI of its shares in the
petition ercorporations and in their holding companies is not only a question of fact
that this Court is without authority toverify, it also does not negate any violation of
the Constitutional provisions previously committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot
by these two events. Asthis Court has time and again declared, the "moot and
academic" principle is not a magical formula that automatically dissuades courts in
resolving a case.1 The Court may still take cognizance of an otherwise moot and
academic case, if it finds that (a) there is a grave violation of the Constitution;(b) the
situation is of exceptional character and paramount public interest is involved; (c) the
constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and (d) the case is capable of repetition yet evading
review.2 The Court’s April 21, 2014 Decision explained in some detail that all four (4)
of the foregoing circumstances are present in the case. If only to stress a point, we
will do so again. First, allowing the issuance of MPSAs to applicants that are owned
and controlled by a 100% foreign-owned corporation, albeit through an intricate web
of corporate layering involving alleged Filipino corporations, is tantamount to
permitting a blatant violation of Section 2, Article XII of the Constitution. The Court
simply cannot allow this breach and inhibit itself from resolving the controversy on
the facile pretext that the case had already been rendered academic.
Second, the elaborate corporate layering resorted to by petitioners so as to make it
appear that there is compliance with the minimum Filipino ownership in the
Constitution is deftly exceptional in character. More importantly, the case is of
paramount public interest, as the corporate layering employed by petitioners was
evidently designed to circumvent the constitutional caveat allowing only Filipino
citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use
the country’s natural resources.
Third, the facts of the case, involving as they do a web of corporate layering intended
to go around the Filipino ownership requirement in the Constitution and pertinent
laws, requirethe establishment of a definite principle that will ensure that the
Constitutional provision reserving to Filipino citizens or "corporations at least sixty
per centum of whose capital is owned by such citizens" be effectively enforced and
complied with. The case, therefore, is an opportunity to establish a controlling
principle that will "guide the bench, the bar, and the public."
Lastly, the petitioners’ actions during the lifetime and existence of the instant case
that gave rise to the present controversy are capable of repetition yet evading review
because, as shown by petitioners’ actions, foreign corporations can easily utilize
dummy Filipino corporations through various schemes and stratagems to skirt the
constitutional prohibition against foreign mining in Philippine soil.
II.
The application of the Grandfather Ruleis justified by the circumstances of the case
to determine the nationality of petitioners.
To petitioners, the Court’s application of the Grandfather Rule to determine their
nationality is erroneous and allegedly without basis in the Constitution, the Foreign
Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and the Rules
issued by the Securities and Exchange Commission (SEC). These laws and rules
supposedly espouse the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of determining compliance withSec. 2,
Art. XII of the Constitution that only "corporations or associations at least sixty per
centum of whose capital is owned by such [Filipino] citizens" may enjoy certain rights
and privileges, like the exploration and development of natural resources.
The application of the Grandfather Rule in the present case does not eschew the
Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the
Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court foreclose
the application of the Control Test in determining which corporations may be
considered as Philippine nationals. Instead, to borrow Justice Leonen’s term, the
Court used the Grandfather Rule as a "supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The
following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining whether or
not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the
1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the Court,
there is doubt, based on the attendant facts and circumstances of the case, in the 60-
40 Filipino equity ownership in the corporation, then it may apply the "grandfather
rule." (emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control Test is
not proscribed by the Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the
Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is owned by
such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers
a "corporation x x x registered in accordance with law at least sixty per cent of the
capital of which is owned by citizens of the Philippines" as a person qualified to
undertake a mining operation. Consistent with this objective, the Grandfather
Rulewas originally conceived to look into the citizenshipof the individuals who
ultimately own and control the shares of stock of a corporation for purposes of
determining compliance with the constitutional requirement of Filipino ownership.
It cannot, therefore, be denied that the framers of the Constitution have not
foreclosed the Grandfather Rule as a tool in verifying the nationality of corporations
for purposes of ascertaining their right to participate in nationalized or partly
nationalized activities. The following excerpts from the Record of the 1986
Constitutional Commission suggest as much:
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS: That is right.
xxxx
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by
which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and
other nationalization laws, is computed, in cases where corporate shareholders are
present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder." 4 Thus, to
arrive at the actual Filipino ownership and control in a corporation, both the direct
and indirect shareholdings in the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine the
ultimate ownership in a corporation is observed by the Bureau of Internal Revenue
(BIR) in applying Section 127 (B)5 of the National Internal Revenue Code on taxes
imposed on closely held corporations, in relation to Section 96 of the Corporation
Code6 on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim
Henares held:
In the case of a multi-tiered corporation, the stock attribution rule must be allowed
to run continuously along the chain of ownership until it finally reaches the individual
stockholders. This is in consonance with the "grandfather rule" adopted in the
Philippines under Section 96 of the Corporation Code(Batas Pambansa Blg. 68) which
provides that notwithstanding the fact that all the issued stock of a corporation are
held by not more than twenty persons, among others, a corporation is nonetheless
not to be deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a close
corporation.7
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC
applied the Grandfather Rule even if the corporation engaged in mining operation
passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML
owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine individual
citizens who are actually MML’s controlled nominees; (2) MEDC, in turn, owns 60%
equity in MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of
PHILSAGA, while MML owns the remaining 40%. You provide the following figure to
illustrate this structure:
xxxx
We note that the Constitution and the statute use the concept "Philippine citizens."
Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x This
enumeration is exhaustive. In other words, there can be no other Philippine citizens
other than those falling within the enumeration provided by the Constitution.
Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of
the Constitutional and statutory restrictions on foreign participation in the
exploitation of mineral resources, a corporation investing in a mining joint venture
can never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose
Petroleum [Inc.]. The Court held that a corporation investing in another corporation
engaged ina nationalized activity cannot be considered as a citizen for purposes of
the Constitutional provision restricting foreign exploitation of natural resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the individual
stockholders, i.e. natural persons, of that investor-corporation in order to determine
if the Constitutional and statutory restrictions are complied with. If the shares of
stock of the immediate investor corporation is in turn held and controlled by another
corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the
individual stockholders of each corporation. This is the strict application of the
grandfather rule, which the Commission has been consistently applying prior to the
1990s. Indeed, the framers of the Constitution intended for the "grandfather rule" to
apply in case a 60%-40% Filipino-Foreign equity corporation invests in another
corporation engaging in an activity where the Constitution restricts foreign
participation.
xxxx
Accordingly, under the structure you represented, the joint mining venture is 87.04
% foreign owned, while it is only 12.96% owned by Philippine citizens. Thus, the
constitutional requirement of 60% ownership by Philippine citizens isviolated.
(emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur
Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule despite the fact that
the subject corporations ostensibly have satisfied the 60-40 Filipino equity
requirement. The SEC en bancheld that to attain the Constitutional objective of
reserving to Filipinos the utilization of natural resources, one should not stop where
the percentage of the capital stock is 60%.Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI,
provided practically all the funds of the remaining appellee-corporations. The records
disclose that: (1) Olympic Mines and Development Corporation ("OMDC"), a
domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively,
out of the authorized capital stock of Madridejos; however, OMDC paid nothing for
this subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of
₱3,331,000.00; (2) Palawan Alpha South Resource Development Corp. ("Palawan
Alpha"), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996
shares, respectively, out of the authorized capital stock of PatriciaLouise; however,
Palawan Alpha paid nothing for this subscription while MBMI paid ₱2,796,000.00 out
of its total subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to
6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara
Marie; however, OMDC paid nothing for this subscription while MBMI paid
₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and (4) Falcon Ridge
Resources Management Corp. ("Falcon Ridge"), another domestic corporation, and
MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized
capital stock of San Juanico; however, Falcon Ridge paid nothing for this subscription
while MBMI paid ₱2,500,000.00 out of its total subscription cost of ₱3,998,000.00.
Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.
xxxx
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of
the Constitution. Hence, the Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of a
given corporate shareholder to the second or even the subsequent tier of ownership
hews with the rule that the "beneficial ownership" of corporations engaged in
nationalized activities must reside in the hands of Filipino citizens. Thus, even if the
60-40 Filipino equity requirement appears to have been satisfied, the Department of
Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may
distort the actual economic or beneficial ownership of a mining corporation may be
struck down as violative of the constitutional requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a
mining service contract with a foreign company granting the latter a share of not
morethan 40% from the proceeds of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation
or partnership registered with the [SEC] at least 60% of the capital of which is owned
by Filipino citizens and possessing x x x.The sixty percent Philippine equity
requirement in mineral resource exploitation x x xis intended to insure, among other
purposes, the conservation of indigenous natural resources, for Filipino posterityx x
x. I think it is implicit in this provision, even if it refers merely to ownership of stock
in the corporation holding the mining concession, that beneficial ownership of the
right to dispose, exploit, utilize, and develop natural resources shall pertain to Filipino
citizens, and that the nationality requirementis not satisfied unless Filipinos are the
principal beneficiaries in the exploitation of the country’s natural resources. This
criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463,
above-quoted, which limits the service fee in service contracts to 40% of the
proceeds of the operation, thereby implying that the 60-40 benefit-sharing ration is
derived from the 60-40 equity requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a service
fee, and therefore, properly deductible from gross proceeds, the service contract
could be employed as a means of going about or circumventing the constitutional
limit on foreign equity participation and the obvious constitutional policy to insure
that Filipinos retain beneficial ownership of our mineral resources. Thus, every
service contract scheme has to be evaluated in its entirety, on a case to case basis, to
determine reasonableness of the total "service fee" x x x like the options available
tothe contractor to become equity participant in the Philippine entity holding the
concession, or to acquire rights in the processing and marketing stages. x x x
(emphasis supplied)
The "beneficial ownership" requirement was subsequently used in tandem with the
"situs of control" todetermine the nationality of a corporation in DOJ Opinion No. 84,
S.of 1988, through the Grandfather Rule, despite the fact that both the investee and
investor corporations purportedly satisfy the 60-40 Filipino equity requirement:9
This refers to your request for opinion on whether or not there may be an investment
in real estate by a domestic corporation (the investing corporation) seventy percent
(70%) of the capital stock of which is owned by another domestic corporation withat
least 60%-40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of
the capital stock is owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is implicit in
the constitutional provisions, even if it refers merely to ownership of stock in the
corporation holding the land or natural resource concession, that the nationality
requirement is not satisfied unless it meets the criterion of beneficial ownership, i.e.
Filipinos are the principal beneficiaries in the exploration of natural resources(Op.
No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock corporation"(Op. No.
178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58),
obviously toinsure that corporations and associations allowed to acquire agricultural
land or to exploit natural resources "shall be controlled by Filipinos." Accordingly, any
arrangement which attempts to defeat the constitutional purpose should be
eschewed (Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC], compliance
with the sixty per centum requirement is being monitored by SEC under the
"Grandfather Rule" a method by which the percentage of Filipino equity in
corporations engaged in nationalized and/or partly nationalized areas of activities
provided for under the Constitution and other national laws is accurately computed,
and the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather
Rule" is applied specifically in cases where the corporation has corporate
stockholders with alien stockholdings, otherwise, if the rule is not applied, the
presence of such corporate stockholders could diminish the effective control of
Filipinos.
Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the
total foreign equity in the investing corporation is 58% while the Filipino equity is only
42%, in the investing corporation, subject of your query, is disqualified from investing
in real estate, which is a nationalized activity, as it does not meet the 60%-40%
Filipino-Foreign equity requirement under the Constitution.
This pairing of the concepts "beneficial ownership" and the "situs of control" in
determining what constitutes"capital" has been adopted by this Court in Heirs of
Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:
This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is heldby "a trustee of funds for pension or other employee retirement
or separation benefits," the trustee is a Philippine national if "at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section
1(b) of the Implementing Rules of the FIA provides that "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,
coupled with appropriate voting rights, is essential." (emphasis supplied)
In emphasizing the twin requirements of "beneficial ownership" and "control" in
determining compliance with the required Filipino equity in Gamboa, the en
bancCourt explicitly cited with approval the SEC en banc’s application in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule, to
wit:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of SEC, has adopted the Grandfather Rulein
determining compliance with the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities. This prevailing
SEC ruling, which the SEC correctly adopted to thwart any circumvention of the
required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en
banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x
x (emphasis supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel
Communications, Inc.,11 denied the foreign creditors’ proposal to convert part of
Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly,
the conversion of the debts to common shares by the foreign creditors would be
done, both directly and indirectly, in order to meet the control test principle under
the FIA.Under the proposed structure, the foreign creditors would own 40% of the
outstanding capital stock of the telecommunications company on a direct basis, while
the remaining 40% of shares would be registered to a holding company that shall
retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more than
60% of the ownership of the common shares of Bayantel to the foreign corporations,
viz:
In its Rehabilitation Plan, among the material financial commitments made by
respondent Bayantelis that its shareholders shall relinquish the agreed-upon amount
of common stock[s] as payment to Unsecured Creditors as per the Term Sheet.
Evidently, the parties intend to convert the unsustainable portion of respondent’s
debt into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control
over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution.Therefore, the Court of
Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.
(emphasis supplied) As shown by the quoted legislative enactments, administrative
rulings, opinions, and this Court’s decisions, the Grandfather Rule not only finds basis,
but more importantly, it implements the Filipino equity requirement, in the
Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in
determining compliance with the minimum Filipino equity requirement vis-à-vis the
Control Test. This confusion springs from the erroneous assumption that the use of
one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21,
2014 Decision, the Control Test can be, as it has been, applied jointly withthe
Grandfather Rule to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the Grandfather Rule are not,
as it were, incompatible ownership-determinant methods that canonly be applied
alternative to each other. Rather, these methodscan, if appropriate, be used
cumulatively in the determination of the ownership and control of corporations
engaged in fully or partly nationalized activities, as the mining operation involved in
this case or the operation of public utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject corporation’s
Filipino equity falls below the threshold 60%, the corporation is immediately
considered foreign-owned, in which case, the needto resort to the Grandfather Rule
disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there is no doubtas to
who has the "beneficial ownership" and "control" of the corporation. In that instance,
there is no need fora dissection or further inquiry on the ownership of the corporate
shareholders in both the investing and investee corporation or the application of the
Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino to foreign equity
ratio is apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt existsas to the locusof the "beneficial
ownership" and "control." In this case, a further investigation as to the nationality of
the personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary.
As explained in the April 21,2012 Decision, the "doubt" that demands the application
of the Grandfather Rule in addition to or in tandem with the Control Test is not
confined to, or more bluntly, does not refer to the fact that the apparent Filipino
ownership of the corporation’s equity falls below the 60% threshold. Rather, "doubt"
refers to various indicia that the "beneficial ownership" and "control" of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent
provisions of the Anti-DummyLaw in relation to the minimum Filipino equity
requirement in the Constitution, "significant indicators of the dummy status" have
been recognized in view of reports "that some Filipino investors or businessmen are
being utilized or [are] allowing themselves to be used as dummies by foreign
investors" specifically in joint ventures for national resource exploitation. These
indicators are:
1. That the foreign investors provide practically all the funds for the joint
investment undertaken by these Filipino businessmen and their foreign
partner;
2. That the foreign investors undertake to provide practically all the
technological support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the
company and prepare all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of
Linear Works Realty Development Corporation,13 the SEC held that when foreigners
contribute more capital to an enterprise, doubt exists as to the actual control and
ownership of the subject corporation even if the 60% Filipino equity threshold is met.
Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the
basis for determining the level of foreign participation is the number of shares
subscribed, regardless of the par value. Applying such an interpretation, the EPD rules
that the foreign equity participation in Linear works Realty Development Corporation
amounts to 26.41% of the corporation’s capital stock since the amount of shares
subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the
subject corporation is compliant with the 40% limit on foreign equity participation.
Accordingly, the EPD dismissed the complaint, and did not pursue any investigation Parenthetically, it is advanced that the application of the Grandfather Rule is
against the subject corporation. impractical as tracing the shareholdings to the point when natural persons hold rights
xxxx to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in
x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD this regard that, while the Grandfather Rule was originally intended to trace the
did not err when it did not take into account the par value of shares in determining shareholdings to the point where natural persons hold the shares, the SEC had
compliance with the constitutional and statutory restrictionson foreign equity. already set up a limit as to the number of corporate layers the attribution of the
However, we are aware that some unscrupulous individuals employ schemes to nationality of the corporate shareholders may be applied.
circumvent the constitutional and statutory restrictions on foreign equity. In the In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule
present case, the fact that the shares of the Japanese nationals have a greater par on two (2) levels of corporate relations for publicly-held corporations or where the
value but only have similar rights to those held by Philippine citizens having much shares are traded in the stock exchanges, and to three (3) levels for closely held
lower par value, is highly suspicious. This is because a reasonable investor would corporations or the shares of which are not traded in the stock exchanges. 14 These
expect to have greater control and economic rights than other investors who limits comply with the requirement in Palting v. San Jose Petroleum, Inc. 15 that the
invested less capital than him. Thus, it is reasonable to suspectthat there may be application of the Grandfather Rule cannot go beyond the level of what is reasonable.
secret arrangements between the corporation and the stockholders wherein the A doubt exists as to the extent of control and beneficial ownership of MBMI over the
Japanese nationals who subscribed to the shares with greater par value actually have petitioners and their investing corporate stockholders.
greater control and economic rights contrary to the equality of shares based on the In the Decision subject of this recourse, the Court applied the Grandfather Rule to
articles of incorporation. determine the matter of true ownership and control over the petitioners as doubt
With this in mind, we find it proper for the EPD to investigate the subject corporation. exists as to the actual extent of the participation of MBMI in the equity of the
The EPD is advised to avail of the Commission’s subpoena powers in order to gather petitioners and their investing corporations.
sufficient evidence, and file the necessary complaint. We considered the following membership and control structures and like nuances:
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Tesoro
Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of
reasonable suspicion that the Filipino shareholders do not actually have the requisite the 10,000 commonshares of petitioner Tesoro while the Canadian-owned company,
number of control and beneficial ownership in petitioners Narra, Tesoro, and MBMI, holds 39.98% of its shares.
McArthur. Hence, a further investigation and dissection of the extent of the
ownership of the corporate shareholders through the Grandfather Rule is justified.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Sara Marie Mining, Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Inc.
MBMI Resources, Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
Inc.16
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara Marie’s shares while the same Canadian company MBMI holds 33.31% of
Sara Marie’s shares. Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary, MBMI paid for 99% of the paid-up capital of Sara Marie.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.17
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the true extent of its (MBMI) control and ownership over both
Sara Marie and Tesoro since, as observed by the SEC, "a reasonable investor would expect to have greater control and economic rights than other investors who invested less
capital than him." The application of the Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic benefits in petitioner Tesoro (through Sara
Marie) fallbelow the threshold 60%, viz:
Filipino participation in petitioner Tesoro: 40.01%
66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%
100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%
Foreign participation in petitioner Tesoro: 59.99%
33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
100

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual SHs in Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its shares, it is clear that petitioner Tesoro does not comply with the
minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation that Tesoro is a foreign corporation not entitled to
an MPSA is apt.
McArthur
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common shares is owned by supposedly Filipino Madridejos Mining Corporation
(Madridejos), while 39.98% belonged to the Canadian MBMI.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Madridejos Mining Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Corporation
MBMI Resources, Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Inc.18
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up capital of Madridejos
and it was MBMI that provided 99.79% of the paid-up capital of Madridejos.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.19
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
 Total 10,000 ₱10,000,000.00 ₱2,809,900.00
Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as to the true extent of its control and ownership of MBMI over
both Madridejos and McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below, MBMI, along with the other foreign shareholders, breached
the maximum limit of 40% ownership in petitioner McArthur, rendering the petitioner disqualified to an MPSA:
Filipino participation in petitioner McArthur: 40.01%
66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%
100

39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%
Foreign participation in petitioner McArthur: 59.99%
33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign individual SHs in McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to 59.99% foreign ownership of its shares, it is clear that petitioner McArthur
does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00
Mining and
Development Corp.
MBMI Resources, Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00
Inc.20
Higinio C. Mendoza, Filipino 1 ₱1,000.00 ₱1,000.00
Henry E. Fernandez Filipino 1 ₱1,000.00 ₱1,000.00
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. McCurdy Canadian 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Bayani H. Agabin Filipino 1 ₱1,000.00 ₱1,000.00
 Total 10,000 ₱10,000,000.00 ₱2,800,000.00
PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the Canadian
MBMI, which subscribed to 33.96% of PLMDC’s shares.
Name Nationality Number of Shares Amount Subscribed Amount Paid
Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0
South Resource
Development Corp.
MBMI Resources, Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Inc.21
Higinio C. Mendoza, Filipino 1 ₱1,000.00 ₱1,000.00
Jr.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Henry E. Fernandez Filipino 1 ₱1,000.00 ₱1,000.00
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. McCurdy Canadian 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Bayani H, Agabin Filipino 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of
MBMI’s control and ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater control and economic rights than other investors who
invested less capital than him." Thus, the application of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino ownership in petitioner Narra falls below
the limit prescribed in both the Constitution and the Philippine Mining Act of 1995.
Filipino participation in petitioner Narra: 39.64%
66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%
100

39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%
Foreign participation in petitioner Narra: 60.36%
 33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
100
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64%
Filipino ownership of its shares, it is clear that petitioner Narra does not comply with
the minimum Filipino equity requirement imposed in Section 2, Article XII of the
Constitution. Hence, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’
Filipino equity composition was based on their common shareholdings, not preferred
or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly
provides that "no share may be deprived of voting rights except those classified as
‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen puts it, there is "no
indication that any of the shares x x x do not have voting rights, [thus] it must be
assumed that all such shares have voting rights." 22 It cannot therefore be gain said
that the foregoing computation hewed with the pronouncements of Gamboa, as
implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No.
8)23 Section 2 of which states:
Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement.1âwphi1 For purposes of determining compliance therewith,
the required percentage of Filipino ownership shall be applied to BOTH (a) the total
outstanding shares of stock entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.
In fact, there is no indication that herein petitioners issued any other class of shares
besides the 10,000 common shares. Neither is it suggested that the common shares
were further divided into voting or non-voting common shares. Hence, for purposes
of this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000 common
shares of each of the petitioners, and there is no need to separately apply the 60-40
ratio to any segment or part of the said common shares.
III.
In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs
Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel
of Arbitrators (POA) of the Department of Environment and Natural Resources
(DENR) since the POA’s determination of petitioners’ nationalities is supposedly
beyond its limited jurisdiction, as defined in Gonzales v. Climax Mining Ltd. 24 and
Philex Mining Corp. v. Zaldivia.25
The April 21, 2014 Decision did not dilute, much less overturn, this Court’s
pronouncements in either Gonzales or Philex Mining that POA’s jurisdiction "is
limited only to mining disputes which raise questions of fact," and not judicial
questions cognizable by regular courts of justice. However, to properly recognize and
give effect to the jurisdiction vested in the POA by Section 77 of the Philippine Mining
Act of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel Mining
Exploration Corporation v. Macroasia Corp.,27 the Court has recognized in its Decision
that in resolving disputes "involving rights to mining areas" and "involving mineral
agreements or permits," the POA has jurisdiction to make a preliminary finding of the
required nationality of the corporate applicant in order to determine its right to a
mining area or a mineral agreement.
There is certainly nothing novel or aberrant in this approach. In ejectment and
unlawful detainer cases, where the subject of inquiry is possession de facto, the
jurisdiction of the municipal trial courts to make a preliminary adjudication regarding
ownership of the real property involved is allowed, but only for purposes of ruling on
the determinative issue of material possession.
The present case arose from petitioners' MPSA applications, in which they asserted
their respective rights to the mining areas each applied for. Since respondent
Redmont, itself an applicant for exploration permits over the same mining areas, filed
petitions for the denial of petitioners' applications, it should be clear that there exists
a controversy between the parties and it is POA's jurisdiction to resolve the said
dispute. POA's ruling on Redmont's assertion that petitioners are foreign
corporations not entitled to MPSA is but a necessary incident of its disposition of the
mining dispute presented before it, which is whether the petitioners are entitled to
MPSAs.
Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining
areas," it necessarily follows that the POA likewise wields the authority to pass upon
the nationality issue involving petitioners, since the resolution of this issue is
essential and indispensable in the resolution of the main issue, i.e., the determination
of the petitioners' right to the mining areas through MPSAs.
WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further
pleadings shall be entertained. Let entry of judgment be made in due course.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
G.R. No. 207246
JOSE M. ROY III, Petitioner
vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE COMMISSION,
and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,, Respondents
x-----------------------x
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,
ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,
x-----------------------x
PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,
x-----------------------x
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-
Intervention.
RESOLUTION
CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January 19, 2017 1 (the
Motion) filed by petitioner Jose M. Roy III (movant) seeking the reversal and setting
aside of the Decision dated November 22, 2016 2 (the Decision) which denied the
movant's petition, and declared that the Securities and Exchange Commission (SEC)
did not commit grave abuse of discretion in issuing Memorandum Circular No. 8,
Series of 2013 (SEC-MC No. 8) as the same was in compliance with, and in fealty to,
the decision of the Court in Gamboa v. Finance Secretary Teves,3(Gamboa Decision)
and the resolution4 denying the Motion for Reconsideration
therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the reconsideration
of the Decision.
The grounds raised by movant are: (1) He has the requisite standing because this case
is one of transcendental importance; (2) The Court has the constitutional duty to
exercise judicial review over any grave abuse of discretion by any instrumentality of
government; (3) He did not rely on an obiter dictum; and (4) The Court should have
treated the petition as the appropriate device to explain the Gamboa Decision.
The Decision has already exhaustively discussed and directly passed upon these
grounds. Movant's petition was dismissed based on both procedural and substantive
grounds.
Regarding the procedural grounds, the Court ruled that petitioners (movant and
petitioners-in-intervention) failed to sufficiently allege and establish the existence of
a case or controversy and locus standi on their part to warrant the Court's exercise
of judicial review; the rule on the hierarchy of courts was violated; and petitioners
failed to implead indispensable parties such as the Philippine Stock Exchange, Inc.
and Shareholders' Association of the Philippines, Inc. 5
In connection with the failure to implead indispensable parties, the Court's Decision
held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-
interest without whom there can be no final determination of an action.
Indispensable parties are those with such a material and direct interest in the
controversy that a final decree would necessarily affect their rights, so that the court
cannot proceed without their presence. The interests of such indispensable parties
in the subject matter of the suit and the relief are so bound with those of the other
parties that their legal presence as parties to the proceeding is an absolute necessity
and a complete and efficient determination of the equities and rights of the parties
is not possible if they are not joined.
Other than PLDT, the petitions failed to join or implead other public utility
corporations subject to the same restriction imposed by Section 11, Article XII of the
Constitution. These corporations are in danger of losing their franchise and property
if they are found not compliant with the restrictive interpretation of the
constitutional provision under review which is being espoused by petitioners. They
should be afforded due notice and opportunity to be heard, lest they be deprived of
their property without due process.
Not only are public utility corporations other than PLDT directly and materially
affected by the outcome of the petitions, their shareholders also stand to suffer in
case they will be forced to divest their shareholdings to ensure compliance with the
said restrictive interpretation of the term "capital". As explained by SHAREPHIL, in
five corporations alone, more than Php158 Billion worth of shares must be divested
by foreign shareholders and absorbed by Filipino investors if petitioners' position is
upheld.
Petitioners' disregard of the rights of these other corporations and numerous
shareholders constitutes another fatal procedural flaw, justifying the dismissal of
their petitions. Without giving all of them their day in court, they will definitely be
deprived of their property without due process of law. 6
This is highlighted to clear any misimpression that the Gamboa Decision
and Gamboa Resolution made a categorical ruling on the meaning of the word
"capital" under Section 11, Article XII of the Constitution only in respect of, or only
confined to, respondent Philippine Long Distance Telephone Company (PLDT).
Nothing is further from the truth. Indeed, a fair reading of the Gamboa Decision
and Gamboa Resolution shows that the Court's pronouncements therein would
affect all public utilities, and not just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on whether the SEC
gravely abused its discretion in ruling that respondent PLDT is compliant with the
limitation on foreign ownership under the Constitution and other relevant laws as
without merit. The Court reasoned that "in the absence of a definitive ruling by the
SEC on PLDT's compliance with the capital requirement pursuant to
the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature."7
In resolving the other substantive issue raised by petitioners, the Court held that:
[E]ven if the resolution of the procedural issues were conceded in favor of
petitioners, the petitions, being anchored on Rule 65, must nonetheless fail because
the SEC did not commit grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC
No. 8 to have been issued in fealty to the Gamboa Decision and Resolution. 8
To belabor the point, movant's petition is not a continuation of the Gamboa case as
the Gamboa Decision attained finality on October 18, 2012, and thereafter Entry of
Judgment was issued on December 11, 2012.9
As regards movant's repeated invocation of the transcendental importance of
the Gamboa case, this does not ipso facto accord locus standi to movant. Being a
new petition, movant had the burden to justify his locus standi in his own petition.
The Court, however, was not persuaded by his justification.
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has
conclusively found no grave abuse of discretion on the part of SEC in issuing SEC-MC
No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on
Filipino ownership should "apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of a
corporation."[[9-a]] The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and
Resolution are definite, clear and unequivocal. While there is a passage in the body
of the Gamboa Resolution that might have appeared contrary to the fallo of
the Gamboa Decision x x x the definiteness and clarity of the fallo of
the Gamboa Decision must control over the obiter dictum in the Gamboa Resolution
regarding the application of the 60-40 Filipino-foreign ownership requirement to
"each class of shares, regardless of differences in voting rights, privileges and
restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the Decision, the
dispositive portion of the Gamboa Decision was in no way modified by
the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens x x x."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution
requires is "[fJull [and legal] beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights x x x must rest in the hands
of Filipino nationals x x x." 11 And, precisely that is what SEC-MC No. 8
provides, viz.: "x x x For purposes of determining compliance [with the constitutional
or statutory ownership], the required percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding shares of stock,
whether or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and Regulations of
the Foreign Investments Act of 1991 (FIA-IRR) provides:
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, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing
Rules and Regulations of the Securities Regulation Code (SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power (which includes
the power to vote or direct the voting of such security) and/or investment returns or
power (which includes the power to dispose of, or direct the disposition of such
security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR,
which is in consonance with the concept of "full beneficial ownership" in the FIA-IRR,
is, as stressed in the Decision, relevant in resolving only the question of who is the
beneficial owner or has beneficial ownership of each "specific stock" of the public
utility company whose stocks are under review. If the Filipino has the voting
power of the "specific stock", i.e., he can vote the stock or direct another to vote for
him, or the Filipino has the investment power over the "specific stock", i.e., he
can dispose of the stock or direct another to dispose of it for him, or both, i.e., he
can vote and dispose of that "specific stock" or direct another to vote or dispose it
for him, then such Filipino is the "beneficial owner" of that "specific stock." Being
considered Filipino, that "specific stock" is then to be counted as part of the 60%
Filipino ownership requirement under the Constitution. The right to the
dividends, jus fruendi - a right emanating from ownership of that "specific stock"
necessarily accrues to its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that the dividends
accruing to any particular stock are determinative of that stock's "beneficial
ownership." Dividend declaration is dictated by the corporation's unrestricted
retained earnings. On the other hand, the corporation's need of capital for expansion
programs and special reserve for probable contingencies may limit retained earnings
available for dividend declaration. 15 It bears repeating here that the Court in
the Gamboa Decision adopted the foregoing definition of the term "capital" in
Section 11, Article XII of the 1987 Constitution in express recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security, so that the evident purpose of the citizenship requirement is to prevent
aliens from assuming control of public utilities, which may be inimical to the national
interest. 16 This purpose prescinds from the "benefits"/dividends that are derived
from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by
aliens. So long as Filipinos have controlling interest of a public utility corporation,
their decision to declare more dividends for a particular stock over other kinds of
stock is their sole prerogative - an act of ownership that would presumably be for the WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH
benefit of the public utility corporation itself. Thus, as explained in the Decision: FINALITY. No further pleadings or motions shall be entertained in this case. Let entry
In this regard, it would be apropos to state that since Filipinos own at least 60% of of final judgment be issued immediately.
the outstanding shares of stock entitled to vote directors, which is what the SO ORDERED.
Constitution precisely requires, then the Filipino stockholders control the ALFREDO BENJAMIN S. CAGUIOA,
corporation, i.e., they dictate corporate actions and decisions, and they have all the Associate Justice
rights of ownership including, but not limited to, offering certain preferred shares
that may have greater economic interest to foreign investors - as the need for capital
for corporate pursuits (such as expansion), may be good for the corporation that they
own. Surely, these "true owners" will not allow any dilution of their ownership and
control if such move will not be beneficial to them. 17
Finally, as to how the SEC will classify or treat certain stocks with voting rights held
by a trust fund that is created by the public entity whose compliance with the
limitation on foreign ownership under the Constitution is under scrutiny, and how
the SEC will determine if such public utility does, in fact, control how the said stocks
will be voted, and whether, resultantly, the trust fund would be considered as
Philippine national or not - lengthily discussed in the dissenting opinion of Justice
Carpio - is speculative at this juncture. The Court cannot engage in guesswork. Thus,
there is need of an actual case or controversy before the Court may exercise its power
of judicial review. The movant's petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred
shares created by respondent PLDT, their acquisition by BTF Holdings, Inc., which
appears to be a wholly-owned company of the PLDT Beneficial Trust Fund (BTF), and
whether or not it is respondent PLDT's management that controls BTF and BTF
Holdings, Inc. - all these are factual matters that are outside the ambit of this Court's
review which, as stated in the beginning, is confined to determining whether or not
the SEC committed grave abuse of discretion in issuing SEC-MC No. 8; that is, whether
or not SEC-MC No. 8 violated the ruling of the Court in Gamboa v. Finance Secretary
Teves, 18 and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the proper
understanding of "capital".
To be sure, it would be more prudent and advisable for the Court to await the SEC's
prior determination of the citizenship of specific shares of stock held in trust - based
on proven facts - before the Court proceeds to pass upon the legality of such
determination.
As to whether respondent PLDT is currently in compliance with the Constitutional
provision regarding public utility entities, the Court must likewise await the SEC's
determination thereof applying SEC-MC No. 8. After all, as stated in the Decision, it
is the SEC which is the government agency with the competent expertise and the
mandate of law to make such determination.
In conclusion, the basic issues raised in the Motion having been duly considered and
passed upon by the Court in the Decision and no substantial argument having been
adduced to warrant the reconsideration sought, the Court resolves to DENY the
Motion with FINALITY.
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES SO ORDERED.5
AND EXCHANGE COMMISSION, AND PHILILIPPINE LONG DISTANCE TELEPHONE The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment
COMPANY, Respondents. was thereafter issued on December 11, 2012. 6

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, On November 6, 2012, the SEC posted a Notice in its website inviting the public to
ANTONIO V. PESINA, JR., MODESTO MARTIN Y. MAMON III, AND GERARDO C. attend a public dialogue and to submit comments on the draft memorandum circular
EREBAREN, Petitioners-in-Intervention, (attached thereto) on the guidelines to be followed in determining compliance with
the Filipino ownership requirement in public utilities under Section 11, Article XII of
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention, the Constitution pursuant to the Court's directive in the Gamboa Decision.7

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in- On November 9, 2012, the SEC held the scheduled dialogue and more than 100
Intervention. representatives from various organizations, government agencies, the academe and
DECISION the private sector attended.8
CAGUIOA, J.:
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of On January 8, 2013, the SEC received a copy of the Entry of Judgment9 from the Court
the Rules of Court seeking to annul Memorandum Circular No. 8, Series of 2013 ("SEC- certifying that on October 18, 2012, the Gamboa Decision had become final and
MC No. 8") issued by the Securities and Exchange Commission ("SEC") for allegedly executory.10
being in violation of the Court's Decision 2 ("GamboaDecision") and
Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. On March 25, 2013, the SEC posted another Notice in its website soliciting from the
176579, respectively promulgated on June 28, 2011, and October 9, 2012, which public comments and suggestions on the draft guidelines.11
jurisprudentially established the proper interpretation of Section 11, Article XII of the
Constitution.chanroblesvirtuallawlibrary On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written
The Antecedents comments on the draft guidelines. 12

On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of
which reads:chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term "capital" in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They
were denied in the Gamboa Resolution issued by the Court on October 9,
2012, viz:chanRoblesvirtualLawlibrary
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further
pleadings shall be entertained.
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa,
issued SEC-MC No. 8 entitled "Guidelines on Compliance with the Filipino-Foreign
Ownership Requirements Prescribed in the Constitution and/or Existing Laws by
Corporations Engaged in Nationalized and Partly Nationalized Activities." It was
published in the Philippine Daily Inquirer and the Business Mirror on May 22,
2013.13Section 2 of SEC-MC No. 8 provides:chanRoblesvirtualLawlibrary
Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory ownership requirement. For purposes of determining compliance
therewith, the required percentage of Filipino ownership shall be applied to BOTH (a)
the total number of outstanding shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
Corporations covered by special laws which provide specific citizenship requirements
shall comply with the provisions of said law.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the
Petition,15 assailing the validity of SEC-MC No. 8 for not conforming to the letter and
spirit of the Gamboa Decision and Resolution and for having been issued by the SEC
with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino
ownership requirement separately to each class of shares of a public utility
corporation, whether common, preferred nonvoting, preferred voting or any other
class of shares. Petitioner Roy also questions the ruling of the SEC that respondent
Philippine Long Distance Telephone Company ("PLDT") is compliant with the
constitutional rule on foreign ownership. He prays that the Court declare SEC-MC No.
8 unconstitutional and direct the SEC to issue new guidelines regarding the
determination of compliance with Section 11, Article XII of the Constitution in
accordance with Gamboa.
Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V.
Pesina, Jr., Modesto Martin Y. Mamon III, and Gerardo C. Erebaren ("intervenors
Gamboa, et al.") filed a Motion for Leave to File Petition-in-Intervention17 on July 30,
2013, which the Court granted. The Petition-in-Intervention18filed by intervenors
Gamboa, et al. mirrored the issues, arguments and prayer of petitioner Roy.
On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10
June 2013).19 PLDT posited that the Petition should be dismissed because it violates
the doctrine of hierarchy of courts as there are no compelling reasons to invoke the
Court's original jurisdiction; it is prematurely filed because petitioner Roy failed to
exhaust administrative remedies before the SEC; the principal actions/remedies
of mandamus and declaratory relief are not within the exclusive and/or original
jurisdiction of the Court; the petition for certiorari is an inappropriate remedy since
the SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it deprives
the necessary and indispensable parties of their constitutional right to due process;
and the SEC merely implemented the dispositive portion of the Gamboa Decision.
On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed
their Consolidated Comment.20 They sought the dismissal of the petitions on the
following grounds: (1) the petitioners do not possess locus standi to assail the
constitutionality of SEC-MC No. 8; (2) a petition for certiorari under Rule 65 is not the
appropriate and proper remedy to assail the validity and constitutionality of the SEC-
MC No. 8; (3) the direct resort to the Court violates the doctrine of hierarchy of
courts; (4) the SEC did not abuse its discretion; (5) on PLDT's compliance with the
capital requirement as stated in the Gamboaruling, the petitioners' challenge is
premature considering that the SEC has not yet issued a definitive ruling thereon.
On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated
16 July 2013).21PLDT adopted the position that intervenors Gamboa, et al. have no
standing and are not the proper party to question the constitutionality of SEC-MC No.
8; they are in no position to assail SEC-MC No. 8 considering that they did not
participate in the public consultations or give comments thereon; and their Petition-
in-Intervention is a disguised motion for reconsideration of the Gamboa Decision and
Resolution.
On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint
Consolidated Reply with Motion for Issuance of Temporary Restraining Order. 23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-
Intervention's Joint Consolidated Reply dated 7 May 2014] and Opposition [To
Petitioner and Petitioners-in-Intervention's Motion for Issuance of a Temporary
Restraining Order dated 7 May 2014].24
On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to
Intervene with Leave of Court25 and its Comment-in Intervention.26 The PSE alleged
that it has standing to intervene as the primary regulator of the stock exchange and
will sustain direct injury should the petitions be granted. The PSE argued that in
the Gamboa ruling, "capital" refers only to shares entitled to vote in the election of
directors, and excludes those not so entitled; and the dispositive portion of the
decision is the controlling factor that determines and settles the questions presented
in the case. The PSE further argued that adopting a new interpretation of Section 11,
Article XII of the Constitution violates the policy of conclusiveness of judgment, stare
decisis, and the State's obligation to maintain a stable and predictable legal
framework for foreign investors under international treaties; and adopting a new
definition of "capital" will prove disastrous for the Philippine stock market. The Court
granted the Motion to Intervene filed by PSE.27
PLDT filed its Consolidated Memorandum28 on February 10, 2015.
On June 1, 2016, Shareholders' Association of the Philippines, Inc.29 ("SHAREPHIL")
filed an Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached
Comment-in-Intervention.30 The Court granted the Omnibus Motion of SHAREPHIL.31
On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of
Philippine Stock Exchange and Sharephil.32 Intervenors Gamboa, et al. then filed on
September 14, 2016, their Reply (to Interventions by Philippine Stock Exchange and
Sharephil).33
The Issues
The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the
SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of
the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely
abused its discretion in ruling that PLDT is compliant with the constitutional limitation
on foreign ownership.chanroblesvirtuallawlibrary
The Court's Ruling
At the outset, the Court disposes of the second issue for being without merit. In its
Consolidated Comment dated September 13, 2013,34 the SEC already clarified that it
"has not yet issued a definitive ruling anent PLDT's compliance with the limitation on
foreign ownership imposed under the Constitution and relevant laws [and i]n fact, a
careful perusal of x x x SEC-MC No. 8 readily reveals that all existing covered
corporations which are non-compliant with Section 2 thereof were given a period of
one (1) year from the effectivity of the same within which to comply with said
ownership requirement. x x x."35 Thus, in the absence of a definitive ruling by the SEC
on PLDT's compliance with the capital requirement pursuant to the Gamboa Decision
and Resolution, any question relative to the inexistent ruling is premature.
Also, considering that the Court is not a trier of facts and is in no position to make a
factual determination of PLDT's compliance with the constitutional provision under
review, the Court can only resolve the first issue, which is a pure question of law.
However, before the Court tackles the first issue, it has to rule on certain procedural
challenges that have been raised.chanroblesvirtuallawlibrary
The Procedural Issues
The Court may exercise its power of judicial review and take cognizance of a case
when the following specific requisites are met: (1) there is an actual case or
controversy calling for the exercise of judicial power; (2) the petitioner has standing
to question the validity of the subject act or issuance, i.e., he has a personal and
substantial interest in the case that he has sustained, or will sustain, direct injury as
a result of the enforcement of the act or issuance; (3) the question of constitutionality
is raised at the earliest opportunity; and (4) the constitutional question is the very lis
mota of the case.36
The first two requisites of judicial review are not met.
Petitioners' failure to sufficiently allege, much less establish, the existence of the first
two requisites for the exercise of judicial review warrants the perfunctory dismissal
of the petitions.
a. No actual controversy.
37
Regarding the first requisite, the Court in Belgica v. Ochoa stressed anew that an
actual case or controversy is one which involves a conflict of legal rights, an assertion
of opposite legal claims, susceptible of judicial resolution as distinguished from a
hypothetical or abstract difference or dispute since the courts will decline to pass
upon constitutional issues through advisory opinions, bereft as they are of authority
to resolve hypothetical or moot questions. Related to the requirement of an actual
case or controversy is the requirement of "ripeness", and a question is ripe for
adjudication when the act being challenged has a direct adverse effect on the
individual challenging it.
Petitioners have failed to show that there IS an actual case or controversy which is
ripe for adjudication.
The Petition and the Petition-in-Intervention identically
allege:chanRoblesvirtualLawlibrary
3. The standing interpretation of the SEC found in MC8 practically encourages
circumvention of the 60-40 ownership rule by impliedly allowing the creation of
several classes of voting shares with different degrees of beneficial ownership over
the same, but at the same time, not imposing a 40% limit on foreign ownership of
the higher yielding stocks.38
4. For instance, a situation may arise where a corporation may issue several classes
of shares of stock, one of which are common shares with rights to elect directors,
another are preferred shares with rights to elect directors but with much lesser
entitlement to dividends, and still another class of preferred shares with no rights to
elect the directors and even less dividends. In this situation, the corporation may
issue common shares to foreigners amounting to forty percent (40%) of the
outstanding capital stock and issue preferred shares entitled to vote the directors of
the corporation to Filipinos consisting of 60%39 percent (sic) of the outstanding
capital stock entitled to vote. Although it may appear that the 60-40 rule has been
complied with, the beneficial ownership of the corporation remains with the foreign
stockholder since the Filipino owners of the preferred shares have only a miniscule
share in the dividends and profit of the corporation. Plainly, this situation runs
contrary to the Constitution and the ruling of this x x x Court. 40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages
circumvention of the 60-40 ownership rule" is evidently speculative and fraught with
conjectures and assumptions. There is clearly wanting specific facts against which the
veracity of the conclusions purportedly following from the speculations and
assumptions can be validated. The lack of a specific factual milieu from which the
petitions originated renders any pronouncement from the Court as a purely advisory
opinion and not a decision binding on identified and definite parties and on a known
set of facts.
Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of
which is at issue, is unknown. Its outstanding capital stock and the actual composition
thereof in terms of numbers, classes, preferences and features are all theoretical.
The description "preferred shares with rights to elect directors but with much lesser
entitlement to dividends, and still another class of preferred shares with no rights to
elect the directors and even less dividends" is ambiguous. What are the specific
dividend policies or entitlements of the purported preferred shares? How are the
preferred shares' dividend policies different from those of the common shares? Why
and how did the fictional public utility corporation issue those preferred shares
intended to be owned by Filipinos? What are the actual features of the foreign-
owned common shares which make them superior over those owned by Filipinos?
How did it come to be that Filipino holders of preferred shares ended up with "only
a miniscule share in the dividends and profit of the [hypothetical] corporation"? Any
answer to any of these questions will, at best, be contingent, conjectural, indefinite
or anticipatory.
Secondly, preferred shares usually have preference over the common shares in the
payment of dividends. If most of the "preferred shares with rights to elect directors
but with much lesser entitlement to dividends" and the other "class of preferred
shares with no rights to elect the directors and even less dividends" are owned by
Filipinos, they stand to receive their dividend entitlement ahead of the foreigners,
who are common shareholders. For the common shareholders to have "bigger
dividends" as compared to the dividends paid to the preferred shareholders, which
are supposedly predominantly owned by Filipinos, there must still be unrestricted
retained earnings of the fictional corporation left after payment of the dividends
declared in favor of the preferred shareholders. The fictional illustration does not
even intimate how this situation can be possible. No permutation of unrestricted
retained earnings of the hypothetical corporation is shown that makes the present
conclusion of the petitioners achievable. Also, no concrete meaning to the
petitioners' claim of the Filipinos' "miniscule share in the dividends and profit of the
[fictional] corporation" is demonstrated.
Thirdly, petitioners fail to allege or show how their hypothetical illustration will
directly and adversely affect them. That is impossible since their relationship to the
fictional corporation is a matter of guesswork.
From the foregoing, it is evident that the Court can only surmise or speculate on the
situation or controversy that the petitioners contemplate to present for judicial
determination. Petitioners are likewise conspicuously silent on the direct adverse
impact to them of the implementation of SEC-MC No. 8. Thus, the petitions must fail
because the Court is barred from rendering a decision based on assumptions,
speculations, conjectures and hypothetical or fictional illustrations, more so in the
present case which is not even ripe for decision.
b. No locus standi.
The personal and substantial interest that enables a party to have legal standing is
one that is both material, an interest in issue and to be affected by the government
action, as distinguished from mere interest in the issue involved, or a mere incidental
interest, and real, which means a present substantial interest, as distinguished from
a mere expectancy or a future, contingent, subordinate, or consequential
interest.41cralawred
As to injury, the party must show that (1) he will personally suffer some actual or
threatened injury because of the allegedly illegal conduct of the government; (2) the
injury is fairly traceable to the challenged action; and (3) the injury is likely to be
redressed by a favorable action.42 If the asserted injury is more imagined than real,
or is merely superficial and insubstantial, an excursion into constitutional
adjudication by the courts is not warranted.43
Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.
To establish his standing, petitioner Roy merely claimed that he has standing to
question SEC-MC No. 8 "as a concerned citizen, an officer of the Court and as a
taxpayer" as well as "the senior law partner of his own law firm[, which] x x x is a
subscriber of PLDT."44 On the other hand, intervenors Gamboa, et al.allege, as basis
of their locus standi, their "[b]eing lawyers and officers of the Court" and "citizens x
x x and taxpayers."45
The Court has previously emphasized that the locus standi requisite is not met by the
expedient invocation of one's citizenship or membership in the bar who has an
interest in ensuring that laws and orders of the Philippine government are legally and
validly issued as these supposed interests are too general, which are shared by other
groups and by the whole citizenry.46 Per their allegations, the personal interest
invoked by petitioners as citizens and members of the bar in the validity or invalidity
of SEC-MC No. 8 is at best equivocal, and totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the
Court, a taxpayer's suit is allowed only when the petitioner has demonstrated the
direct correlation of the act complained of and the disbursement of public funds in
contravention of law or the Constitution, or has shown that the case involves the
exercise of the spending or taxing power of Congress.47 SEC-MC No. 8 does not
involve an additional expenditure of public funds and the taxing or spending power
of Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous.
It is unclear whether his law firm is a "subscriber" of PLDT's shares of stock or of its
various telecommunication services. Petitioner Roy has not identified the specific
direct and substantial injury he or his law firm stands to suffer as "subscriber of PLDT"
as a result of the issuance of SEC-MC No. 8 and its enforcement.
As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of
SEC-MC No. 8 is upheld, the rights and privileges of all PLDT subscribers, as with all
the rest of subscribers of other corporations, are necessarily and equally preserved
and protected. Nothing is added [to] or removed from a PLDT subscriber in terms of
the extent of his or her participation, relative to what he or she had originally enjoyed
from the beginning. In the most practical sense, a PLDT subscriber loses or gains
nothing in the event that SEC-MC No. 8 is either sustained or struck down by [the
Court]."48
More importantly, the issue regarding PLDT's compliance with Section 11, Article XII
of the Constitution has been earlier ruled as premature and beyond the Court's Admit Attached Comment-in-Intervention dated May 30, 201656 demonstrate how
jurisdiction. Thus, petitioner Roy's allegation that his law firm is a "subscriber of petitioners should have impleaded not only PLDT but all other corporations in
PLDT" is insufficient to clothe him with locus standi. nationalized and partlynationalized industries because the propriety of the SEC's
enforcement of the Court's interpretation of "capital" through SEC-MC No. 8 affects
Petitioners' cursory incantation of "transcendental importance x x x of the rules on them as well.
foreign ownership of corporations or entities vested with public interest" 49 does not
automatically justify the brushing aside of the strict observance of the requisites for Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-
the Court's exercise of judicial review. An indiscriminate disregard of the requisites interest without whom there can be no final determination of an action.
every time "transcendental or paramount importance or significance" is invoked Indispensable parties are those with such a material and direct interest in the
would result in an unacceptable corruption of the settled doctrine of locus standi, as controversy that a final decree would necessarily affect their rights, so that the court
every worthy cause is an interest shared by the general public.50 cannot proceed without their presence.57 The interests of such indispensable parties
in the subject matter of the suit and the relief are so bound with those of the other
In the present case, the general and equivocal allegations of petitioners on their legal parties that their legal presence as parties to the proceeding is an absolute necessity
standing do not justify the relaxation of the locus standi rule. While the Court has and a complete and efficient determination of the equities and rights of the parties
taken an increasingly liberal approach to the rule of locus standi, evolving from the is not possible if they are not joined.58
stringent requirements of personal injury to the broader transcendental importance
doctrine, such liberality is not to be abused. 51 Other than PLDT, the petitions failed to join or implead other public utility
corporations subject to the same restriction imposed by Section 11, Article XII of the
The Rule on the Hierarchy of Courts has been violated. Constitution. These corporations are in danger of losing their franchise and property
if they are found not compliant with the restrictive interpretation of the
The Court in Bañez, Jr. v. Concepcion52 stressed that:chanRoblesvirtualLawlibrary constitutional provision under review which is being espoused by petitioners. They
The Court must enjoin the observance of the policy on the hierarchy of courts, and should be afforded due notice and opportunity to be heard, lest they be deprived of
now affirms that the policy is not to be ignored without serious consequences. The their property without due process.
strictness of the policy is designed to shied the Court from having to deal with causes
that are also well within the competence of the lower courts, and thus leave time to Not only are public utility corporations other than PLDT directly and materially
the Court to deal with the more fundamental and more essential tasks that the affected by the outcome of the petitions, their shareholders also stand to suffer in
Constitution has assigned to it. The Court may act on petitions for the extraordinary case they will be forced to divest their shareholdings to ensure compliance with the
writs of certiorari, prohibition and mandamus only when absolutely necessary or said restrictive interpretation of the term "capital". As explained by SHAREPIDL, in
when serious and important reasons exist to justifY an exception to the policy. x x x five corporations alone, more than Php158 Billion worth of shares must be divested
x x x Where the issuance of an extraordinary writ is also within the competence of by foreign shareholders and absorbed by Filipino investors if petitioners' position is
the Court of Appeals or a Regional Trial Court, it is in either of these courts that the upheld.59
specific action for the writ's procurement must be presented. This is and should
continue to be the policy in this regard, a policy that courts and lawyers must strictly Petitioners' disregard of the rights of these other corporations and numerous
observe. x x x53 shareholders constitutes another fatal procedural flaw, justifYing the dismissal of
Petitioners' invocation of "transcendental importance" is hollow and does not merit their petitions. Without giving all of them their day in court, they will definitely be
the relaxation of the rule on hierarchy of courts. There being no special, important or deprived of their property without due process of law.
compelling reason that justified the direct filing of the petitions in the Court in
violation of the policy on hierarchy of courts, their outright dismissal on this ground During the deliberations, Justice Velasco stressed on the foregoing procedural
is further warranted.54 objections to the granting of the petitions; and Justice Bersamin added that the
special civil action for certiorari and prohibition is not the proper remedy to assail
The petitioners failed to implead indispensable parties. SEC-MC No. 8 because it was not issued under the adjudicatory or quasi-judicial
functions of the SEC.chanroblesvirtuallawlibrary
The cogent submissions of the PSE in its Comment-in-Intervention dated June 16, The Substantive Issue
201455 and SHAREPHIL in its Omnibus Motion [1] For Leave to Intervene; and [2] To
The only substantive issue that the petitions assert is whether the SEC's issuance of The Court directly answered the Issue and consistently defined the term "capital" as
SEC-MC No. 8 is tainted with grave abuse of discretion. follows:chanRoblesvirtualLawlibrary
x x x The term "capital" in Section 11, Article XII of the Constitution refers only to
The Court holds that, even if the resolution of the procedural issues were conceded shares of stock entitled to vote in the election of directors, and thus in the present
in favor of petitioners, the petitions, being anchored on Rule 65, must nonetheless case only to common shares, and not to the total outstanding capital stock
fail because the SEC did notcommit grave abuse of discretion amounting to lack or comprising both common and non voting preferred shares.
excess of jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds
SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision and Resolution. x x x x

The ratio in the Gamboa Decision and Gamboa Resolution. Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term "capital"
To determine what the Court directed the SEC to do - and therefore resolve whether in Section 11, Article XII of the Constitution refers only to common shares. However,
what the SEC did amounted to grave abuse of discretion - the Court resorts to the if the preferred shares also have the right to vote in the election of directors, then
decretal portion of the GamboaDecision, as this is the portion of the decision that a the term "capital" shall include such preferred shares because the right to participate
party relies upon to determine his or her rights and in the control or management of the corporation is exercised through the right to
duties,60viz:chanRoblesvirtualLawlibrary vote in the election of directors. In short, the term "capital" in Section 11, Article XII
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in of the Constitution refers only to shares of stock that can vote in the election of
Section II, Article XII of the I987 Constitution refers only to shares of stock entitled to directors.65
vote in the election of directors, and thus in the present case only to common shares, The decretal portion of the Gamboa Decision follows the definition of the term
and not to the total outstanding capital stock (common and non-voting preferred "capital" in the body of the decision, to wit: "x x x we x x x rule that the term 'capital'
shares). Respondent Chairperson of the Securities and Exchange Commission in Section 11, Article XII of the 1987 Constitution refers only to shares of stock
is DIRECTED to apply this definition of the term "capital" in determining the extent of entitled to vote in the election of directors, and thus in the present case only to
allowable foreign ownership in respondent Philippine Long Distance Telephone common shares, and not to the total outstanding capital stock (common and non-
Company, and if there is a violation of Section II, Article XII of the Constitution, to voting preferred shares)."66
impose the appropriate sanctions under the law.61
In turn, the Gamboa Resolution stated:chanRoblesvirtualLawlibrary The Court adopted the foregoing definition of the term "capital" in Section 11, Article
In any event, the SEC has expressly manifested 62 that it will abide by the Court's XII of the 1987 Constitution in furtherance of "the intent and letter of the
decision and defer to the Court's definition of the term "capital" in Section II, Article Constitution that the 'State shall develop a self-reliant and independent national
XII of the Constitution. Further, the SEC entered its special appearance in this case economy effectively controlled by Filipinos' [because a] broad definition unjustifiably
and argued during the Oral Arguments, indicating its submission to the Court's disregards who owns the all-important voting stock, which necessarily equates to
jurisdiction. It is clear, therefore, that there exists no legal impediment against the control of the public utility."67 The Court, recognizing that the provision is an express
proper and immediate implementation of the Court's directive to the SEC. recognition of the sensitive and vital position of public utilities both in the national
economy and for national security, also pronounced that the evident purpose of the
x x x x citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.68 Further, the Court noted that the
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely foregoing interpretation is consistent with the intent of the framers of the
to the SEC, which is the administrative agency tasked to enforce the 60-40 Constitution to place in the hands of Filipino citizens the control and management of
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the public utilities; and, as revealed in the deliberations of the Constitutional
Constitution.63 Commission, "capital" refers to the voting stock or controlling interest of a
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in corporation.69
Section 11, Article XII of the Constitution refers to the total common shares only or
to the total outstanding capital stock (combined total of common and non-voting In this regard, it would be apropos to state that since Filipinos own at least 60% of
preferred shares) of PLDT, a public utility."64 the outstanding shares of stock entitled to vote directors, which is what the
Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the
rights of ownership including, but not limited to, offering certain preferred shares
that may have greater economic interest to foreign investors - as the need for capital
for corporate pursuits (such as expansion), may be good for the corporation that they
own. Surely, these "true owners" will not allow any dilution of their ownership and
control if such move will not be beneficial to them.
As owners of the corporation, the economic benefits will necessarily accrue to them.
There is thus no logical reason why Filipino shareholders will allow foreigners to have
greater economic benefits than them. It is illogical to speculate that they will create
shares which have features that will give greater economic interests or benefits than
they are holding and not benefit from such offering, or that they will allow foreigners
to profit more than them from their own corporation - unless they are dummies. But,
Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in these petitions.
Notably, even if the shares of a particular public utility were owned 100% Filipino,
that does not discount the possibility of a dummy situation from arising. Hence, even
if the 60-40 ownership in favor of Filipinos rule is applied separately to each class of
shares of a public utility corporation, as the petitioners insist, the rule can easily be
side-stepped by a dummy relationship. In other words, even applying the 60-40
Filipino foreign ownership rule to each class of shares will not assure the lofty
purpose enunciated by petitioners.
The Court observed further in the Gamboa Decision that reinforcing this
interpretation of the term "capital", as referring to interests or shares entitled to
vote, is the definition of a Philippine national in the Foreign Investments Act of 1991
("FIA"), which is explained in the Implementing Rules and Regulations of the FIA ("FIA-
IRR"). The FIA-IRR provides:chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.
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, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals. 70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision
that:chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is "considered as non-Philippine national[s]."
x x x x
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is constitutionally required for the State's grant of
authority to operate a public utility. x x x71
Was the definition of the term "capital" in Section 11, Article XII of the 1987
Constitution declared for the first time by the Court in the Gamboa Decision modified
in the Gamboa Resolution?
The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages
(excluding the dissenting opinions of Associate Justices Velasco and Abad). For the
most part of the Gamboa Resolution, the Court, after reviewing SEC and
DOJ72 Opinions as well as the provisions of the FIA and its predecessor
statutes,73 reiterated that both the Voting Control Test and the Beneficial Ownership
Test must be applied to determine whether a corporation is a "Philippine
national"74 and that a "Philippine national," as defined in the FIA and all its
predecessor statutes, is "a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote," is owned by
Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60%
of its voting stock is owned by Filipino citizens."75 The Court also reiterated that,
from the deliberations of the Constitutional Commission, it is evident that the term
"capital" refers to controlling interest of a corporation,76 and the framers of the
Constitution intended public utilities to be majority Filipino-owned and controlled.
The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of
the term "capital", and this is quoted verbatim, to wit:chanRoblesvirtualLawlibrary
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the
Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as
Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA's implementing rules explain
that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of stocks, coupled with appropriate voting rights is essential."
In effect, the FIA clarifies, reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers to shares with
voting rights, as well as with full beneficial ownership. This is precisely because the
outstanding shares of stock entitled to
right to vote in the election of directors, coupled with full beneficial ownership of
vote in the election of directors
stocks, translates to effective control of a corporation.77
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution,
finally settled with the PIA's definition of "Philippine national" as expounded in the If at least a total of 120 of common shares and Class A preferred shares (in any
FIA-IRR in construing the term "capital" in Section 11, Article XII of the 1987 combination) are owned and controlled by Filipinos, Company X is compliant with the
Constitution. 60% of the voting rights in favor of Filipinos requirement of both SEC-MC No. 8 and
the Gamboa Decision.
The assailed SEC-MC No. 8.
SEC-MC No. 8 GAMBOA DECISION/RESOLUTION
The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which
provides:chanRoblesvirtualLawlibrary (2) 60% (required percentage of "Full beneficial ownership of 60
Section 2. All covered corporations shall, at all times, observe the constitutional or Filipino) applied to BOTH (a) the total percent of the outstanding capital
statutory ownership requirement. For purposes of determining compliance number of outstanding shares of stock, stock, coupled with 60 percent of the
therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) entitled to vote in the election of voting rights"81 or "Full beneficial
the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of ownership of the stocks, coupled with
directors; AND (b) the total number of outstanding shares of stock, whether or not outstanding shares of stock, whether appropriate voting rights x x x shares
entitled to vote in the election of directors.78 or not entitled to vote in the election of with voting rights, as well as with full
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the directors. beneficial ownership"82
controlling interest requirement. In fact, Section 2 goes beyond requiring a 60-40
ratio in favor of Filipino nationals in the voting stocks; it moreover requires the 60- If at least a total of 180 shares of all the outstanding capital stock of Company X are
40 percentage ownership in the total number of outstanding shares of stock, owned and controlled by Filipinos, provided that among those 180 shares a total of
whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's 120 of the common shares and Class A preferred shares (in any combination) are
unambiguous pronouncement that "[f]ull beneficial ownership of 60 percent of the owned and controlled by Filipinos, then Company X is compliant with both
outstanding capital stock, coupled with 60 percent of the voting rights is requirements of voting rights and beneficial ownership under SEC-MC No. 8 and
required."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave the Gamboa Decision and Resolution.
abuse of discretion.
From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in
A simple illustration involving Company X with three kinds of shares of stock, easily accordance with, the Gamboa Decision and Resolution.
shows how compliance with the requirements of SEC-MC No. 8 will necessarily result
to full and faithful compliance with the Gamboa Decision as well as While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full
the Gamboa Resolution. beneficial ownership of stocks requirement in the FIA, this will not, as it does not,
render it invalid meaning, it does not follow that the SEC will not apply this test in
The following is the composition of the outstanding capital stock of Company determining whether the shares claimed to be owned by Philippine nationals are
X:chanRoblesvirtualLawlibrary Filipino, i.e., are held by them by mere title or in full beneficial ownership. To be sure,
100 common shares the SEC takes its guiding lights also from the FIA and its implementing rules, the
100 Class A preferred shares (with right to elect directors) Securities Regulation Code (Republic Act No. 8799; "SRC") and its implementing
100 Class B preferred shares (without right to elect directors) rules.83
SEC-MC No. 8 GAMBOA DECISION
The full beneficial ownership test.
"shares of stock entitled to vote in the
(1) 60% (required percentage of The minority justifies the application of the 60-40 Filipino-foreign ownership rule
election of directors"80 (60% of the
Filipino) applied to the total number of separately to each class of shares of a public utility corporation in this
voting rights)
fashion:chanRoblesvirtualLawlibrary
x x x The words "own and control," used to qualify the minimum Filipino participation
in Section 11, Article XII of the Constitution, reflects the importance of Filipinos
having both the ability to influence the corporation through voting rights and
economic benefits. In other words, full ownership up to 60% of a public
utility encompasses both controland economic rights, both of which must stay in
Filipino hands. Filipinos, who own 60% of the controlling interest, must also own 60%
of the economic interest in a public utility.
x x x In mixed class or dual structured corporations, however, there is variance in the
proportion of stockholders' controlling interest visa-vis their economic ownership
rights. This resulting variation is recognized by the Implementing Rules and
Regulations (IRR) of the Securities Regulation Code, which defined beneficial
ownership as that may exist either through voting power and/or through investment
returns. By using and/or in defining beneficial ownership, the IRR, in effect,
recognizes a possible situation where voting power is not commensurate to
investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing
Rules and Regulations of the Securities Regulation Code ("SRC-IRR") is consistent with
the concept of"full beneficial ownership" in the FIA-IRR.
As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any
person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power (which includes
the power to vote or direct the voting of such security) and/or investment returns or
power (which includes the power to dispose of, or direct the disposition of such
security) x x x."84
While it is correct to state that beneficial ownership is that which may exist either
through voting power and/or investment returns, it does not follow, as espoused by
the minority opinion, that the SRC-IRR, in effect, recognizes a possible situation
where voting power is not commensurate to investment power. That is a wrong
syllogism. The fallacy arises from a misunderstanding on what the definition is for.
The "beneficial ownership" referred to in the definition, while it may ultimately and
indirectly refer to the overall ownership of the corporation, more pertinently refers
to the ownership of the share subject of the question: is it Filipino-owned or not?
As noted earlier, the FIA-IRR states:chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.
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, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals. 85
The emphasized portions in the foregoing provision is the equivalent of the so-called
"beneficial ownership test". That is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in the
context of the entire paragraph defining the term "Philippine national". Mere legal
title is not enough to meet the required Filipino equity, which means that it is not
sufficient that a share is registered in the name of a Filipino citizen or national, i.e.,
he should also have full beneficial ownership of the share. If the voting right of a
share held in the name of a Filipino citizen or national is assigned or transferred to
an alien, that share is not to be counted in the determination of the required Filipino
equity. In the same vein, if the dividends and other fruits and accessions of the share
do not accrue to a Filipino citizen or national, then that share is also to be excluded
or not counted.
In this regard, it is worth reiterating the Court's pronouncement in
the Gamboa Decision, which is consistent with the FIA-
IRR, viz:chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. x x x
x x x x
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is constitutionally required (or the State's grant of
authority to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing
pronouncement of the Court, to wit:chanRoblesvirtualLawlibrary
XII.
Final Word
x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and
held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights is essential."87
Given that beneficial ownership of the outstanding capital stock of the public utility
corporation has to be determined for purposes of compliance with the 60% Filipino
ownership requirement, the definition in the SRC-IRR can now be applied to
resolve only the question of who is the beneficial owner or who has beneficial
ownership of each "specific stock" of the said corporation. Thus, if a "specific stock"
is owned by a Filipino in the books of the corporation, but the stock's voting power
or disposing power belongs to a foreigner, then that "specific stock" will not be
deemed as "beneficially owned" by a Filipino.
Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote
the stock or direct another to vote for him), or the Filipino has the investment power
over the "specific stock" (he can dispose of the stock or direct another to dispose it
for him), or he has both (he can vote and dispose of the "specific stock" or direct
another to vote or dispose it for him), then such Filipino is the "beneficial owner" of
that "specific stock" and that "specific stock" is considered (or counted) as part of the
60% Filipino ownership of the corporation. In the end, all those "specific stocks" that
are determined to be Filipino (per definition of "beneficial owner" or "beneficial
ownership") will be added together and their sum must be equivalent to at least 60%
of the total outstanding shares of stock entitled to vote in the election of directors
and at least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR
is understood only in determining the respective nationalities of the outstanding
capital stock of a public utility corporation in order to determine its compliance with
the percentage of Filipino ownership required by the Constitution.
The restrictive re-interpretation of "capital" as insisted by the petitioners is
unwarranted.
Petitioners' insistence that the 60% Filipino equity requirement must be applied to
each class of shares is simply beyond the literal text and contemplation of Section 11,
Article XII of the 1987 Constitution, viz:chanRoblesvirtualLawlibrary
Sec. 11. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty
per centum or whose capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive in 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
common good so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.
As worded, effective control by Filipino citizens of a public utility is already assured
in the provision. With respect to a stock corporation engaged in the business of a
public utility, the constitutional provision mandates three safeguards: (1) 60% of its
capital must be owned by Filipino citizens; (2) participation of foreign investors in its
board of directors is limited to their proportionate share in its capital; and (3) all its
executive and managing officers must be citizens of the Philippines.
In the exhaustive review made by the Court in the Gamboa Resolution of the
deliberations of the Constitutional Commission, the opinions of the framers of the
1987 Constitution, the opinions of the SEC and the DOJ as well as the provisions of
the FIA, its implementing rules and its predecessor statutes, the intention to apply
the voting control test and the beneficial ownership test was not mentioned in
reference to "each class of shares." Even the Gamboa Decision was silent on this
point.
To be sure, the application of the 60-40 Filipino-foreign ownership requirement
separately to each class of shares, whether common, preferred non-voting, preferred
voting or any other class of shares fails to understand and appreciate the nature and
features of stocks as financial instruments. 88
There are basically only two types of shares or stocks, i.e., common stock and
preferred stock. However, the classes and variety of shares that a corporation may
issue are dictated by the confluence of the corporation's financial position and needs,
business opportunities, short-term and long term targets, risks involved, to name a
few; and they can be classified and re-classified from time to time. With respect to
preferred shares, there are cumulative preferred shares, non-cumulative preferred
shares, convertible preferred shares, participating preferred shares.
Because of the different features of preferred shares, it is required that the
presentation and disclosure of these financial instruments in financial statements
should be in accordance with the substance of the contractual arrangement and the
definitions of a financial liability, a financial asset and an equity instrument. 89
Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the
instrument includes no contractual obligation to deliver cash or another financial
asset to another entity, and (b) if the instrument will or may be settled in the issuer's
own equity instruments, it is either: (i) a non derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity instruments;
or (ii) a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own equity instruments. 91
The following are illustrations of how preferred shares should be presented and
disclosed:chanRoblesvirtualLawlibrary
Illustration - preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and
that have a mandatory redemption feature at a future date, the substance is that
they are a contractual obligation to deliver cash and, therefore, should be recognized
as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed
maturity, and where the issuer does not have a contractual obligation to make any
payment are equity. In this example even though both instruments are legally termed
preference shares they have different contractual terms and one is a financial liability
while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or
other equity instruments that varies so that the fair value of the entity's own equity
instruments to be received or delivered equals the fixed monetary amount of the
contractual right or obligation is a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled
(for instance, the issuer or the holder can choose settlement net in cash or by
exchanging shares for cash), it is a financial asset or a financial liability unless all of
the settlement alternatives would result in it being an equity instrument. [IAS
32.26]92
The fact that from an accounting standpoint, the substance or essence of the financial
instrument is the key determinant whether it should be categorized as a financial
liability or an equity instrument, there is no compelling reason why the same
treatment may not be recognized from a legal perspective. Thus, to require Filipino
shareholders to acquire preferred shares that are substantially debts, in order to
meet the "restrictive" Filipino ownership requirement that petitioners espouse, may
not bode well for the Philippine corporation and its Filipino shareholders.
Parenthetically, given the innumerable permutations that the types and classes of
stocks may take, requiring the SEC and other government agencies to keep track of
the ever-changing capital classes of corporations will be impracticable, if not
downright impossible. And the law does not require the impossible. (Lex non cogit ad
impossibilia.)93
That stock corporations are allowed to create shares of different classes with varying
features is a flexibility that is granted, among others, for the corporation to attract
and generate capital (funds) from both local and foreign capital markets. This access
to capital - which a stock corporation may need for expansion, debt relief/repayment,
working capital requirement and other corporate pursuits - will be greatly eroded
with further unwarranted limitations that are not articulated in the Constitution. The
intricacies and delicate balance between debt instruments (liabilities) and equity
(capital) that stock corporations need to calibrate to fund their business
requirements and achieve their financial targets are better left to the judgment of
their boards and officers, whose bounden duty is to steer their companies to financial
stability and profitability and who are ultimately answerable to their shareholders.
Going back to the illustration above, the restrictive meaning of the term "capital"
espoused by petitioners will definitely be complied with if 60% of each of the three
classes of shares of Company X, consisting of 100 common shares, 100 Class A
preferred shares (with right to elect directors) and 100 Class B preferred shares
(without right to elect directors), is owned by Filipinos. However, what if the 60%
Filipino ownership in each class of preferred shares, i.e., 60 Class A preferred shares
and 60 Class B preferred shares, is not fully subscribed or achieved because there are
not enough Filipino takers? Company X will be deprived of capital that would
otherwise be accessible to it were it not for this unwarranted "restrictive" meaning
of "capital".
The fact that all shares have the right to vote in 8 specific corporate actions as
provided in Section 6 of the Corporation Code does not per se justify the favorable
adoption of the restrictive re-interpretation of "capital" as the petitioners espouse.
As observed in the Gamboa Decision, viz:chanRoblesvirtualLawlibrary
The Corporation Code of the Philippines classifies shares as common or preferred,
thus:chanRoblesvirtualLawlibrary
Sec. 6. Classification of shares. The shares of stock of stock 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 incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a class
or series of shares which have complete voting rights. Any or all of the shares or series
of shares may have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles
of incorporation which are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with
the Securities and Exchange Commission.
x x x x
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Considering that common shares have voting rights which translate to control, as
Except as otherwise provided in the articles of incorporation and stated in the opposed to preferred shares which usually have no voting rights, the term "capital"
certificate of stock, each share shall be equal in all respects to every other share. in Section 11, Article XII of the Constitution refers only to common shares. However,
if the preferred shares also have the right to vote in the election of directors, then
Where the articles of incorporation provide for non voting shares in the cases allowed the term "capital" shall include such preferred shares because the right to participate
by this Code, the holders of such shares shall nevertheless be entitled to vote on the in the control or management of the corporation is exercised through the right to
following matters:cralawlawlibrary vote in the election of directors. In short, the term "capital" in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in the election of
1. Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary directors.

2. Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially As revealed in the deliberations of the Constitutional Commission, "capital" refers to
all of the corporate property;ChanRoblesVirtualawlibrary the voting stock or controlling interest of a corporation x x x.94
The Gamboa Decision held that preferred shares are to be factored in only if they are
4. Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary entitled to vote in the election of directors. If preferred shares have no voting rights,
then they cannot elect members of the board of directors, which wields control of
5. Increase or decrease of capital stock;ChanRoblesVirtualawlibrary the corporation. As to the right of non voting preferred shares to vote in the 8
instances enumerated in Section 6 of the Corporation Code, the Gamboa Decision
6. Merger or consolidation of the corporation with another corporation or other considered them but, in the end, did not find them significant in resolving the issue
corporations;ChanRoblesVirtualawlibrary of the proper interpretation of the word "capital" in Section 11, Article XII of the
Constitution.
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and Therefore, to now insist in the present case that preferred shares be regarded
differently from their unambiguous treatment in the Gamboa Decision is enough
8. Dissolution of the corporation. proof that the Gamboa Decision, which had attained finality more than 4 years ago,
is being drastically changed or expanded.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer In this regard, it should be noted that the 8 corporate matters enumerated in Section
only to stocks with voting rights. 6 of the Corporation Code require, at the outset, a favorable recommendation by the
Indisputably, one of the rights of a stockholder is the right to participate in the control management to the board. As mandated by Section 11, Article XII of the Constitution,
or management of the corporation. This is exercised through his vote in the election all the executive and managing officers of a public utility company must be Filipinos.
of directors because it is the board of directors that controls or manages the Thus, the all-Filipino management team must first be convinced that any of the 8
corporation. In the absence of provisions in the articles of incorporation denying corporate actions in Section 6 will be to the best interest of the company. Then, when
voting rights to preferred shares, preferred shares have the same voting rights as the all-Filipino management team recommends this to the board, a majority of the
common shares. However, preferred shareholders are often excluded from any board has to approve the recommendation and, as required by the Constitution,
control, that is, deprived of the right to vote in the election of directors and on other foreign participation in the board cannot exceed 40% of the total number of board
matters, on the theory that the preferred shareholders are merely investors in the seats. Since the Filipino directors comprise the majority, they, if united, do not even
corporation for income in the same manner as bondholders. In fact, under the need the vote of the foreign directors to approve the intended corporate act. After
Corporation Code only preferred or redeemable shares can be deprived of the right approval by the board, all the shareholders (with and without voting rights) will vote
to vote. Common shares cannot be deprived of the right to vote in any corporate on the corporate action. The required vote in the shareholders' meeting is 2/3 of the
meeting, and any provision in the articles of incorporation restricting the right of outstanding capital stock.95 Given the super majority vote requirement, foreign
common shareholders to vote is invalid. shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if
owning at least a third of the outstanding capital stock) must agree with Filipino
shareholders for the corporate action to be approved. The 2/3 voting requirement 81. Current data of the PSE show that, if the "Effective Control Test" were applied,
applies to all corporations, given the significance of the 8 corporate actions the total value of shares that would be deemed in excess of the foreign-ownership
contemplated in Section 6 of the Corporation Code. limits based on stock prices as of 30 April 2014 is One Hundred Fifty Nine Billion Six
Hundred Thirty Eight Million Eight Hundred Forty Five Thousand Two Hundred Six
In short, if the Filipino officers, directors and shareholders will not approve of the Pesos and Eighty Nine Cents (Php159,638,845,206.89).
corporate act, the foreigners are helpless.
82. The aforementioned value of investments would have to be discharged by foreign
Allowing stockholders holding preferred shares without voting rights to vote in the 8 holders, and consequently must be absorbed by Filipino investors. Needless to state,
corporate matters enumerated in Section 6 is an acknowledgment of their right of the lack of investments may lead to shutdown of the affected enterprises and to
ownership. If the owners of preferred shares without right to vote/elect directors are immeasurable consequences to the Philippine economy.98
not allowed to vote in any of those 8 corporate actions, then they will not be entitled In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached
to the appraisal right provided under Section 8196 of the Corporation Code in the Comment-in-Intervention dated May 30, 2016,99 SHAREPHIL further warns that
event that they dissent in the corporate act. As required in Section 82, the appraisal "[t]he restrictive re-interpretation of the term "capital" will result in massive forced
right can only be exercised by any stockholder who voted against the proposed divestment of foreign stockholdings in Philippine corporations."100SHAREPHIL
action. Thus, without recognizing the right of every stockholder to vote in the 8 explains:chanRoblesvirtualLawlibrary
instances enumerated in Section 6, the stockholder cannot exercise his appraisal 4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which
right in case he votes against the corporate action. In simple terms, the right to vote analyzed the implications of the ruling in Gamboa. The Market Research Study stated
in the 8 instances enumerated in Section 6 is more in furtherance of the stockholder's that:chanRoblesvirtualLawlibrary
right of ownership rather than as a mode of control. "If this thinking is applied and becomes established precedent, it would significantly
expand on the rules for determining nationality in partially nationalized industries. If
As to financial interest, giving short-lived preferred or superior terms to certain that were to happen, not only will PLDT's move to issue the 150m voting prefs be
classes or series of shares may be a welcome option to expand capital, without the inadequate to address the issue, a large number of listed companies with similar
Filipino shareholders putting up additional substantial capital and/or losing capital structures could also be affected."
ownership and control of the company. For shareholders who are not keen on the 4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos
creation of those shares, they may opt to avail themselves of their appraisal right. As (PhP158,000,000,000.00) worth of shares will have to be sold by foreign shareholders
acknowledged in the Gamboa Decision, preferred shareholders are merely investors in a forced divestment, if the obiter in Gamboa were to be implemented. Foreign
in the company for income in the same manner as bondholders. Without a lucrative shareholders of PLDT will have to divest One Hundred Three Billion Eight Hundred
package, including an attractive return of investment, preferred shares will not be Sixty Million Pesos (PhP103,860,000,000.00) worth of shares.
subscribed and the much-needed additional capital will be elusive. A too restrictive a. Foreign shareholders of Globe Telecom will have to divest Thirty
definition of "capital", one which was never contemplated in the GamboaDecision, Eight Billion Two Hundred Fifty Million Pesos
will surely have a dampening effect on the business milieu by eroding the flexibility (PhP38,250,000,000.00) worth of shares.
inherent in the issuance of preferred shares with varying terms and conditions. b. Foreign shareholders of Ayala Land will have to divest Seventeen
Consequently, the rights and prerogatives of the owners of the corporation will be Billion Five Hundred Fifty Million Pesos (PhP17,550,000,000.00)
unwarrantedly stymied. worth of shares.
c. Foreign shareholders of ICTSI will have to divest Six Billion Four
Moreover, the restrictive interpretation of the term "capital" would have a Hundred Ninety Million Pesos (PhP6,490,000,000.00) worth of
tremendous impact on the country as a whole and to all Filipinos. shares.
d. Foreign shareholders of MWC will have to divest Seven Billion
The PSE's Comment-in-Intervention dated June 16, 201497 warns Seven Hundred Fourteen Million Pesos (PhP7,714,000,000.00)
that:chanRoblesvirtualLawlibrary worth of shares.
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution 4.53. Clearly, the local stock market which has an average value turn-over of Seven
and adopting the supposed "Effective Control Test" will lead to disastrous Billion Pesos cannot adequately absorb the influx of shares caused by the forced
consequences to the Philippine stock market. divestment. As a result, foreign stockholders will have to sell these shares at bargain
prices just to comply with the Obiter.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-
vis the inability of the local stock market to absorb these shares will necessarily bring
immense downward pressure on the index. A domino-effect implosion of the
Philippine stock market and the Philippine economy, in general is not remote. x x x.101
Petitioners have failed to counter or refute these submissions of the PSE and
SHAREPHIL. These unrefuted observations indicate to the Court that a restrictive
interpretation - or rather, re-interpretation, of "capital", as already defined with
finality in the Gamboa Decision and Resolution - directly affects the well-being of the
country and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing]
burden [to] the Court."102 These observations by the PSE103 and SHAREPHIL,104 unless
refuted, must be considered by the Court to be valid and sound.
The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market
transactions affect the general public and the national economy. The rise and fall of
stock market indices reflect to a considerable degree the state of the economy.
Trends in stock prices tend to herald changes in business conditions. Consequently,
securities transactions are impressed with public interest x x x."106 The importance of
the stock market in the economy cannot simply be glossed over.
In view of the foregoing, the pronouncement of the Court in the Gamboa Resolution
- the constitutional requirement to apply uniformly and across the board to all classes
of shares, regardless of nomenclature and category, comprising the capital of a
corporation107 - is clearly an obiter dictum that cannot override the Court's
unequivocal definition of the term "capital" in both the Gamboa Decision and
Resolution.
Nowhere in the discussion of the definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution in the Gamboa Decision did the Court mention the 60%
Filipino equity requirement to be applied to each class of shares. The definition of
"Philippine national" in the FIA and expounded in its IRR, which the Court adopted in
its interpretation of the term "capital", does not support such application. In fact,
even the Final Word of the Gamboa Resolution does not even intimate or suggest
the need for a clarification or re-interpretation.
To revisit or even clarify the unequivocal definition of the term "capital" as referring
"only to shares of stock entitled to vote in the election of directors" and apply the
60% Filipino ownership requirement to each class of share is effectively and
unwarrantedly amending or changing the Gamboa Decision and Resolution.
The Gamboa Decision and Resolution Doctrine did NOT make any definitive ruling
that the 60% Filipino ownership requirement was intended to apply to each class of
share.
In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court
stated:chanRoblesvirtualLawlibrary
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse
of discretion, the petitioner should establish that the respondent court or tribunal
acted in a capricious, whimsical, arbitrary or despotic manner in the exercise of its
jurisdiction as to be equivalent to lack of jurisdiction. This is so because "grave abuse
of discretion" is well-defined and not an amorphous concept that may easily be
manipulated to suit one's purpose. In this connection, Yu v. Judge Reyes-Carpio, is
instructive:chanRoblesvirtualLawlibrary
The term "grave abuse of discretion" has a specific meaning. An act of a court or
tribunal can only be considered as with grave abuse of discretion when such act is
done in a "capricious or whimsical exercise of judgment as is equivalent to lack of
jurisdiction." The abuse of discretion must be so patent and gross as to amount to an
"evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law,
or to act at all in contemplation of law, as where the power is exercised in an arbitrary
and despotic manner by reason of passion and hostility." Furthermore, the use of a
petition for certiorari is restricted only to "truly extraordinary cases wherein the act
of the lower court or quasi-judicial body is wholly void." From the foregoing
definition, it is clear that the special civil action of certiorari under Rule 65 can only
strike an act down for having been done with grave abuse of discretion if
the petitioner could manifestly show that such act was patent and gross. x x x.
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in
issuing SEC-MC No. 8, acted in a capricious, whimsical, arbitrary or despotic manner
in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction or that the
SEC's abuse of discretion is so patent and gross as to amount to an evasion of a
positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all
in contemplation of law and the Gamboa Decision and Resolution. Petitioners
miserably failed in this respect.
The clear and unequivocal definition of "capital" in Gamboa has attained finality.
It is an elementary principle in procedure that the resolution of the court in a given
issue as embodied in the dispositive portion or fallo of a decision controls the
settlement of rights of the parties and the questions, notwithstanding statement in
the body of the decision which may be somewhat confusing, inasmuch as the
dispositive part of a final decision is definite, clear and unequivocal and can be wholly
given effect without need of interpretation or construction. 109
As explained above, the fallo or decretal/dispositive portions of both
the Gamboa Decision and Resolution are definite, clear and unequivocaL While there
is a passage in the body of the Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision - capitalized upon by petitioners to
espouse a restrictive re-interpretation of "capital" - the definiteness and clarity of
the fallo of the GamboaDecision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in voting
rights, privileges and restrictions."
The final judgment as rendered is the judgment of the court irrespective of all
seemingly contrary statements in the decision because at the root of the doctrine
that the premises must yield to the conclusion is, side by side with the need of
writing finis to litigations, the recognition of the truth that "the trained intuition of
the judge continually leads him to right results for which he is puzzled to give
unimpeachable legal reasons."110
Petitioners cannot, after Gamboa has attained finality, seek a belated correction or
reconsideration of the Court's unequivocal definition of the term "capital". At the
core of the doctrine of finality of judgments is that public policy and sound practice
demand that, at the risk of occasional errors, judgments of courts should become
final at some definite date fixed by law and the very objects for which courts were
instituted was to put an end to controversies. 111 Indeed, the definition of the term
"capital" in the fallo of the Gamboa Decision has acquired finality.
Because the SEC acted pursuant to the Court's pronouncements in both
the Gamboa Decision and Gamboa Resolution, then it could not have gravely abused
its discretion. That portion found in the body of the Gamboa Resolution which the
petitioners rely upon is nothing more than an obiter dictum and the SEC could not be
expected to apply it as it was not - is not - a binding pronouncement of the Court.112
Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of
immutability of judgment precludes the Court from re examining the definition of
"capital" under Section 11, Article XII of the Constitution. Under the doctrine of
finality and immutability of judgment, a decision that has acquired finality becomes
immutable and unalterable, and may no longer be modified in any respect, even if
the modification is meant to correct erroneous conclusions of fact and law, and even
if the modification is made by the court that rendered it or by the Highest Court of
the land. Any act that violates the principle must be immediately stricken
down.113 The petitions have not succeeded in pointing to any exceptions to the
doctrine of finality of judgments, under which the present case falls, to wit: (1) the
correction of clerical errors; (2) the so-called nunc pro tunc entries which cause no
prejudice to any party; (3) void judgments; and (4) whenever circumstances transpire
after the finality of the decision rendering its execution unjust and inequitable. 114
With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to
the Court's definition and interpretation of the term "capital". Accordingly, the
petitions must be denied for failing to show grave abuse of discretion in the issuance
of SEC-MC No. 8.
The petitions are second motions for Reconsideration, which are proscribed.
As Justice Bersamin further noted during the deliberations, the petitions are in reality
second motions for reconsideration prohibited by the Internal Rules of the Supreme
Court.115 The parties, particularly intervenors Gamboa, et al., could have filed a
motion for clarification in Gamboa in order to fill in the perceived shortcoming
occasioned by the non-inclusion in the dispositive portion of the GamboaResolution
of what was discussed in the body.116 The statement in the fallo of
the Gamboa Resolution to the effect that "[n]o further pleadings shall be
entertained" could not be a hindrance to a motion for clarification that sought an
unadulterated inquiry arising upon an ambiguity in the decision.117
Closing
Ultimately, the key to nationalism is in the individual. Particularly for a public utility
corporation or association, whether stock or non-stock, it starts with the Filipino
shareholder or member who, together with other Filipino shareholders or members
wielding 60% voting power, elects the Filipino director who, in turn, together with
other Filipino directors comprising a majority of the board of directors or trustees,
appoints and employs the all-Filipino management team. This is what is envisioned
by the Constitution to assure effective control by Filipinos. If the safeguards, which
are already stringent, fail, i.e., a public utility corporation whose voting stocks are
beneficially owned by Filipinos, the majority of its directors are Filipinos, and all its
managing officers are Filipinos, is proalien (or worse, dummies), then that is not the
fault or failure of the Constitution. It is the breakdown of nationalism in each of the
Filipino shareholders, Filipino directors and Filipino officers of that corporation. No
Constitution, no decision of the Court, no legislation, no matter how ultranationalistic
they are, can guarantee nationalism.
WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-
Intervention.
SO ORDERED.ChanRoblesVirtualawlibrary
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the
County Trust Company of New York, United States of America, of the estate of the
deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to
surrender to the ancillary administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the
legitimate claims of local creditors, the lower court, then presided by the Honorable
Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated February 11, 1964, as
well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the administration and
liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates
covering the 33,002 shares of stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said
corporation to issue new certificates in lieu thereof, the same to be delivered by said
corporation to either the incumbent ancillary administrator or to the Probate Division
of this Court."1
From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine
corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The
challenged order represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the attainment of specific
ends by the use of specific remedies, with full and ample support from legal doctrines
of weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet Consolidated,
Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among
others, two stock certificates covering 33,002 shares of appellant, the certificates
being in the possession of the County Trust Company of New York, which as noted, is
the domiciliary administrator of the estate of the deceased.2 Then came this portion
of the appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila; Lazaro A.
Marquez was appointed ancillary administrator, and on January 22, 1963, he was
substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary
administrator in New York and the ancillary administrator in the Philippines as to
which of them was entitled to the possession of the stock certificates in question. On
January 27, 1964, the Court of First Instance of Manila ordered the domiciliary
administrator, County Trust Company, to "produce and deposit" them with the
ancillary administrator or with the Clerk of Court. The domiciliary administrator did
not comply with the order, and on February 11, 1964, the ancillary administrator
petitioned the court to "issue an order declaring the certificate or certificates of
stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by
Benguet Consolidated, Inc., be declared [or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is
immaterial" as far as it is concerned as to "who is entitled to the possession of the
stock certificates in question; appellant opposed the petition of the ancillary
administrator because the said stock certificates are in existence, they are today in
the possession of the domiciliary administrator, the County Trust Company, in New
York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot
be declared or considered as lost. Moreover, it would allege that there was a failure
to observe certain requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The
challenged order constitutes an emphatic affirmation of judicial authority sought to
be emasculated by the wilful conduct of the domiciliary administrator in refusing to
accord obedience to a court decree. How, then, can this order be stigmatized as
illegal?
As is true of many problems confronting the judiciary, such a response was called for
by the realities of the situation. What cannot be ignored is that conduct bordering on
wilful defiance, if it had not actually reached it, cannot without undue loss of judicial
prestige, be condoned or tolerated. For the law is not so lacking in flexibility and
resourcefulness as to preclude such a solution, the more so as deeper reflection
would make clear its being buttressed by indisputable principles and supported by
the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of
the judiciary no less than that of the country. Through this challenged order, there is
thus dispelled the atmosphere of contingent frustration brought about by the
persistence of the domiciliary administrator to hold on to the stock certificates after
it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court
by entering its appearance through counsel on June 27, 1963, and filing a petition for
relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness
to what was decreed. For without it, what it had been decided would be set at naught
and nullified. Unless such a blatant disregard by the domiciliary administrator, with
residence abroad, of what was previously ordained by a court order could be thus
remedied, it would have entailed, insofar as this matter was concerned, not a partial
but a well-nigh complete paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee
ancillary administrator to gain control and possession of all assets of the decedent
within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his
duty to settle her estate and satisfy the claims of local creditors. 5 As Justice Tuason
speaking for this Court made clear, it is a "general rule universally recognized" that
administration, whether principal or ancillary, certainly "extends to the assets of a
decedent found within the state or country where it was granted," the corollary being
"that an administrator appointed in one state or country has no power over property
in another state or country."6
It is to be noted that the scope of the power of the ancillary administrator was, in an
earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more
than one administration of an estate. When a person dies intestate owning property
in the country of his domicile as well as in a foreign country, administration is had in
both countries. That which is granted in the jurisdiction of decedent's last domicile is
termed the principal administration, while any other administration is termed the
ancillary administration. The reason for the latter is because a grant of administration
does not ex proprio vigore have any effect beyond the limits of the country in which
it is granted. Hence, an administrator appointed in a foreign state has no authority in
the [Philippines]. The ancillary administration is proper, whenever a person dies,
leaving in a country other than that of his last domicile, property to be administered
in the nature of assets of the deceased liable for his individual debts or to be
distributed among his heirs."7
It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing
in her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is
equally beyond question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of
stock cannot therefore be considered in any wise as immune from lawful court
orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds
application. "In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled [here]." To the force of the above
undeniable proposition, not even appellant is insensible. It does not dispute it. Nor
could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive
fashion for the legality of the challenged order, how does appellant, Benguet
Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of
precisely demonstrating the contrary? It would assign as the basic error allegedly
committed by the lower court its "considering as lost the stock certificates covering
33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9 More
specifically, appellant would stress that the "lower court could not "consider as lost"
the stock certificates in question when, as a matter of fact, his Honor the trial Judge
knew, and does know, and it is admitted by the appellee, that the said stock
certificates are in existence and are today in the possession of the domiciliary
administrator in New York."10
There may be an element of fiction in the above view of the lower court. That
certainly does not suffice to call for the reversal of the appealed order. Since there is
a refusal, persistently adhered to by the domiciliary administrator in New York, to
deliver the shares of stocks of appellant corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing unreasonable or
arbitrary in considering them as lost and requiring the appellant to issue new
certificates in lieu thereof. Thereby, the task incumbent under the law on the
ancillary administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to
depend on the uncontrolled discretion of the party or entity, in this case domiciled
abroad, which thus far has shown the utmost persistence in refusing to yield
obedience. Certainly, appellant would not be heard to contend in all seriousness that
a judicial decree could be treated as a mere scrap of paper, the court issuing it being
powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did
not correspond exactly with the facts. To be more blunt, the quality of truth may be
lacking in such a conclusion arrived at. It is to be remembered however, again to
borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of
legitimate ends have played an important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were
devices to advance the ends of justice, [even if] clumsy and at times
offensive."12 Some of them have persisted even to the present, that eminent jurist,
noting "the quasi contract, the adopted child, the constructive trust, all of flourishing
vitality, to attest the empire of "as if" today."13 He likewise noted "a class of fictions
of another order, the fiction which is a working tool of thought, but which at times
hides itself from view till reflection and analysis have brought it to the light." 14
What cannot be disputed, therefore, is the at times indispensable role that fictions
as such played in the law. There should be then on the part of the appellant a further
refinement in the catholicity of its condemnation of such judicial technique. If ever
an occasion did call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded with apparent
impunity, this is it. What is thus most obvious is that this particular alleged error does
not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention
by its invoking one of the provisions of its by-laws which would set forth the
procedure to be followed in case of a lost, stolen or destroyed stock certificate; it
would stress that in the event of a contest or the pendency of an action regarding
ownership of such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would await the "final
decision by [a] court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion to apply such
by-law. It is admitted that the foreign domiciliary administrator did not appeal from
the order now in question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who is entitled to the
possession of the stock certificates ..." Even if such were not the case, it would be a
legal absurdity to impart to such a provision conclusiveness and finality. Assuming
that a contrariety exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a
statute, to which, however, the judiciary must yield deference, when appropriately
invoked and deemed applicable. It would be most highly unorthodox, however, if a
corporate by-law would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless
the appealed order be set aside for its inconsistency with one of its by-laws does not
impress us. Its obedience to a lawful court order certainly constitutes a valid defense,
assuming that such apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have developed gives
substance to such a fear. Gossamer possibilities of a future prejudice to appellant do
not suffice to nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught
with implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being
created by operation of law...."16 It owes its life to the state, its birth being purely
dependent on its will. As Berle so aptly stated: "Classically, a corporation was
conceived as an artificial person, owing its existence through creation by a sovereign
power."17 As a matter of fact, the statutory language employed owes much to Chief
Justice Marshall, who in the Dartmouth College decision defined a corporation
precisely as "an artificial being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could summarize the matter thus: "A corporation
is not in fact and in reality a person, but the law treats it as though it were a person
by process of fiction, or by regarding it as an artificial person distinct and separate
from its individual stockholders.... It owes its existence to law. It is an artificial person
created by law for certain specific purposes, the extent of whose existence, powers
and liberties is fixed by its charter."19Dean Pound's terse summary, a juristic person,
resulting from an association of human beings granted legal personality by the state,
puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which
to quote from Friedmann, "is the reality of the group as a social and legal entity,
independent of state recognition and concession." 21 A corporation as known to
Philippine jurisprudence is a creature without any existence until it has received the
imprimatur of the state according to law. It is logically inconceivable therefore that it
will have rights and privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of its state organs,
certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law
still of persuasive authority in our jurisdiction, comes more often within the ken of
the judiciary than the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to
confer upon it not autonomy which may be conceded but license which cannot be
tolerated. It is to argue that it may, when so minded, overrule the state, the source
of its very existence; it is to contend that what any of its governmental organs may
lawfully require could be ignored at will. So extravagant a claim cannot possibly merit
approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that
in a guardianship proceedings then pending in a lower court, the United States
Veterans Administration filed a motion for the refund of a certain sum of money paid
to the minor under guardianship, alleging that the lower court had previously granted
its petition to consider the deceased father as not entitled to guerilla benefits
according to a determination arrived at by its main office in the United States. The
motion was denied. In seeking a reconsideration of such order, the Administrator
relied on an American federal statute making his decisions "final and conclusive on
all questions of law or fact" precluding any other American official to examine the
matter anew, "except a judge or judges of the United States
court."23 Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of
the opinion that the appeal should be rejected. The provisions of the U.S. Code,
invoked by the appellant, make the decisions of the U.S. Veterans' Administrator final
and conclusive when made on claims property submitted to him for resolution; but
they are not applicable to the present case, where the Administrator is not acting as
a judge but as a litigant. There is a great difference between actions against the
Administrator (which must be filed strictly in accordance with the conditions that are
imposed by the Veterans' Act, including the exclusive review by United States courts),
and those actions where the Veterans' Administrator seeks a remedy from our courts
and submits to their jurisdiction by filing actions therein. Our attention has not been
called to any law or treaty that would make the findings of the Veterans'
Administrator, in actions where he is a party, conclusive on our courts. That, in effect,
would deprive our tribunals of judicial discretion and render them mere subordinate
instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final
and conclusive, determinations made by foreign governmental agencies. It is
infinitely worse if through the absence of any coercive power by our courts over
juridical persons within our jurisdiction, the force and effectivity of their orders could
be made to depend on the whim or caprice of alien entities. It is difficult to imagine
of a situation more offensive to the dignity of the bench or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition to which
appellant Benguet Consolidated seems to be firmly committed as shown by its failure
to accept the validity of the order complained of; it seeks its reversal. Certainly we
must at all pains see to it that it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative response from
us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal cannot succeed.
It is always easy to conjure extreme and even oppressive possibilities. That is not
decisive. It does not settle the issue. What carries weight and conviction is the result
arrived at, the just solution obtained, grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of realism requires. For
through the appealed order, the imperative requirement of justice according to law
is satisfied and national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the
Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-
appelant Benguet Consolidated, Inc.
Makalintal, Zaldivar and Capistrano, JJ., concur.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ., concur in the result.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION
and PUERTO AZUL LAND, INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of
enforcing the Revised Securities Act, and all other duties assigned to it by pertinent
laws. Among its inumerable functions, and one of the most important, is the
supervision of all corporations, partnerships or associations, who are grantees of
primary franchise and/or a license or permit issued by the government to operate in
the Philippines. 2 Just how far this regulatory authority extends, particularly, with
regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of
the Securities and Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in
its stock market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to
offer its shares to the public in order to raise funds allegedly to develop its properties
and pay its loans with several banking institutions. In January, 1995, PALI was issued
a Permit to Sell its shares to the public by the Securities and Exchange Commission
(SEC). To facilitate the trading of its shares among investors, PALI sought to course
the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which
purpose it filed with the said stock exchange an application to list its shares, with
supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's
listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of
Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming
that the late President Marcos was the legal and beneficial owner of certain
properties forming part of the Puerto Azul Beach Hotel and Resort Complex which
PALI claims to be among its assets and that the Ternate Development Corporation,
which is among the stockholders of PALI, likewise appears to have been held and
continue to be held in trust by one Rebecco Panlilio for then President Marcos and
now, effectively for his estate, and requested PALI's application to be deferred. PALI
was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel
and Resort Complex were not claimed by PALI as its assets. On the contrary, the
resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country
Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation
owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to
the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby
implying that they are also asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for comments on
the letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed
that the Marcoses received a Temporary Restraining Order on the same date,
enjoining the Marcoses from, among others, "further impeding, obstructing, delaying
or interfering in any manner by or any means with the consideration, processing and
approval by the PSE of the initial public offering of PALI." The TRO was issued by Judge
Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561,
pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE
reached its decision to reject PALI's application, citing the existence of serious claims,
issues and circumstances surrounding PALI's ownership over its assets that adversely
affect the suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting
Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by
the PSE in the application of PALI for the listing of its shares with the PSE, and
requesting that the SEC, in the exercise of its supervisory and regulatory powers over
stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's
listing application and institute such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto
the letter of PALI and directing the PSE to file its comments thereto within five days
from its receipt and for its authorized representative to appear for an "inquiry" on
the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its
comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the
Commissioner's authority and jurisdiction under Section 3 of the
Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m)
of Presidential Decree No. 902-A, the decision of the Board of
Governors of the Philippine Stock Exchange denying the listing of
shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE is
hereby ordered to immediately cause the listing of the PALI shares
in the Exchange, without prejudice to its authority to require PALI
to disclose such other material information it deems necessary for
the protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to reconsider its order dated April 24, 1996, and
in the light of recent developments on the adverse claim against
the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the
investing public. In this regard, PALI is hereby ordered to amend its
registration statements filed with the Commission to incorporate
the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996
a Petition for Review (with Application for Writ of Preliminary Injunction and
Temporary Restraining Order), assailing the above mentioned orders of the SEC,
submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE
ACTED IN AN ARBITRARY AND ABUSIVE MANNER
IN DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL
AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS
AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE OF
THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently,
a Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment
and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the
PSE's Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look
into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised
Securities Act in relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section
38(b)5 of the Revised Securities Act, and for the purpose of ensuring fair
administration of the exchange. Both as a corporation and as a stock exchange, the
petitioner is subject to public respondent's jurisdiction, regulation and control.
Accepting the argument that the public respondent has the authority merely to
supervise or regulate, would amount to serious consequences, considering that the
petitioner is a stock exchange whose business is impressed with public interest.
Abuse is not remote if the public respondent is left without any system of control. If
the securities act vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock exchanges; the right
to supervise and regulate the same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities, then the law certainly granted to
the public respondent the plenary authority over the petitioner; and the power of
review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and
abusive manner in disapproving the application of PALI for listing
of its shares in the face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules
and full disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability
for listing of shares, PSE has failed to justify why it acted differently
on the application of PALI, as compared to the IPOs of other
companies similarly situated that were allowed listing in the
Exchange;
3. It appears that the claims and issues on the title to PALI's
properties were even less serious than the claims against the assets
of the other companies in that, the assertions of the Marcoses that
they are owners of the disputed properties were not substantiated
enough to overcome the strength of a title to properties issued
under the Torrens System as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction
seeking to nullify PALI's ownership over the disputed properties,
neither has the government instituted recovery proceedings
against these properties. Yet the import of PSE's decision in
denying PALI's application is that it would be PALI, not the
Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval
Reservation does not inspire belief. The point is, the PALI properties are now titled.
A property losses its public character the moment it is covered by a title. As a matter
of fact, the titles have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened considering that the one
year period has already passed. Lastly, the determination of what standard to apply
in allowing PALI's application for listing, whether the discretion method or the system
of public disclosure adhered to by the SEC, should be addressed to the Securities
Commission, it being the government agency that exercises both supervisory and
regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant
Petition for Review on Certiorari, taking exception to the rulings of the SEC and the
Court of Appeals. Respondent PALI filed its Comment to the petition on October 17,
1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997.
The Office of the Solicitor General, representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In answer to the PCGG's motion
for leave to file petition for intervention, PALI filed its Comment thereto on January
17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of
respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).
On May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to
order the PSE to list the shares of PALI in the stock exchange. Under presidential
decree No. 902-A, the powers of the SEC over stock exchanges are more limited as
compared to its authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to reverse the decisions
of the stock exchange. Authorities are in abundance even in the United States, from
which the country's security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in turn are given
more lee-way in making the decision whether or not to allow corporations to offer
their stock to the public through the stock exchange. This is in accord with the
"business judgment rule" whereby the SEC and the courts are barred from intruding
into business judgments of corporations, when the same are made in good faith. the
said rule precludes the reversal of the decision of the PSE to deny PALI's listing
application, absent a showing of bad faith on the part of the PSE. Under the listing
rules of the PSE, to which PALI had previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the discretion to
accept or reject the issuer's listing application if the PSE determines that the listing
shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations,
nor with corporations whose properties are under sequestration. A reading of
Republic of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would
reveal that the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol Development Corporation
(MSDC). are under sequestration by the PCGG, and subject of forfeiture proceedings
in the Sandiganbayan. This ruling of the Court is the "law of the case" between the
Republic and TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership
over its properties can no longer be questioned, since certificates of title have been
issued to PALI and more than one year has since lapsed, is erroneous and ignores well
settled jurisprudence on land titles. That a certificate of title issued under the Torrens
System is a conclusive evidence of ownership is not an absolute rule and admits
certain exceptions. It is fundamental that forest lands or military reservations are
non-alienable. Thus, when a title covers a forest reserve or a government reservation,
such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy
of "full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence
of a clear mandate for the effectivity of such policy. As it is, the case records reveal
the truth that PALI did not comply with the listing rules and disclosure requirements.
In fact, PALI's documents supporting its application contained misrepresentations
and misleading statements, and concealed material information. The matter of
sequestration of PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that
although it is clothed with the markings of a corporate entity, it functions as the
primary channel through which the vessels of capital trade ply. The PSE's relevance
to the continued operation and filtration of the securities transactions in the country
gives it a distinct color of importance such that government intervention in its affairs
becomes justified, if not necessarily. Indeed, as the only operational stock exchange
in the country today, the PSE enjoys a monopoly of securities transactions, and as
such, it yields an immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it
wise to give special treatment to the administration and regulation of stock
exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC
the special mandate to be vigilant in the supervision of the affairs of stock exchanges
so that the interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold
the SEC's challenged control authority over the petitioner PSE even as it provides that
"the Commission shall have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to operate in the
Philippines. . ." The SEC's regulatory authority over private corporations encompasses
a wide margin of areas, touching nearly all of a corporation's concerns. This authority
springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied
from or be considered as necessary or incidental to the carrying out of the SEC's
express power to insure fair dealing in securities traded upon a stock exchange or to
ensure the fair administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities
may be encouraged and protected, and their activities for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision
of the PSE to deny the application for listing in the stock exchange of the private
respondent PALI. The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded or not in the
stock exchange. This is in line with the SEC's mission to ensure proper compliance
with the laws, such as the Revised Securities Act and to regulate the sale and
disposition of securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public
respondent to review petitioner's denial of the listing. Being a stock
exchange, the petitioner performs a function that is vital to the
national economy, as the business is affected with public interest.
As a matter of fact, it has often been said that the economy moves
on the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate which and
how many users are allowed to sell securities thru the facilities of
a stock exchange, if allowed to interpret its own rules liberally as it
may please. Petitioner can either allow or deny the entry to the
market of securities. To repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence, considering public
interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other
pertinent laws, has entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not otherwise vested in some
other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the
absolute control of the SEC. The PSE is, alter all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved business. One of
the PSE's main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter (or not to enter) into
contracts with third persons, and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as
a collective body, it waives no constitutional immunities and perquisites appropriate
to such a body. 11 As to its corporate and management decisions, therefore, the state
will generally not interfere with the same. Questions of policy and of management
are left to the honest decision of the officers and directors of a corporation, and the
courts are without authority to substitute their judgment for the judgment of the
board of directors. The board is the business manager of the corporation, and so long
as it acts in good faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSE's decision in matters of application for listing
in the market, the SEC may exercise such power only if the PSE's judgment is attended
by bad faith. In Board of Liquidators vs. Kalaw,13 it was held that bad faith does not
simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the
qualification of PALI to sell its shares to the public through the stock exchange. During
the time for receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his family who claim
the properties of the private respondent to be part of the Marcos estate. In time, the
PCGG confirmed this claim. In fact, an order of sequestration has been issued
covering the properties of PALI, and suit for reconveyance to the state has been filed
in the Sandiganbayan Court. How the properties were effectively transferred, despite
the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general
public. The purpose of the Revised Securities Act, after all, is to give adequate and
effective protection to the investing public against fraudulent representations, or
false promises, and the imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to
acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act,
was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to obtain
capital through honest presentation against competition from
crooked promoters and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities & Exchange Commission, p.
14).
As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by
requirement of that their details be revealed; (2) placing the
market during the early stages of the offering of a security a body
of information, which operating indirectly through investment
 services and expert investors, will tend to produce a more accurate
appraisal of a security, . . . Thus, the Commission may refuse to
permit a registration statement to become effective if it appears
on its face to be incomplete or inaccurate in any material respect,
and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to
include any untrue statement of a material fact or to omit to state
any material fact required to be stated therein or necessary to
make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and
goodwill, and it has the right to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact through its facilities. It
was reasonable for the PSE, therefore, to exercise its judgment in the manner it
deems appropriate for its business identity, as long as no rights are trampled upon,
and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism
is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer
be assailed is of no moment. At this juncture, there is the claim that the properties
were owned by TDC and MSDC and were transferred in violation of sequestration
orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses
that such properties belong to the Marcos estate, and were held only in trust by
Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to
naval and forest reserves, and therefore beyond private dominion. If any of these
claims is established to be true, the certificates of title over the subject properties
now held by PALI map be disregarded, as it is an established rule that a registration
of a certificate of title does not confer ownership over the properties described
therein to the person named as owner. The inscription in the registry, to be effective,
must be made in good faith. The defense of indefeasibility of a Torrens Title does not
extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing
the application of PALI, the true ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that the uncertainty of the
properties' ownership and alienability exists, and this puts to question the
qualification of PALI's public offering. In sum, the Court finds that the SEC had acted
arbitrarily in arrogating unto itself the discretion of approving the application for
listing in the PSE of the private respondent PALI, since this is a matter addressed to
the sound discretion of the PSE, a corporation entity, whose business judgments are
respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to determine, but is
left to the sound discretion of the Securities and Exchange Commission. In mandating
the SEC to administer the Revised Securities Act, and in performing its other functions
under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the
SEC the power to promulgate such rules and regulations as it may consider
appropriate in the public interest for the enforcement of the said laws. The second
paragraph of Section 4 of the said law, on the other hand, provides that no security,
unless exempt by law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance with the rules and
regulations that shall be promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as such, is given ample
authority in determining appropriate policies. Pursuant to this regulatory authority,
the SEC has manifested that it has adopted the policy of "full material disclosure"
where all companies, listed or applying for listing, are required to divulge truthfully
and accurately, all material information about themselves and the securities they sell,
for the protection of the investing public, and under pain of administrative, criminal
and civil sanctions. In connection with this, a fact is deemed material if it tends to
induce or otherwise effect the sale or purchase of its securities. 15 While the
employment of this policy is recognized and sanctioned by the laws, nonetheless, the
Revised Securities Act sets substantial and procedural standards which a proposed
issuer of securities must satisfy. 16 Pertinently, Section 9 of the Revised Securities Act
sets forth the possible Grounds for the Rejection of the registration of a security:
— The Commission may reject a registration statement and refuse
to issue a permit to sell the securities included in such registration
statement if it finds that —
(1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue statement
of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial
condition;
(ii) has violated or has not complied with the
provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the
Commission;
(iii) has failed to comply with any of the
applicable requirements and conditions that the
Commission may, in the public interest and for
the protection of investors, impose before the
security can be registered;
(iv) has been engaged or is engaged or is about to
engage in fraudulent transaction;
(v) is in any way dishonest or is not of good
repute; or
 (vi) does not conduct its business in accordance
with law or is engaged in a business that is illegal
or contrary to government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be
sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to be such officer, director
or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the
prejudice of the public interest or as a fraud upon the purchasers or
investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make
the registration and issuance of securities dependent, to a certain extent, on the
merits of the securities themselves, and of the issuer, to be determined by the
Securities and Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless securities, and the
SEC is mandated by law to safeguard these interests, following the policies and rules
therefore provided. The absolute reliance on the full disclosure method in the
registration of securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has failed to support
the propriety of the issue of its shares with unfailing clarity, thereby lending support
to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for public offerings
of corporations wishing to do so. However, the SEC must recognize and implement
the mandate of the law, particularly the Revised Securities Act, the provisions of
which cannot be amended or supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection,
discounting, therefore, any imputation of arbitrariness and whimsical animation on
its part. Its action in refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the
Securities and Exchange Commission dated July 27, 1996 and April 24, 1996
respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby
ENTERED, affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.
G.R. No. L-19891 July 31, 1964
J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN, petitioners,
vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First Instance of
Manila, respondents.
Felipe N. Aurea for petitioners.
Tañada, Teehankee and Carreon for respondent Imperial Insurance, Inc.
PAREDES, J.:
Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an
establishment duly franchised by the Congress of the Philippines, to conduct a
messenger and delivery express service. On July 12, 1961, the respondent Imperial
Insurance, Inc., presented with the CFI of Manila a complaint (Civ. Case No. 47520),
for sum of money against the petitioner corporation. After the defendants therein
have submitted their Answer, the parties entered into a Compromise Agreement,
assisted by their respective counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary
indebtedness to the PLAINTIFF in the full sum of PESOS SIXTY ONE
THOUSAND ONE HUNDRED SEVENTY-TWO & 32/100 (P61,172.32),
Philippine Currency, itemized as follows:
a) Principal P50,000.00
b) Interest at 12% per annum 5,706.14
c) Liquidated damages at 7% per annum 3,330.58
d) Costs of suit 135.60
e) Attorney's fees 2,000.00
2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and
hereby promise to pay their aforementioned obligation to the PLAINTIFF at
its business address at 301-305 Banquero St., (Ground Floor), Regina
Building, Escolta, Manila, within sixty (60) days from March 16, 1962 or on
or before May 14, 1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total
amount of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY TWO &
32/100 (P61,172.32), Philippine Currency, for any reason whatsoever, on
May 14, 1962, the PLAINTIFF shall be entitled, as a matter of right, to move
for the execution of the decision to be rendered in the above-entitled case
by this Honorable Court based on this COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment embodying the contents of
the said compromise agreement, the dispositive portion of which reads —
WHEREFORE, the Court hereby approves the above-quoted compromise
agreement and renders judgment in accordance therewith, enjoining the
parties to comply faithfully and strictly with the terms and conditions
thereof, without special pronouncement as to costs.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without prejudice
to the parties adducing other evidence to prove their case not covered by
this stipulation of facts. 1äwphï1.ñët
On May 15, 1962, one day after the date fixed in the compromise agreement, within
which the judgment debt would be paid, but was not, respondent Imperial Insurance
Inc., filed a "Motion for the Insurance of a Writ of Execution". On May 23, 1962, a
Writ of Execution was issued by respondent Sheriff of Manila and on May 26, 1962,
Notices of Sale were sent out for the auction of the personal properties of the
petitioner J.R.S. Business Corporation. On June 2, 1962, a Notice of Sale of the "whole
capital stocks of the defendants JRS Business Corporation, the business name, right
of operation, the whole assets, furnitures and equipments, the total liabilities, and
Net Worth, books of accounts, etc., etc." of the petitioner corporation was, handed
down. On June 9, the petitioner, thru counsel, presented an "Urgent Petition for
Postponement of Auction Sale and for Release of Levy on the Business Name and
Right to Operate of Defendant JRS Business Corporation", stating that petitioners
were busy negotiating for a loan with which to pay the judgment debt; that the
judgment was for money only and, therefore, plaintiff (respondent Insurance
Company) was not authorized to take over and appropriate for its own use, the
business name of the defendants; that the right to operate under the franchise, was
not transferable and could not be considered a personal or immovable, property,
subject to levy and sale. On June 10, 1962, a Supplemental Motion for Release of
Execution, was filed by counsel of petitioner JRS Business Corporation, claiming that
the capital stocks thereof, could not be levied upon and sold under execution. Under
date of June 20, 1962, petitioner's counsel presented a pleading captioned "Very
Urgent Motion for Postponement of Public Auction Sale and for Ruling on Motion for
Release of Levy on the Business Name, Right to Operate and Capital Stocks of JRS
Business Corporation". The auction sale was set for June 21, 1962. In said motion,
petitioners alleged that the loan they had applied for, was to be secured within the
next ten (10) days, and they would be able to discharge the judgment debt.
Respondents opposed the said motion and on June 21, 1962, the lower court denied
the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business Corporation at
1341 Perez St., Paco, Manila, all the properties of said corporation contained in the
Notices of Sale dated May 26, 1962, and June 2, 1962 (the latter notice being for the
whole capital stocks of the defendant, JRS Business Corporation, the business name,
right of operation, the whole assets, furnitures and equipments, the total liabilities
and Net Worth, books of accounts, etc., etc.), were bought by respondent Imperial
Insurance, Inc., for P10,000.00, which was the highest bid offered. Immediately after
the sale, respondent Insurance Company took possession of the proper ties and
started running the affairs and operating the business of the JRS Business
Corporation. Hence, the present appeal.
It would seem that the matters which need determination are (1) whether the
respondent Judge acted without or in excess of his jurisdiction or with grave abuse
of discretion in promulgating the Order of June 21, 1962, denying the motion for
postponement of the scheduled sale at public auction, of the properties of petitioner;
and (2) whether the business name or trade name, franchise (right to operate) and
capital stocks of the petitioner are properties or property rights which could be the
subject of levy, execution and sale.
The respondent Court's act of postponing the scheduled sale was within the
discretion of respondent Judge, the exercise of which, one way or the other, did not
constitute grave abuse of discretion and/or excess of jurisdiction. There was a
decision rendered and the corresponding writ of execution was issued. Respondent
Judge had jurisdiction over the matter and erroneous conclusions of law or fact, if
any, committed in the exercise of such jurisdiction are merely errors of judgment,
not correctible by certiorari (Villa Rey Transit v. Bello, et al., L-18957, April 23, 1963,
and cases cited therein.)
The corporation law, on forced sale of franchises, provides —
Any franchise granted to a corporation to collect tolls or to occupy, enjoy,
or use public property or any portion of the public domain or any right of
way over public property or the public domain, and any rights and privileges
acquired under such franchise may be levied upon and sold under execution,
together with the property necessary for the enjoyment, the exercise of the
powers, and the receipt of the proceeds of such franchise or right of way, in
the same manner and with like effect as any other property to satisfy any
judgment against the corporation: Provided, That the sale of the franchise
or right of way and the property necessary for the enjoyment, the exercise
of the powers, and the receipt of the proceeds of said franchise or right of
way is especially decreed and ordered in the judgment: And provided,
further, That the sale shall not become effective until confirmed by the court
after due notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held —
The first question then for decision is the meaning of the word "franchise"
in the statute.
"A franchise is a special privilege conferred by governmental
authority, and which does not belong to citizens of the country
generally as a matter of common right. ... Its meaning depends
more or less upon the connection in which the word is employed
and the property and corporation to which it is applied. It may have
different significations.
"For practical purposes, franchises, so far as relating to
corporations, are divisible into (1) corporate or general franchises;
and (2) special or secondary franchises. The former is the franchise
to exist as a corporation, while the latter are certain rights and
privileges conferred upon existing corporations, such as the right
to use the streets of a municipality to lay pipes or tracks, erect poles
or string wires." 2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p.
160; Adams v. Yazon & M. V. R. Co., 24 So. 200, 317, 28 So. 956, 77
Miss. 253, 60 L.R.A. 33 et seq.
The primary franchise of a corporation that is, the right to exist as such, is
vested "in the individuals who compose the corporation and not in the
corporation itself" (14 C.J. pp. 160, 161; Adams v. Railroad, supra; 2
Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3 Thompson on Corporations
2d Ed.] Secs. 2863, 2864), and cannot be conveyed in the absence of a
legislative authority so to do (14A CJ. 543, 577; 1 Fletcher's Cyc. Corp. Sec.
1224; Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837;
Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d.
1102, 6 Ann. Cas. 253; Arthur v. Commercial & Railroad Bank, 9 Smedes &
M. 394, 48 Am. Dec. 719), but the specify or secondary franchises of a
corporation are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of its
property (Adams v. Railroad, supra; 14A C.J. 542, 557; 3 Thompson on Corp.
[2nd Ed.] Sec. 2909), except such special or secondary franchises as are
charged with a public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3
Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R.
Bank, supra; McAllister v. Plant, 54 Miss. 106).
The right to operate a messenger and express delivery service, by virtue of a
legislative enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled
"An Act granting the JRS Business Corporation a franchise to conduct a messenger
and express service)" and, as such, under our corporation law, is subject to levy and
sale on execution together and including all the property necessary for the
enjoyment thereof. The law, however, indicates the procedure under which the same
(secondary franchise and the properties necessary for its enjoyment) may be sold
under execution. Said franchise can be sold under execution, when such sale is
especially decreed and ordered in the judgment and it becomes effective only when
the sale is confirmed by the Court after due notice (Sec. 56, Corp. Law). The
compromise agreement and the judgment based thereon, do not contain any special
decree or order making the franchise answerable for the judgment debt. The same
thing may be stated with respect to petitioner's trade name or business name and its
capital stock. Incidentally, the trade name or business name corresponds to the
initials of the President of the petitioner corporation and there can be no serious
dispute regarding the fact that a trade name or business name and capital stock are
necessarily included in the enjoyment of the franchise. Like that of a franchise, the
law mandates, that property necessary for the enjoyment of said franchise, can only
be sold to satisfy a judgment debt if the decision especially so provides. As We have
stated heretofore, no such directive appears in the decision. Moreover, a trade name
or business name cannot be sold separately from the franchise, and the capital stock
of the petitioner corporation or any other corporation, for the matter, represents the
interest and is the property of stockholders in the corporation, who can only be
deprived thereof in the manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8
Stew.] 501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words
and Phrases, 109).
It, therefore, results that the inclusion of the franchise, the trade name and/or
business name and the capital stock of the petitioner corporation, in the sale of the
properties of the JRS Business Corporation, has no justification. The sale of the
properties of petitioner corporation is set aside, in so far as it authorizes the levy and
sale of its franchise, trade name and capital stocks. Without pronouncement as to
costs.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Regala and
Makalintal, JJ., concur.
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG,
ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT
CORP., respondents.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization from he board of
directors, validly sell a parcel of land owned by the corporation?. May the veil of
corporate fiction be pierced on the mere ground that almost all of the shares of stock
of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition
for Review on Certiorari before us, assailing the March 18, 1997 Decision 1 of the
Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994
Decision of the Regional Trial Court of Makati, Metro Manila, Branch 633 in Civil Case
No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by
the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is
AFFIRMED WITH MODIFICATION ordering defendant-appellee
Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant
the downpayment of P100,000.00 which she received from
plaintiff-appellant. There is no pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s
amended complaint alleged that on 14 February 1989, plaintiff-
appellant entered into an agreement with defendant-appellee
Motorich Sales Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City. Metro Manila,
containing an area of Four Hundred Fourteen (414) square meters,
covered by TCT No. (362909) 2876: that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant paid the
downpayment in the sum of One Hundred Thousand (P100,000.00)
Pesos, the balance to be paid on or before March 2, 1989; that on
March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be
paid: that said letter was coursed through defendant-appellee's
broker. Linda Aduca, who wrote the computation of the balance:
that on March 2, 1989, plaintiff-appellant was ready with the
amount corresponding to the balance, covered by Metrobank
Cashier's Check No. 004223, payable to defendant-appellee
Motorich Sales Corporation; that plaintiff-appellant and
defendant-appellee Motorich Sales Corporation were supposed to
meet in the office of plaintiff-appellant but defendant-appellee's
treasurer, Nenita Lee Gruenberg, did not appear; that defendant-
appellee Motorich Sales Corporation despite repeated demands
and in utter disregard of its commitments had refused to execute
the Transfer of Rights/Deed of Assignment which is necessary to
transfer the certificate of title; that defendant ACL Development
Corp. is impleaded as a necessary party since Transfer Certificate of
Title No. (362909) 2876 is still in the name of said defendant; while
defendant JNM Realty & Development Corp. is likewise impleaded
as a necessary party in view of the fact that it is the transferor of
right in favor of defendant-appellee Motorich Sales Corporation:
that on April 6, 1989, defendant ACL Development Corporation and
Motorich Sales Corporation entered into a Deed of Absolute Sale
whereby the former transferred to the latter the subject property;
that by reason of said transfer, the Registry of Deeds of Quezon City
issued a new title in the name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee Gruenberg and
Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571;
that as a result of defendants-appellees Nenita Lee Gruenberg and
Motorich Sales Corporation's bad faith in refusing to execute a
formal Transfer of Rights/Deed of Assignment, plaintiff-appellant
suffered moral and nominal damages which may be assessed
against defendants-appellees in the sum of Five Hundred Thousand
(500,000.00) Pesos; that as a result of defendants-appellees Nenita
Lee Gruenberg and Motorich Sales Corporation's unjustified and
unwarranted failure to execute the required Transfer of
Rights/Deed of Assignment or formal deed of sale in favor of
plaintiff-appellant, defendants-appellees should be assessed
exemplary damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of defendants-appellees' bad
faith in refusing to execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the opportunity to
construct a residential building in the sum of One Hundred
Thousand (P100,000.00) Pesos; and that as a consequence of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor
of plaintiff-appellant, it has been constrained to obtain the services
of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in
court hearings.
In its answer, defendants-appellees Motorich Sales Corporation
and Nenita Lee Gruenberg interposed as affirmative defense that
the President and Chairman of Motorich did not sign the
agreement adverted to in par. 3 of the amended complaint; that
Mrs. Gruenberg's signature on the agreement (ref: par. 3 of
Amended Complaint) is inadequate to bind Motorich. The other
signature, that of Mr. Reynaldo Gruenberg, President and
Chairman of Motorich, is required: that plaintiff knew this from the
very beginning as it was presented a copy of the Transfer of Rights
(Annex B of amended complaint) at the time the Agreement (Annex
B of amended complaint) was signed; that plaintiff-appellant itself
drafted the Agreement and insisted that Mrs. Gruenberg accept
the P100,000.00 as earnest money; that granting, without
admitting, the enforceability of the agreement, plaintiff-appellant
nonetheless failed to pay in legal tender within the stipulated
period (up to March 2, 1989); that it was the understanding
between Mrs. Gruenberg and plaintiff-appellant that the Transfer
of Rights/Deed of Assignment will be signed only upon receipt of
cash payment; thus they agreed that if the payment be in check,
they will meet at a bank designated by plaintiff-appellant where
they will encash the check and sign the Transfer of Rights/Deed.
However, plaintiff-appellant informed Mrs. Gruenberg of the
alleged availability of the check, by phone, only after banking
hours.
On the basis of the evidence, the court a quo rendered the
judgment appealed from[,] dismissing plaintiff-appellant's
complaint, ruling that:
The issue to be resolved is: whether plaintiff had
the right to compel defendants to execute a deed
of absolute sale in accordance with the
agreement of February 14, 1989: and if so,
whether plaintiff is entitled to damage.
As to the first question, there is no evidence to
show that defendant Nenita Lee Gruenberg was
indeed authorized by defendant corporation.
Motorich Sales, to dispose of that property
covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation.
Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec.
40. of the Corporation Code of the Philippines, to
wit:
Sec. 40, Sale or other
disposition of assets. Subject to
the provisions of existing laws
on illegal combination and
monopolies, a corporation may
by a majority vote of its board
of directors . . . sell, lease,
exchange, mortgage, pledge or
otherwise dispose of all or
substantially all of its property
and assets including its
goodwill . . . when authorized
by the vote of the stockholders
representing at least two third
(2/3) of the outstanding capital
stock . . .
No such vote was obtained by defendant Nenita
Lee Gruenberg for that proposed sale[;] neither
was there evidence to show that the supposed
transaction was ratified by the corporation.
Plaintiff should have been on the look out under
these circumstances. More so, plaintiff himself
[owns] several corporations (tsn dated August
16, 1993, p. 3) which makes him knowledgeable
on corporation matters.
Regarding the question of damages, the Court
likewise, does not find substantial evidence to
hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway
misrepresent herself to be authorized by the
corporation to sell the property to plaintiff (tsn
dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby
renders judgment DISMISSING the complaint at
instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for
lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation
duly organized and existing under and by virtue
of Philippine Laws, with principal office address
 at 5510 South Super Hi-way cor. Balderama St.,
Pio del Pilar. Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE GRUENBERG,
hereinafter referred to as the TRANSFEROR;
— and —
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a
corporation duly organized and existing under
and by virtue of the laws of the Philippines, with
principal office address at Sumulong Highway,
Barrio Mambungan, Antipolo, Rizal, represented
herein by its President, ANDRES T. CO,
hereinafter referred to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land
identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION
located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE
METERS, covered by a TRANSFER OF RIGHTS between JNM Realty
& Dev. Corp. as the Transferor and Motorich Sales Corp. as the
Transferee;
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties have agreed as follows:
1. That the purchase price shall be at FIVE
THOUSAND TWO HUNDRED PESOS (P5,200.00)
per square meter; subject to the following terms:
a. Earnest money amounting to
ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be
paid upon the execution of this
agreement and shall form part
of the total purchase price;
b. Balance shall be payable on
or before March 2, 1989;
2. That the monthly amortization for the month
of February 1989 shall be for the account of the
Transferor; and that the monthly amortization
starting March 21, 1989 shall be for the account
of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the
above-described property and that there [are] no existing liens
and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date
specified on 1, (b), the earnest money shall be forfeited in favor of
the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to
execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of
the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands
this 14th day of February, 1989 at Greenhills, San Juan, Metro
Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL
FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]
————————————— ———————————6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees
to execute a Deed of Absolute Sale in accordance
with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages. 7
As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed
the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg
was ordered to refund P100,000 to petitioner, the amount remitted as
"downpayment" or "earnest money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil
of corporate fiction is applicable in the instant
case
II. Whether or not the appellate court may
consider matters which the parties failed to raise
in the lower court
III. Whether or not there is a valid and
enforceable contract between the petitioner and
the respondent corporation
IV. Whether or not the Court of Appeals erred in
holding that there is a valid
correction/substitution of answer in the
transcript of stenographic note[s].
V. Whether or not respondents are liable for
damages and attorney's fees 9
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between
petitioner and Motorich?
 2. May the doctrine of piercing the veil of
corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenberg's
testimony as recorded in the transcript of
stenographic notes material to the disposition of
this case?
4. Are respondents liable for damages and
attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14,
1989, it entered through its president, Andres Co, into the disputed Agreement with
Respondent Motorich Sales Corporation, which was in turn allegedly represented by
its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and
Co affixed their signatures on the contract they both consented to be bound by the
terms thereof." Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to
which a lot owned by Motorich Sales Corporation was purportedly sold. Such
contract, however, cannot bind Motorich, because it never authorized or ratified
such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporation's board of directors. 10 Section
23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. — Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when
authorized either by its bylaws or by its board resolution, through its officers or
agents in the normal course of business. The general principles of agency govern the
relation between the corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that
"a corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that the authority to do so has been conferred upon
him, and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or agent to
believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons dealing with an
assumed agent, whether the assumed agency be a general or special one bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind
the corporation in a sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that it ever authorized
Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently,
petitioner had the burden of proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction. Petitioner failed to discharge this
burden. Its offer of evidence before the trial court contained no proof of such
authority. 16 It has not shown any provision of said respondent's articles of
incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the
corporation. Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is obviously foreign to a
corporate treasurer's function, which generally has been described as "to receive and
keep the funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers." 17
Neither was such real estate sale shown to be a normal business activity of Motorich.
The primary purpose of Motorich is marketing, distribution, export and import in
relation to a general merchandising business. 18Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real property, an activity
which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing:
otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the following
case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable
is transmitted or acquired either gratuitously or for a valuable
consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of
sale because of its "acceptance of benefits," as evidenced by the receipt issued by
Respondent Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their
actions "cannot bind the corporation, unless it has ratified such acts or is estopped
from disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell
its land or to receive the earnest money. Neither was there any proof that Motorich
ratified, expressly or impliedly, the contract. Petitioner rests its argument on the
receipt which, however, does not prove the fact of ratification. The document is a
hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's
signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1)
consent of the contracting parties; (2) object certain which is the subject matter of
the contract; (3) cause of the obligation which is established." As found by the trial
court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg
was authorized to enter into the contract of sale, or that the said contract was ratified
by Motorich. This factual finding of the two courts is binding on this Court. 23 As the
consent of the seller was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg
to sell its parcel of land, we hold that the February 14, 1989 Agreement entered into
by the latter with petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced,
because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and
Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the
subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract. 26 It adds that, being
solely owned by the Spouses Gruenberg, the company can treated as a close
corporation which can be bound by the acts of its principal stockholder who needs
no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly, 27 not having done
so during the trial, but only when it filed its sur-rejoinder before the Court of
Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled the points of law, theories and arguments not brought
to the attention of the trial court need not be, and ordinarily will not be, considered
by a reviewing court, as they cannot be raised for the first time on appeal. 29 Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the
basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time,
the Court still finds no reason to uphold it. True, one of the advantages of a corporate
form of business organization is the limitation of an investor's liability to the amount
of the investment. 30 This feature flows from the legal theory that a corporate entity
is separate and distinct from its stockholders. However, the statutorily granted
privilege of a corporate veil may be used only for legitimate purposes. 31 On equitable
considerations, the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or
serve as a mere alter ego or business conduit of a person or an instrumentality,
agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the
law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of
individuals." 33
We stress that the corporate fiction should be set aside when it becomes a shield
against liability for fraud, illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is essentially, then, a matter of proof.
In the present case, however, the Court finds no reason to pierce the corporate veil
of Respondent Motorich. Petitioner utterly failed to establish that said corporation
was formed, or that it is operated, for the purpose of shielding any alleged fraudulent
or illegal activities of its officers or stockholders; or that the said veil was used to
conceal fraud, illegality or inequity at the expense of third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section
96 of the Corporation Code defines a close corporation as follows:
Sec. 96. Definition and Applicability of Title. — A close corporation,
within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All of the corporation's issued stock
of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not exceeding
twenty (20); (2) All of the issued stock of all classes shall be subject
to one or more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall be deemed not
a close corporation when at least two-thirds (2/3) of its voting stock
or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code. .
...
The articles of incorporation 34 of Motorich Sales Corporation does not contain any Third Issue: Challenged Portion of TSN Immaterial
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a Petitioner calls our attention to the following excerpt of the transcript of
preemption of shares is restricted in favor of any stockholder or of the corporation, stenographic notes (TSN):
or (3) listing its stocks in any stock exchange or making a public offering of such stocks Q Did you ever represent to Mr. Co that you were
is prohibited. From its articles, it is clear that Respondent Motorich is not a close authorized by the corporation to sell the
corporation. 35 Motorich does not become one either, just because Spouses property?
Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The A Yes, sir. 45
"[m]ere ownership by a single stockholder or by another corporation of all or capital Petitioner claims that the answer "Yes" was crossed out, and, in its place was written
stock of a corporation is not of itself sufficient ground for disregarding the separate a "No" with an initial scribbled above it. 46 This, however, is insufficient to prove that
corporate personalities." 36 So, too, a narrow distribution of ownership does not, by Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of
itself, make a close corporation. its immovable property. Said excerpt be understood in the context of her whole
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the testimony. During her cross-examination. Respondent Gruenberg testified:
Court ruled that ". . . petitioner corporation is classified as a close corporation and, Q So, you signed in your capacity as the
consequently, a board resolution authorizing the sale or mortgage of the subject treasurer?
property is not necessary to bind the corporation for the action of its [A] Yes, sir.
president." 38 But the factual milieu in Dulay is not on all fours with the present case. Q Even then you kn[e]w all along that you [were]
In Dulay, the sale of real property was contracted by the president of a close not authorized?
corporation with the knowledge and acquiescence of its board of directors. 39 In the A Yes, sir.
present case, Motorich is not a close corporation, as previously discussed, and the Q You stated on direct examination that you did
agreement was entered into by the corporate treasurer without the knowledge of not represent that you were authorized to sell
the board of directors. the property?
The Court is not unaware that there are exceptional cases where "an action by a A Yes, sir.
director, who singly is the controlling stockholder, may be considered as a binding Q But you also did not say that you were not
corporate act and a board action as nothing more than a mere formality." 40 The authorized to sell the property, you did not tell
present case, however, is not one of them. that to Mr. Co, is that correct?
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost A That was not asked of me.
99.866%" of Respondent Motorich. 41Since Nenita is not the sole controlling Q Yes, just answer it.
stockholder of Motorich, the aforementioned exception does not apply. A I just told them that I was the treasurer of the
Granting arguendo that the corporate veil of Motorich is to be disregarded, the corporation and it [was] also the president who
subject parcel of land would then be treated as conjugal property of Spouses [was] also authorized to sign on behalf of the
Gruenberg, because the same was acquired during their marriage. There being no corporation.
indication that said spouses, who appear to have been married before the effectivity Q You did not say that you were not authorized
of the Family Code, have agreed to a different property regime, their property nor did you say that you were authorized?
relations would be governed by conjugal partnership of gains. 42 As a consequence, A Mr. Co was very interested to purchase the
Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here property and he offered to put up a P100,000.00
is no co-ownership between the spouses in the properties of the conjugal partnership earnest money at that time. That was our first
of gains. Hence, neither spouse can alienate in favor of another his or interest in the meeting. 47
partnership or in any property belonging to it; neither spouse can ask for a partition Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to
of the properties before the partnership has been legally dissolved." 43 sell its property. On the other hand, her testimony demonstrates that the president
Assuming further, for the sake of argument, that the spouses' property regime is the of Petitioner Corporation, in his great desire to buy the property, threw caution to
absolute community of property, the sale would still be invalid. Under this regime, the wind by offering and paying the earnest money without first verifying
"alienation of community property must have the written consent of the other Gruenberg's authority to sell the lot.
spouse or he authority of the court without which the disposition or encumbrance Fourth Issue:
is void." 44 Both requirements are manifestly absent in the instant case. Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter petitioner paid Gruenberg on the mistaken belief that she had the authority to sell
display of malice and bad faith, respondents attempted and succeeded in impressing the property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by
on the trial court and [the] Court of Appeals that Gruenberg did not represent herself reason of a mistake in the contruction or application of a difficult question of law may
as authorized by Respondent Motorich despite the receipt issued by the former come within the scope of the preceding article."
specifically indicating that she was signing on behalf of Motorich Sales Corporation. WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
Respondent Motorich likewise acted in bad faith when it claimed it did not authorize SO ORDERED.
Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was]
concerned, despite receipt and enjoyment of the proceeds of Gruenberg's
act." 48 Assuming that Respondent Motorich was not a party to the alleged fraud,
petitioner maintains that Respondent Gruenberg should be held liable because she
"acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the appellate courts
that the foregoing allegations lack factual bases. Hence, an award of damages or
attorney's fees cannot be justified. The amount paid as "earnest money" was not
proven to have redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent Motorich, because "it
was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation." 50 Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a
matter of fact, that was encashed, the check was
encashed.
A Yes. sir, the check was paid in my name and I
deposit[ed] it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to petitioner ". . .
since the sale did not push through." 52
Moreover, we note that Andres Co is not a neophyte in the world of corporate
business. He has been the president of Petitioner Corporation for more than ten
years and has also served as chief executive of two other corporate entities. 53 Co
cannot feign ignorance of the scope of the authority of a corporate treasurer such as
Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of
Gruenberg's authorization to enter into a contract to sell a parcel of land belonging
to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to
persuade the Court. Indubitably, petitioner appears to be the victim of its own
officer's negligence in entering into a contract with and paying an unauthorized
officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be
ordered to return to petitioner the amount she received as earnest money, as "no
one shall enrich himself at the expense of another." 54 a principle embodied in Article
2154 of Civil Code. 55 Although there was no binding relation between them,
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner
in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim
requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus
15% of the amount awarded to plaintiff as attorney's fees from July
2,1966, until full payment is made; plus P70,000.00 moral and
exemplary damages.
It is found in the records that the cross party plaintiffs incurred
additional miscellaneous expenses aside from Pl51,000.00,,making
a total of P184,878.74. Defendant Jacob S. Lim is further required
to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is
fully paid; plus moral and exemplary damages in the amount of
P184,878.84 with interest from the filing of the cross-complaints
until the amount is fully paid; plus moral and exemplary damages
in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B. Maglana
as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer
against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per
year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this
action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment,
is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment
prayed for by the plaintiff Pioneer. If an insurance company would
be liable for damages in performing an act which is clearly within
its power and which is the reason for its being, then nobody would
engage in the insurance business. No further claim or counter-claim
for or against anybody is declared by this Court. (Rollo - G.R. No.
24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-
3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price
of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-
718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on
July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions
to a new corporation proposed by Lim to expand his airline business. They executed
two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer,
one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and
the Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and hold and
save harmless Pioneer from and against any/all damages, losses, costs, damages,
taxes, penalties, charges and expenses of whatever kind and nature which Pioneer
may incur in consequence of having become surety upon the bond/note and to pay,
reimburse and make good to Pioneer, its successors and assigns, all sums and
amounts of money which it or its representatives should or may pay or cause to be
paid or become liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the
surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of
the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however,
filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application
for a writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against
Lim alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of
the sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the
action is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To
qualify a person to be a real party in interest in whose name an
action must be prosecuted, he must appear to be the present real
owner of the right sought to be enforced (Moran, Vol. I, Comments
on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real
party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27;
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414;
Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d
667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 — the bulk of defendants'
alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its spare
engine, realizing the total amount of P37,050.00 from the sale of
the mortgaged chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00, it is patent
that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants
the amount in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the
 expense of another (Article 22, New Civil Code). (Rollo-84197, pp.
24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2)
even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between
the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is
not applicable considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to
so much of its obligations to JDA as has been paid with reinsurance
money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the
amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by
an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be prosecuted in
the name of the real party in interest.' This
provision is mandatory. The real party in interest
is the party who would be benefitted or injured
by the judgment or is the party entitled to the
avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest, that
there is no law permitting an action to be brought
by an attorney-in-fact. Arroyo v. Granada and
Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco
and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses
Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance.
 (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA.
380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila
Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the real
party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-
in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner
was not the real party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does not,
however, cite any grounds except its allegation that respondent "Maglanas defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to the
petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel mortgage there
is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover
any unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage.
These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to
the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of
the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned provisions,
Pioneer shall have no further action against the purchaser to
recover any unpaid balance and any agreement to the contrary is
void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L-
24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of
the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments,
the first of which shall be due and payable 25
August 1965, the remainder of which ... shall be
due and payable on the 26th day x x x of each
succeeding three months and the last of which
shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying the
maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the
first of which shall be due and payable 4
September 1965, the remainder of which ... shall
be due and payable on the 4th day ... of each
succeeding months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the
last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much
less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a
written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the
case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on
the part of the creditor to demand payment after
the debt has become due does not of itself
constitute any extension time referred to herein,
(New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its claim
to Pioneer within ten days from default of Lim or SAL on every
installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-
debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the instant
case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record
on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate
vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure
of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner
Lim to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the
appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to
wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-
party plaintiffs incurred additional expenses, hence, the total sum
of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily
held that persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the
position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl.
615, Ann. Cas. 1913A 1065). Thus, where persons associate
themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me.
555; Whipple v. Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the development of
land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the
difference in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was treated as
a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets,
sold, and the proceeds distributed among them in proportion to
the value of the property contributed by each (Shorb v. Beaudry,
56 Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied
only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen,
44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464).
(Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for
his failure to appear during the pretrial despite notification. In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant
Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation
with the respondents despite his representations to them. This gives credence to the
cross-claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-
claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
 proceeded to acquire the planes on his own account. Since then up
to the filing of this answer, Lim has refused, failed and still refuses
to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant
Lim. Down payments were advanced by defendants Bormaheco
and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary
to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein
plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of
third party claim. Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not in
behalf of his other would-be incorporators in transacting the sale of the airplanes and
spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-19550 June 19, 1967
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL
BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in
his capacity as Acting Director, National Bureau of Investigation; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and
ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila;
JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN
JIMENEZ, Municipal Court of Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David
for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P.
de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason
and Solicitor C. Padua for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin 1 —
hereinafter referred to as Respondents-Prosecutors — several judges2 — hereinafter
referred to as Respondents-Judges — issued, on different dates,3 a total of 42 search
warrants against petitioners herein4 and/or the corporations of which they were
officers,5 directed to the any peace officer, to search the persons above-named
and/or the premises of their offices, warehouses and/or residences, and to seize and
take possession of the following personal property to wit:
Books of accounts, financial records, vouchers, correspondence, receipts,
ledgers, journals, portfolios, credit journals, typewriters, and other
documents and/or papers showing all business transactions including
disbursements receipts, balance sheets and profit and loss statements and
Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the
offense," or "used or intended to be used as the means of committing the offense,"
which is described in the applications adverted to above as "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as contravening
the Constitution and the Rules of Court — because, inter alia: (1) they do not describe
with particularity the documents, books and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized; (3) the warrants were issued to fish
evidence against the aforementioned petitioners in deportation cases filed against
them; (4) the searches and seizures were made in an illegal manner; and (5) the
documents, papers and cash money seized were not delivered to the courts that
issued the warrants, to be disposed of in accordance with law — on March 20, 1962,
said petitioners filed with the Supreme Court this original action for certiorari,
prohibition, mandamus and injunction, and prayed that, pending final disposition of
the present case, a writ of preliminary injunction be issued restraining Respondents-
Prosecutors, their agents and /or representatives from using the effects seized as
aforementioned or any copies thereof, in the deportation cases already adverted to,
and that, in due course, thereafter, decision be rendered quashing the contested
search warrants and declaring the same null and void, and commanding the
respondents, their agents or representatives to return to petitioners herein, in
accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers,
things and cash moneys seized or confiscated under the search warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the contested search
warrants are valid and have been issued in accordance with law; (2) that the defects
of said warrants, if any, were cured by petitioners' consent; and (3) that, in any event,
the effects seized are admissible in evidence against herein petitioners, regardless of
the alleged illegality of the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in
the petition. However, by resolution dated June 29, 1962, the writ was partially lifted
or dissolved, insofar as the papers, documents and things seized from the offices of
the corporations above mentioned are concerned; but, the injunction was
maintained as regards the papers, documents and things found and seized in the
residences of petitioners herein.7
Thus, the documents, papers, and things seized under the alleged authority of the
warrants in question may be split into two (2) major groups, namely: (a) those found
and seized in the offices of the aforementioned corporations, and (b) those found
and seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to
assail the legality of the contested warrants and of the seizures made in pursuance
thereof, for the simple reason that said corporations have their respective
personalities, separate and distinct from the personality of herein petitioners,
regardless of the amount of shares of stock or of the interest of each of them in said
corporations, and whatever the offices they hold therein may be. 8 Indeed, it is well
settled that the legality of a seizure can be contested only by the party whose rights
have been impaired thereby,9 and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third parties. 10 Consequently,
petitioners herein may not validly object to the use in evidence against them of the
documents, papers and things seized from the offices and premises of the
corporations adverted to above, since the right to object to the admission of said
papers in evidence belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in proceedings
against them in their individual capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining possession of papers belonging
to the corporation did not relate to nor did it affect
the personal defendants. If these papers were unlawfully seized and
thereby the constitutional rights of or any one were invaded, they were the
rights of the corporation and not the rights of the other defendants. Next, it
is clear that a question of the lawfulness of a seizure can be raised only by
one whose rights have been invaded. Certainly, such a seizure, if unlawful,
 could not affect the constitutional rights of defendants whose property had
not been seized or the privacy of whose homes had not been disturbed; nor
could they claim for themselves the benefits of the Fourth Amendment,
when its violation, if any, was with reference to the rights of another. Remus
vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that the
question of the admissibility of the evidence based on an alleged unlawful
search and seizure does not extend to the personal defendants but
embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789,
Emphasis supplied.)
With respect to the documents, papers and things seized in the residences of
petitioners herein, the aforementioned resolution of June 29, 1962, lifted the writ of
preliminary injunction previously issued by this Court, 12 thereby, in effect,
restraining herein Respondents-Prosecutors from using them in evidence against
petitioners herein.
In connection with said documents, papers and things, two (2) important questions
need be settled, namely: (1) whether the search warrants in question, and the
searches and seizures made under the authority thereof, are valid or not, and (2) if
the answer to the preceding question is in the negative, whether said documents,
papers and things may be used in evidence against petitioners herein.1äwphï1.ñët
Petitioners maintain that the aforementioned search warrants are in the nature of
general warrants and that accordingly, the seizures effected upon the authority there
of are null and void. In this connection, the Constitution 13provides:
The right of the people to be secure in their persons, houses, papers, and
effects against unreasonable searches and seizures shall not be violated, and
no warrants shall issue but upon probable cause, to be determined by the
judge after examination under oath or affirmation of the complainant and
the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized.
Two points must be stressed in connection with this constitutional mandate, namely:
(1) that no warrant shall issue but upon probable cause, to be determined by the
judge in the manner set forth in said provision; and (2) that the warrant
shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested warrants.
Indeed, the same were issued upon applications stating that the natural and juridical
person therein named had committed a "violation of Central Ban Laws, Tariff and
Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words,
no specific offense had been alleged in said applications. The averments thereof with
respect to the offense committed were abstract. As a consequence, it
was impossible for the judges who issued the warrants to have found the existence
of probable cause, for the same presupposes the introduction of competent proof
that the party against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws. As a
matter of fact, the applications involved in this case do not allege any specific acts
performed by herein petitioners. It would be the legal heresy, of the highest order,
to convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws,
Internal Revenue (Code) and Revised Penal Code," — as alleged in the
aforementioned applications — without reference to any determinate provision of
said laws or
To uphold the validity of the warrants in question would be to wipe out completely
one of the most fundamental rights guaranteed in our Constitution, for it would place
the sanctity of the domicile and the privacy of communication and correspondence
at the mercy of the whims caprice or passion of peace officers. This is precisely the
evil sought to be remedied by the constitutional provision above quoted — to outlaw
the so-called general warrants. It is not difficult to imagine what would happen, in
times of keen political strife, when the party in power feels that the minority is likely
to wrest it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule
122 of the former Rules of Court 14 by providing in its counterpart, under the Revised
Rules of Court 15 that "a search warrant shall not issue but upon probable cause in
connection with one specific offense." Not satisfied with this qualification, the Court
added thereto a paragraph, directing that "no search warrant shall issue for more
than one specific offense."
The grave violation of the Constitution made in the application for the contested
search warrants was compounded by the description therein made of the effects to
be searched for and seized, to wit:
Books of accounts, financial records, vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit journals, typewriters, and other
documents and/or papers showing all business transactions including
disbursement receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions
were legal or illegal. The warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations, whatever their nature, thus openly
contravening the explicit command of our Bill of Rights — that the things to be seized
be particularly described — as well as tending to defeat its major objective: the
elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors
maintain that, even if the searches and seizures under consideration were
unconstitutional, the documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature deliberation, however, we are
unanimously of the opinion that the position taken in the Moncado case must be
abandoned. Said position was in line with the American common law rule, that the
criminal should not be allowed to go free merely "because the constable has
blundered," 16 upon the theory that the constitutional prohibition against
unreasonable searches and seizures is protected by means other than the exclusion
of evidence unlawfully obtained, 17 such as the common-law action for damages
against the searching officer, against the party who procured the issuance of the
search warrant and against those assisting in the execution of an illegal search, their
criminal punishment, resistance, without liability to an unlawful seizure, and such
other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this approach and
eventually adopted the exclusionary rule, realizing that this is the only practical
means of enforcing the constitutional injunction against unreasonable searches and
seizures. In the language of Judge Learned Hand:
As we understand it, the reason for the exclusion of evidence competent as
such, which has been unlawfully acquired, is that exclusion is the only
practical way of enforcing the constitutional privilege. In earlier times the
action of trespass against the offending official may have been protection
enough; but that is true no longer. Only in case the prosecution which itself
controls the seizing officials, knows that it cannot profit by their wrong will
that wrong be repressed.18
In fact, over thirty (30) years before, the Federal Supreme Court had already
declared:
If letters and private documents can thus be seized and held and used in
evidence against a citizen accused of an offense, the protection of the 4th
Amendment, declaring his rights to be secure against such searches and
seizures, is of no value, and, so far as those thus placed are concerned, might
as well be stricken from the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy as they are, are not
to be aided by the sacrifice of those great principles established by years of
endeavor and suffering which have resulted in their embodiment in the
fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on
the same Federal Court. 20After reviewing previous decisions thereon, said Court
held, in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional documentation
of the right of privacy free from unreasonable state intrusion, and after its
dozen years on our books, are led by it to close the only courtroom door
remaining open to evidence secured by official lawlessness in flagrant abuse
of that basic right, reserved to all persons as a specific guarantee against
that very same unlawful conduct. We hold that all evidence obtained by
searches and seizures in violation of the Constitution is, by that same
authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared
enforceable against the States through the Due Process Clause of the
Fourteenth, it is enforceable against them by the same sanction of exclusion
as it used against the Federal Government. Were it otherwise, then just as
without the Weeks rule the assurance against unreasonable federal
searches and seizures would be "a form of words," valueless and
underserving of mention in a perpetual charter of inestimable human
liberties, so too, without that rule the freedom from state invasions of
privacy would be so ephemeral and so neatly severed from its conceptual
nexus with the freedom from all brutish means of coercing evidence as not
to permit this Court's high regard as a freedom "implicit in the concept of
ordered liberty." At the time that the Court held in Wolf that the amendment
was applicable to the States through the Due Process Clause, the cases of
this Court as we have seen, had steadfastly held that as to federal officers
the Fourth Amendment included the exclusion of the evidence seized in
violation of its provisions. Even Wolf "stoutly adhered" to that proposition.
The right to when conceded operatively enforceable against the States, was
not susceptible of destruction by avulsion of the sanction upon which its
protection and enjoyment had always been deemed dependent under the
Boyd, Weeks and Silverthorne Cases. Therefore, in extending the
substantive protections of due process to all constitutionally unreasonable
searches — state or federal — it was logically and constitutionally
necessarily that the exclusion doctrine — an essential part of the right to
privacy — be also insisted upon as an essential ingredient of the right newly
recognized by the Wolf Case. In short, the admission of the new
constitutional Right by Wolf could not tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence which an
accused had been forced to give by reason of the unlawful seizure. To hold
otherwise is to grant the right but in reality to withhold its privilege and
enjoyment. Only last year the Court itself recognized that the purpose of the
exclusionary rule to "is to deter — to compel respect for the constitutional
guaranty in the only effectively available way — by removing the incentive
to disregard it" . . . .
The ignoble shortcut to conviction left open to the State tends to destroy
the entire system of constitutional restraints on which the liberties of the
people rest. Having once recognized that the right to privacy embodied in
the Fourth Amendment is enforceable against the States, and that the right
to be secure against rude invasions of privacy by state officers is, therefore
constitutional in origin, we can no longer permit that right to remain an
empty promise. Because it is enforceable in the same manner and to like
effect as other basic rights secured by its Due Process Clause, we can no
longer permit it to be revocable at the whim of any police officer who, in the
name of law enforcement itself, chooses to suspend its enjoyment. Our
decision, founded on reason and truth, gives to the individual no more than
that which the Constitution guarantees him to the police officer no less than
that to which honest law enforcement is entitled, and, to the courts, that
judicial integrity so necessary in the true administration of justice. (emphasis
ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the
spirit of the constitutional injunction against unreasonable searches and seizures. To
be sure, if the applicant for a search warrant has competent evidence to establish
probable cause of the commission of a given crime by the party against whom the
warrant is intended, then there is no reason why the applicant should not comply
with the requirements of the fundamental law. Upon the other hand, if he has no
such competent evidence, then it is not possible for the Judge to find that there is
probable cause, and, hence, no justification for the issuance of the warrant. The only
possible explanation (not justification) for its issuance is the necessity
of fishing evidence of the commission of a crime. But, then, this fishing expedition is
indicative of the absence of evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal
search warrant and/or make unreasonable searches or seizures would suffice to
protect the constitutional guarantee under consideration, overlooks the fact that
violations thereof are, in general, committed By agents of the party in power, for,
certainly, those belonging to the minority could not possibly abuse a power they do
not have. Regardless of the handicap under which the minority usually — but,
understandably — finds itself in prosecuting agents of the majority, one must not
lose sight of the fact that the psychological and moral effect of the possibility 21 of
securing their conviction, is watered down by the pardoning power of the party for
whose benefit the illegality had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court
dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen
Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street,
and Room No. 304 of the Army-Navy Club, should be included among the premises
considered in said Resolution as residences of herein petitioners, Harry S. Stonehill,
Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore,
the records, papers and other effects seized in the offices of the corporations above
referred to include personal belongings of said petitioners and other effects under
their exclusive possession and control, for the exclusion of which they have a
standing under the latest rulings of the federal courts of federal courts of the United
States. 22
We note, however, that petitioners' theory, regarding their alleged possession of and
control over the aforementioned records, papers and effects, and the alleged
"personal" nature thereof, has Been Advanced, not in their petition or amended
petition herein, but in the Motion for Reconsideration and Amendment of the
Resolution of June 29, 1962. In other words, said theory would appear to be
readjustment of that followed in said petitions, to suit the approach intimated in the
Resolution sought to be reconsidered and amended. Then, too, some of the affidavits
or copies of alleged affidavits attached to said motion for reconsideration, or
submitted in support thereof, contain either inconsistent allegations, or allegations
inconsistent with the theory now advanced by petitioners herein.
Upon the other hand, we are not satisfied that the allegations of said petitions said
motion for reconsideration, and the contents of the aforementioned affidavits and
other papers submitted in support of said motion, have sufficiently established the
facts or conditions contemplated in the cases relied upon by the petitioners; to
warrant application of the views therein expressed, should we agree thereto. At any
rate, we do not deem it necessary to express our opinion thereon, it being best to
leave the matter open for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is
hereby, abandoned; that the warrants for the search of three (3) residences of herein
petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the
searches and seizures therein made are illegal; that the writ of preliminary injunction
heretofore issued, in connection with the documents, papers and other effects thus
seized in said residences of herein petitioners is hereby made permanent; that the
writs prayed for are granted, insofar as the documents, papers and other effects so
seized in the aforementioned residences are concerned; that the aforementioned
motion for Reconsideration and Amendment should be, as it is hereby, denied; and
that the petition herein is dismissed and the writs prayed for denied, as regards the
documents, papers and other effects seized in the twenty-nine (29) places, offices
and other premises enumerated in the same Resolution, without special
pronouncement as to costs.
It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.
CASTRO, J., concurring and dissenting:
From my analysis of the opinion written by Chief Justice Roberto Concepcion and
from the import of the deliberations of the Court on this case, I gather the following
distinct conclusions:
1. All the search warrants served by the National Bureau of Investigation in
this case are general warrants and are therefore proscribed by, and in
violation of, paragraph 3 of section 1 of Article III (Bill of Rights) of the
Constitution;
2. All the searches and seizures conducted under the authority of the said
search warrants were consequently illegal;
3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1,
should be, and is declared, abandoned;
4. The search warrants served at the three residences of the petitioners
are expressly declared null and void the searches and seizures therein made
are expressly declared illegal; and the writ of preliminary injunction
heretofore issued against the use of the documents, papers and effect
seized in the said residences is made permanent; and
5. Reasoning that the petitioners have not in their pleadings satisfactorily
demonstrated that they have legal standing to move for the suppression of
the documents, papers and effects seized in the places other than the three
residences adverted to above, the opinion written by the Chief
Justice refrains from expressly declaring as null and void the such warrants
served at such other places and as illegal the searches and seizures made
therein, and leaves "the matter open for determination in appropriate cases
in the future."
It is precisely the position taken by the Chief Justice summarized in the immediately
preceding paragraph (numbered 5) with which I am not in accord.
I do not share his reluctance or unwillingness to expressly declare, at this time, the
nullity of the search warrants served at places other than the three residences, and
the illegibility of the searches and seizures conducted under the authority thereof. In
my view even the exacerbating passions and prejudices inordinately generated by
the environmental political and moral developments of this case should not deter
this Court from forthrightly laying down the law not only for this case but as well for
future cases and future generations. All the search warrants, without exception, in
this case are admittedly general, blanket and roving warrants and are therefore
admittedly and indisputably outlawed by the Constitution; and the searches and
seizures made were therefore unlawful. That the petitioners, let us assume in gratia
argumente, have no legal standing to ask for the suppression of the papers, things
and effects seized from places other than their residences, to my mind, cannot in any
manner affect, alter or otherwise modify the intrinsic nullity of the search warrants
and the intrinsic illegality of the searches and seizures made thereunder. Whether or
not the petitioners possess legal standing the said warrants are void and remain void,
and the searches and seizures were illegal and remain illegal. No inference can be
drawn from the words of the Constitution that "legal standing" or the lack of it is a
determinant of the nullity or validity of a search warrant or of the lawfulness or
illegality of a search or seizure.
On the question of legal standing, I am of the conviction that, upon the pleadings
submitted to this Court the petitioners have the requisite legal standing to move for
the suppression and return of the documents, papers and effects that were seized
from places other than their family residences.
Our constitutional provision on searches and seizures was derived
almost verbatim from the Fourth Amendment to the United States Constitution. In
the many years of judicial construction and interpretation of the said constitutional
provision, our courts have invariably regarded as doctrinal the pronouncement made
on the Fourth Amendment by federal courts, especially the Federal Supreme Court
and the Federal Circuit Courts of Appeals.
The U.S. doctrines and pertinent cases on standing to move for the suppression or
return of documents, papers and effects which are the fruits of an unlawful search
and seizure, may be summarized as follows; (a) ownership of documents, papers and
effects gives "standing;" (b) ownership and/or control or possession — actual or
constructive — of premises searched gives "standing"; and (c) the "aggrieved person"
doctrine where the search warrant and the sworn application for search warrant are
"primarily" directed solely and exclusively against the "aggrieved person," gives
"standing."
An examination of the search warrants in this case will readily show that, excepting
three, all were directed against the petitioners personally. In some of them, the
petitioners were named personally, followed by the designation, "the President
and/or General Manager" of the particular corporation. The three warrants excepted
named three corporate defendants. But the "office/house/warehouse/premises"
mentioned in the said three warrants were also the same
"office/house/warehouse/premises" declared to be owned by or under the control
of the petitioners in all the other search warrants directed against the petitioners
and/or "the President and/or General Manager" of the particular corporation. (see
pages 5-24 of Petitioners' Reply of April 2, 1962). The searches and seizures were to
be made, and were actually made, in the "office/house/warehouse/premises" owned
by or under the control of the petitioners.
Ownership of matters seized gives "standing."
Ownership of the properties seized alone entitles the petitioners to bring a motion
to return and suppress, and gives them standing as persons aggrieved by an unlawful
search and seizure regardless of their location at the time of seizure. Jones vs. United
States, 362 U.S. 257, 261 (1960) (narcotics stored in the apartment of a friend of the
defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal
and corporate papers of corporation of which the defendant was president), United
States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging
to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925) (books
seized from the defendant's sister but belonging to the defendant); Cf. Villano vs.
United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither
owned by nor in exclusive possession of the defendant).
In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it
was held that under the constitutional provision against unlawful searches and
seizures, a person places himself or his property within a constitutionally protected
area, be it his home or his office, his hotel room or his automobile:
Where the argument falls is in its misapprehension of the fundamental
nature and scope of Fourth Amendment protection. What the Fourth
Amendment protects is the security a man relies upon when he places
himself or his property within a constitutionally protected area, be it his
home or his office, his hotel room or his automobile. There he is protected
from unwarranted governmental intrusion. And when he puts some thing in
his filing cabinet, in his desk drawer, or in his pocket, he has the right to
know it will be secure from an unreasonable search or an unreasonable
seizure. So it was that the Fourth Amendment could not tolerate the
warrantless search of the hotel room in Jeffers, the purloining of the
petitioner's private papers in Gouled, or the surreptitious electronic
surveilance in Silverman. Countless other cases which have come to this
Court over the years have involved a myriad of differing factual contexts in
which the protections of the Fourth Amendment have been appropriately
invoked. No doubt, the future will bring countless others. By nothing we say
here do we either foresee or foreclose factual situations to which the Fourth
Amendment may be applicable. (Hoffa vs. U.S., 87 S. Ct. 408 (December 12,
1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951).
(Emphasis supplied).
Control of premises searched gives "standing."
Independent of ownership or other personal interest in the records and documents
seized, the petitioners have standing to move for return and suppression by virtue of
their proprietary or leasehold interest in many of the premises searched. These
proprietary and leasehold interests have been sufficiently set forth in their motion
for reconsideration and need not be recounted here, except to emphasize that the
petitioners paid rent, directly or indirectly, for practically all the premises searched
(Room 91, 84 Carmen Apts; Room 304, Army & Navy Club; Premises 2008, Dewey
Boulevard; 1436 Colorado Street); maintained personal offices within the corporate
offices (IBMC, USTC); had made improvements or furnished such offices; or had paid
for the filing cabinets in which the papers were stored (Room 204, Army & Navy
Club); and individually, or through their respective spouses, owned the controlling
stock of the corporations involved. The petitioners' proprietary interest in most, if
not all, of the premises searched therefore independently gives them standing to
move for the return and suppression of the books, papers and affects seized
therefrom.
In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and
extent of the interest in the searched premises necessary to maintain a motion to
suppress. After reviewing what it considered to be the unduly technical standard of
the then prevailing circuit court decisions, the Supreme Court said (362 U.S. 266):
We do not lightly depart from this course of decisions by the lower courts.
We are persuaded, however, that it is unnecessarily and ill-advised to import
into the law surrounding the constitutional right to be free from
unreasonable searches and seizures subtle distinctions, developed and
refined by the common law in evolving the body of private property law
which, more than almost any other branch of law, has been shaped by
distinctions whose validity is largely historical. Even in the area from which
they derive, due consideration has led to the discarding of those distinctions
in the homeland of the common law. See Occupiers' Liability Act, 1957, 5
and 6 Eliz. 2, c. 31, carrying out Law Reform Committee, Third Report, Cmd.
9305. Distinctions such as those between "lessee", "licensee," "invitee,"
"guest," often only of gossamer strength, ought not be determinative in
fashioning procedures ultimately referable to constitutional safeguards. See
also Chapman vs. United States, 354 U.S. 610, 616-17 (1961).
It has never been held that a person with requisite interest in the premises searched
must own the property seized in order to have standing in a motion to return and
suppress. In Alioto vs. United States, 216 F. Supp. 48 (1963), a Bookkeeper for several
corporations from whose apartment the corporate records were seized successfully
moved for their return. In United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870,
873 (W D. N. Y. 1943), the corporation's president successfully moved for the return
and suppression is to him of both personal and corporate documents seized from his
home during the course of an illegal search:
The lawful possession by Antonelli of documents and property, "either his
own or the corporation's was entitled to protection against unreasonable
search and seizure. Under the circumstances in the case at bar, the search
and seizure were unreasonable and unlawful. The motion for the return of
seized article and the suppression of the evidence so obtained should be
granted. (Emphasis supplied).
Time was when only a person who had property in interest in either the place
searched or the articles seize had the necessary standing to invoke the protection of
the exclusionary rule. But in MacDonald vs. Unite States, 335 U.S. 461 (1948), Justice
Robert Jackson joined by Justice Felix Frankfurter, advanced the view that "even a
guest may expect the shelter of the rooftree he is under against criminal intrusion."
This view finally became the official view of the U.S. Supreme Court and was
articulated in United States vs. Jeffers, 432 U.S 48 (1951). Nine years later, in 1960,
in Jones vs. Unite States, 362 U.S. 257, 267, the U.S. Supreme Court went a step
further. Jones was a mere guest in the apartment unlawfully searched but the Court
nonetheless declared that the exclusionary rule protected him as well. The concept
of "person aggrieved by an unlawful search and seizure" was enlarged to include
"anyone legitimately on premise where the search occurs."
Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for
the Fifth Circuit held that the defendant organizer, sole stockholder and president of
a corporation had standing in a mail fraud prosecution against him to demand the
return and suppression of corporate property. Henzel vs. United States, 296 F 2d 650,
652 (5th Cir. 1961), supra. The court conclude that the defendant had standing on
two independent grounds: First —he had a sufficient interest in the property seized,
and second — he had an adequate interest in the premises searched (just like in the
case at bar). A postal inspector had unlawfully searched the corporation' premises
and had seized most of the corporation's book and records. Looking to Jones, the
court observed:
Jones clearly tells us, therefore, what is not required qualify one as a "person
aggrieved by an unlawful search and seizure." It tells us that appellant
should not have been precluded from objecting to the Postal Inspector's
search and seizure of the corporation's books and records merely because
the appellant did not show ownership or possession of the books and
records or a substantial possessory interest in the invade premises . . .
(Henzel vs. United States, 296 F. 2d at 651). .
Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir.
1962). In Villano, police officers seized two notebooks from a desk in the defendant's
place of employment; the defendant did not claim ownership of either; he asserted
that several employees (including himself) used the notebooks. The Court held that
the employee had a protected interest and that there also was an invasion of privacy.
Both Henzel and Villano considered also the fact that the search and seizure were
"directed at" the moving defendant. Henzel vs. United States, 296 F. 2d at
682; Villano vs. United States, 310 F. 2d at 683.
In a case in which an attorney closed his law office, placed his files in storage and
went to Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his
standing to move to quash as unreasonable search and seizure under the Fourth
Amendment of the U.S. Constitution a grand jury subpoena duces tecum directed to
the custodian of his files. The Government contended that the petitioner had no
standing because the books and papers were physically in the possession of the
custodian, and because the subpoena was directed against the custodian. The court
rejected the contention, holding that
Schwimmer legally had such possession, control and unrelinquished
personal rights in the books and papers as not to enable the question of
unreasonable search and seizure to be escaped through the mere
procedural device of compelling a third-party naked possessor to produce
and deliver them. Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir.
1956).
Aggrieved person doctrine where the search warrant s primarily directed against said
person gives "standing."
The latest United States decision squarely in point is United States vs. Birrell, 242 F.
Supp. 191 (1965, U.S.D.C. S.D.N.Y.). The defendant had stored with an attorney
certain files and papers, which attorney, by the name of Dunn, was not, at the time
of the seizing of the records, Birrell's attorney. * Dunn, in turn, had stored most of
the records at his home in the country and on a farm which, according to Dunn's
affidavit, was under his (Dunn's) "control and management." The papers turned out
to be private, personal and business papers together with corporate books and
records of certain unnamed corporations in which Birrell did not even claim
ownership. (All of these type records were seized in the case at bar). Nevertheless,
the search in Birrell was held invalid by the court which held that even though Birrell
did not own the premises where the records were stored, he had "standing" to move
for the return ofall the papers and properties seized. The court, relying on Jones vs.
U.S., supra; U.S. vs. Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d
631: Henzel vs. U.S., supra; and Schwimmer vs. U.S., supra, pointed out that
It is overwhelmingly established that the searches here in question were
directed solely and exclusively against Birrell. The only person suggested in
the papers as having violated the law was Birrell. The first search warrant
described the records as having been used "in committing a violation of Title
18, United States Code, Section 1341, by the use of the mails by one Lowell
M. Birrell, . . ." The second search warrant was captioned: "United States of
America vs. Lowell M. Birrell. (p. 198)
Possession (actual or constructive), no less than ownership, gives standing
to move to suppress. Such was the rule even before Jones. (p. 199)
If, as thus indicated Birrell had at least constructive possession of the
records stored with Dunn, it matters not whether he had any interest in the
premises searched. See also Jeffers v. United States, 88 U.S. Appl. D.C. 58,
187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).
The ruling in the Birrell case was reaffirmed on motion for reargument; the United
States did not appeal from this decision. The factual situation in Birrell is strikingly
similar to the case of the present petitioners; as in Birrell, many personal and
corporate papers were seized from premises not petitioners' family residences; as
in Birrell, the searches were "PRIMARILY DIRECTED SOLETY AND EXCLUSIVELY"
against the petitioners. Still both types of documents were suppressed
in Birrell because of the illegal search. In the case at bar, the petitioners connection
with the premises raided is much closer than in Birrell.
Thus, the petitioners have full standing to move for the quashing of all the warrants
regardless whether these were directed against residences in the narrow sense of
the word, as long as the documents were personal papers of the petitioners or (to
the extent that they were corporate papers) were held by them in a personal capacity
or under their personal control.
Prescinding a from the foregoing, this Court, at all events, should order the return to
the petitioners all personal and private papers and effects seized, no matter where
these were seized, whether from their residences or corporate offices or any other
place or places. The uncontradicted sworn statements of the petitioners in their,
various pleadings submitted to this Court indisputably show that amongst the things
seized from the corporate offices and other places were personal and private papers
and effects belonging to the petitioners.
If there should be any categorization of the documents, papers and things which
where the objects of the unlawful searches and seizures, I submit that the grouping
should be: (a) personal or private papers of the petitioners were they were
unlawfully seized, be it their family residences offices, warehouses and/or premises
owned and/or possessed (actually or constructively) by them as shown in all the
search and in the sworn applications filed in securing the void search warrants and
(b) purely corporate papers belonging to corporations. Under such categorization or
grouping, the determination of which unlawfully seized papers, documents and
things are personal/private of the petitioners or purely corporate papers will have to
be left to the lower courts which issued the void search warrants in ultimately
effecting the suppression and/or return of the said documents.
And as unequivocally indicated by the authorities above cited, the petitioners
likewise have clear legal standing to move for the suppression of purely
corporate papers as "President and/or General Manager" of the corporations
involved as specifically mentioned in the void search warrants.
Finally, I must articulate my persuasion that although the cases cited in my
disquisition were criminal prosecutions, the great clauses of the constitutional
proscription on illegal searches and seizures do not withhold the mantle of their
protection from cases not criminal in origin or nature.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to as the PNB — seeks the
review by certiorari of a decision of the Court of Appeals, which affirmed that of the
Court of First Instance of Manila, dismissing plaintiff's complaint against the
Philippine Commercial and Industrial Bank — hereinafter referred to as the PCIB —
for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court
of Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his
current account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915-
B, in the sum of P57,415.00, drawn against the PNB; that, following an established
banking practice in the Philippines, the check was, on the same date, forwarded, for
clearing, through the Central Bank, to the PNB, which did not return said check the
next day, or at any other time, but retained it and paid its amount to the PCIB, as well
as debited it against the account of the GSIS in the PNB; that, subsequently, or on
January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-
credited to the latter's account, for the reason that the signatures of its officers on
the check were forged; and that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which the PCIB refused to do.
Hence, the present action against the PCIB, which was dismissed by the Court of First
Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the
GSIS on the check, as drawer thereof, are forged; that the person named in the check
as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel
Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the
PCIB stamped the following on the back of the check: "All prior indorsements and/or
Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre
Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB, for
clearance, through the Central Bank; and that, over two (2) months before, or on
November 13, 1961, the GSIS had notified the PNB, which acknowledged receipt of
the notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB
guilty of negligence; (2) in not finding that the indorsements at the back of the check
are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's
warranty on the back of the check; (4) in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding
that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which
it is interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures
of the drawer are forged, so must the signatures of the supposed indorsers be; but
this conclusion does not necessarily follow from said premise. Besides, there is
absolutely no evidence, and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the PNB refunded the amount of
the check to the GSIS, on account of the forgery in the signatures, not of the indorsers
or supposed indorsers, but of the officers of the GSIS as drawer of the instrument. In
other words, the question whether or not the indorsements have been falsified is
immaterial to the PNB's liability as a drawee, or to its right to recover from the
PCIB,1 for, as against the drawee, the indorsement of an intermediate bank does not
guarantee the signature of the drawer,2 since the forgery of the indorsement
is notthe cause of the loss.3
With respect to the warranty on the back of the check, to which the third assignment
of error refers, it should be noted that the PCIB thereby guaranteed "all
prior indorsements," not the authenticity of the signatures of the officers of the GSIS
who signed on its behalf, because the GSIS is not an indorser of the check, but its
drawer.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to recover
from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in
due course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon payment
by the PNB, as drawee, the check ceased to be a negotiable instrument, and became
a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in
general, "acceptance", in the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the same are payable on
demand.10 Indeed, "acceptance" and "payment" are, within the purview of said Law,
essentially different things, for the former is "a promise to perform an act," whereas
the latter is the "actual performance" thereof.11 In the words of the Law,12 "the
acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of
money. Upon the other hand, actual payment of the amount of a check implies not
only an assent to said order of the drawer and a recognition of the drawer's
obligation to pay the aforementioned sum, but, also, a compliance with such
obligation.
Let us now consider the first and the last assignments of error. The PNB maintains
that the lower court erred in not finding that the PCIB had been guilty of negligence
in not discovering that the check was forged. Assuming that there had been such
negligence on the part of the PCIB, it is undeniable, however, that the PNB has, also,
been negligent, with the particularity that the PNB had been guilty of a greater
degree of negligence, because it had a previous and formal notice from the GSIS that
the check had been lost, with the request that payment thereof be stopped. Just as
important, if not more important and decisive, is the fact that the PNB's negligence
was the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its
presentation by Augusto Lim; that the latter had merely deposited it in his current
account with the PCIB; that, on the same day, the PCIB sent it, through the Central
Bank, to the PNB, for clearing; that the PNB did not return the check to the PCIB the
next day or at any other time; that said failure to return the check to the PCIB implied,
under the current banking practice, that the PNB considered the check good and
would honor it; that, in fact, the PNB honored the check and paid its amount to the
PCIB; and that only then did the PCIB allow Augusto Lim to draw said amount from
his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe that
the check was genuine and good in every respect, but, also, to pay its amount to
Augusto Lim. In other words, the PNB was the primary or proximate cause of the loss,
and, hence, may not recover from the PCIB. 13
It is a well-settled maxim of law and equity that when one of two (2) innocent persons
must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power
of the third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the
drawee (PNB) banks are equally at fault, the court will leave the parties where it finds
them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a
bill without having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
Philippine National Bank. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, Fernando and Capistrano,
JJ., concur.
Zaldivar, J., took no part.
G.R. No. 75885 May 27, 1987
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO
SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER
RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.
NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive
Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino on February
28, 1986 and March 12, 1986, respectively, and (2) the sequestration, takeover, and
other orders issued, and acts done, in accordance with said executive orders by the
Presidential Commission on Good Government and/or its Commissioners and agents,
affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all
its misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista.
It was addressed to three of the agents of the Commission, hereafter simply referred
to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on
Good Government, by authority of the President of the Philippines,
you are hereby directed to sequester the following companies.
1. Bataan Shipyard and Engineering Co., Inc.
(Engineering Island Shipyard and Mariveles
Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo"
Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum
disruption of these companies' business activities.
2. To ensure the continuity of these companies as going concerns,
the care and maintenance of these assets until such time that the
Office of the President through the Commission on Good
Government should decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security
Support from the Military/Police authorities, and such other acts
essential to the achievement of this sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the
PCGG, addressed a letter dated April 18, 1986 to the President and other officers of
petitioner firm, reiterating an earlier request for the production of certain
documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting
from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings
of the Board of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee
Meetings from 1973 to 1986
2.6. Existing contracts with
suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding
share/stockholdings from 1973 to 1986 duly certified by the
Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit &
Loss and others from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March
31, 1986.
6. Consolidated Cash Position Reports from January to April 15,
1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the
authorized signatories for withdrawals thereof.
10. Schedule of company investments and placements. 2
The letter closed with the warning that if the documents were not submitted within
five days, the officers would be cited for "contempt in pursuance with Presidential
Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to 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 the basic sequestration order. He sent a letter to
BASECO's Vice-President for Finance, 3 terminating the contract for security services
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,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum 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 the stipulated charges for use of the BASECO road network were made
payable "upon entry and not anymore subject to monthly billing as was originally
agreed upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf
of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the
latter undertook to introduce improvements costing approximately P210,000.00 on
the BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to
"optimize its utilization and in return maximize the revenue which would flow into
the government coffers," in consideration of Deltamarine's 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 equipments" "until the improvement remains in a condition
suitable for port operations." 5 It seems however that this contract was never
consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team,"
advised Deltamarine by letter dated July 30, 1986 that "the new management is not
in a position to honor the said contract" and thus "whatever improvements * * (may
be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's)
own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG
agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards
maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by
conventional methods;" but afterwards, Commissioner Bautista, in representation of
the PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at
Mariveles, Bataan, an agreement to this effect having been executed by them on
September 17, 1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's compound,"
and in this connection, to dispose of or sell "metal scraps" and other materials,
equipment and machineries no longer usable, subject to specified guidelines and
safeguards including audit and verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional
takeover by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their
affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive
Order No. 1, empowering the Commission —
* * To provisionally takeover in the public interest or to prevent its
disposal or dissipation, business enterprises and properties taken
over by the government of the Marcos Administration or by
entities or persons close to former President Marcos, until the
transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by Capt.
Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of
the companies;
4. Ensures that the assets of the companies are not dissipated and
used effectively and efficiently; revenues are duly accounted for;
and disburses funds only as may be necessary;
5. Does actions including among others, seeking of military support
as may be necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on
Good Government on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza,
Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the
termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and agents
which, to repeat, petitioner BASECO would have this Court nullify. More particularly,
BASECO prays that this Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the takeover
order of July 14, 1986 and the termination of the services of the BASECO
executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and
Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial action,
might be made within the context of Executive Orders Nos. 1 and 2 before March 25,
1986 when the Freedom Constitution was promulgated, under the principle that the
law promulgated by the ruler under a revolutionary regime is the law of the land, it
ceased to be acceptable when the same ruler opted to promulgate the Freedom
Constitution on March 25, 1986 wherein under Section I of the same, Article IV (Bill
of Rights) of the 1973 Constitution was adopted providing, among others, that "No
person shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well
as the Sequestration Order * * and Takeover Order * * issued purportedly under the
authority of said Executive Orders, rests on four fundamental
considerations: First, no notice and hearing was accorded * * (it) before its properties
and business were taken over; Second, the PCGG is not a court, but a purely
investigative agency and 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 challenge the
validity of the takeover after the same has been effected; and Fourthly, being
directed against specified persons, and in disregard of the constitutional
presumption of innocence and general rules and procedures, they constitute a Bill of
Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it has
apparently already complied with, was issued without court authority and infringed
its constitutional right against self-incrimination, and unreasonable search and
seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of
dominion and management of its business affairs by —
1) terminating its contract for security services with Fairways & Anchor, without the
consent and against the will of the contracting parties; and amending the mode of
payment of entry fees stipulated in its Lease Contract with National Stevedoring &
Lighterage Corporation, these acts being in violation of the non-impairment clause of
the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract"
with Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO
premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its
rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment,
machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their
affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal
Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May
11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration, takeover
and freeze orders have been engendered by misapprehension, or incomplete
comprehension if not indeed downright ignorance of the law governing these
remedies. It is needful that these misconceptions and doubts be dispelled so that
uninformed and useless debates about them may be avoided, and arguments tainted
b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this
end, this opinion will essay an exposition of the law on the matter. In the process
many of the objections raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that the
President-in the exercise of legislative power which she was authorized to continue
to wield "(until a legislature is elected and convened under a new Constitution" —
"shall give priority to measures to achieve the mandate of the people," among others
to (r)ecover ill-gotten properties amassed by the leaders and supporters of the
previous regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and
postulates that "vast resources of the government have been amassed by former
President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad." 25 Upon these premises, the Presidential Commission on
Good Government was created, 26 "charged with the task of assisting the President
in regard to (certain specified) matters," among which was precisely-
* * The recovery of all in-gotten wealth accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, whether located in the
Philippines 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 advantage of their public office and/or using their powers,
authority, influence, connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in the
fulfillment of its mission, the PCGG was granted "power and authority" to do the
following particular acts, to wit:
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
 properties may be found, and any records pertaining thereto, in
order to prevent their destruction, concealment or disappearance
which would frustrate or hamper the investigation or otherwise
prevent the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the
disposal or dissipation, business enterprises and properties taken
over by the government of the Marcos Administration or by
entities or persons close to former President Marcos, until the
transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of
acts by any person or entity that may render moot and academic,
or frustrate or otherwise make ineffectual the efforts of the
Commission to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power
to conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29It was
given power also to promulgate such rules and regulations as may be necessary to
carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in possession of evidence
showing that there are assets and properties purportedly
pertaining to former Ferdinand E. Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates,
business associates, dummies, agents or nominees which had been
or were acquired by 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 Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment
and causing grave damage and prejudice to the Filipino people and
the Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank accounts,
deposits, trust accounts, shares of stocks, buildings, shopping
centers, condominiums, mansions, residences, estates, and other
kinds of real and personal properties in the Philippines and in
various countries of the world." 31
Upon these premises, the President-
1) froze "all assets and properties in the Philippines in which former
President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos,
their close relatives, subordinates, business associates, dummies,
agents, or nominees have any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife *
*, their close relatives, subordinates, business associates, duties,
agents, or nominees from transferring, conveying, encumbering,
concealing or dissipating said assets or properties in the Philippines
and abroad, pending the outcome of appropriate proceedings in
the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal
use of or the conversion of funds belonging to the Government of
the Philippines or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue
advantage of their official position, authority, relationship,
connection or influence to unjustly enrich themselves at the
expense and to the grave damage and prejudice of the Filipino
people and the Republic of the Philippines;
3) prohibited "any person from transferring, conveying,
encumbering or otherwise depleting or concealing such assets and
properties or from assisting or taking part in their transfer,
encumbrance, concealment or dissipation under pain of such
penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or
properties, whether located in the Philippines or abroad, in their
names as nominees, agents or trustees, to make full disclosure of
the same to the Commission on Good Government within thirty
(30) days from publication of * (the) Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other
government agencies, * * to file and prosecute all cases investigated by it * * as may
be warranted by its findings." 34 All such cases, whether civil or criminal, are to be
filed "with the Sandiganbayan which shall have exclusive and original jurisdiction
thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for
restitution, reparation of damages, or indemnification for consequential damages,
forfeiture proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * * (said
Executive Orders Numbered 1 and 2) may be filed separately from and proceed
independently of any criminal proceedings and may be proved by a preponderance
of evidence;" and that, moreover, the "technical rules of procedure and evidence
shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and
supporters of the previous regime"; 37
 a) more particularly, that ill-gotten wealth (was) accumulated by
former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, * * located in the
Philippines or abroad, * * (and) business enterprises and entities
(came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue
advantage of their public office and/or using their powers,
authority, influence, Connections or relationship; 38
b) otherwise stated, that "there are assets and properties
purportedly pertaining to former President Ferdinand E. Marcos,
and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by 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 Philippines or
any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of their office,
authority, influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice to the
Filipino people and the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank accounts.
deposits, trust. accounts, shares of stocks, buildings, shopping
centers, condominiums, mansions, residences, estates, and other
kinds of real and personal properties in the Philippines and in
various countries of the world;" 40 and
2) that certain "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by
entities or persons close to former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above
described factual premises of the Executive Orders and Proclamation No. 3 to be true,
to be demonstrable by competent evidence, the recovery from Marcos, his family
and his dominions of the assets and properties involved, is not only a right but a duty
on the part of Government.
But however plain and valid that right and duty may be, still a balance must be sought
with the equally compelling necessity that a proper respect be accorded and
adequate protection assured, the fundamental rights of private property and free
enterprise which are deemed pillars of a free society such as ours, and to which all
members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution,
embraces as its necessary components freedom of conscience,
freedom of expression, and freedom in the pursuit of
happiness. Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds and
under proper control. * * Evincing much concern for the protection
of property, the Constitution distinctly 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 Constitution
realizes the indispensable role which property, owned in
reasonable quantities and used legitimately, plays in the
stimulation to economic effort and the formation and growth of a
solid social middle class that is said to be the bulwark of democracy
and the backbone of every progressive and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be
assumed. They will have to be duly established by adequate proof in each case, in a
proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly
and properly adjudged and consummated; although there are some who maintain
that the fact-that an immense fortune, and "vast resources of the government have
been amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad," and they have resorted to all
sorts of clever schemes and manipulations to disguise and hide their illicit
acquisitions-is within the realm of judicial notice, being of so extensive notoriety as
to dispense with proof thereof, Be this as it may, the requirement of evidentiary
substantiation has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets
Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of
such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and
imperative need for preliminary, provisional measures to prevent the concealment,
disappearance, destruction, dissipation, or loss of the assets and properties subject
of the suits, or to restrain or foil acts that may render moot and academic, or
effectively hamper, delay, or negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to 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 Administration or by entities or persons close to former President
Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed
to be "ill-gotten" means to place or cause to be placed under its possession or control
said property, or any building or office wherein any such property and any records
pertaining thereto may be found, including "business enterprises and entities,"-for
the purpose of preventing the destruction, concealment or dissipation of, and
otherwise conserving and preserving, the same-until it can be determined, through
appropriate judicial proceedings, whether the 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 Government or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of official position,
authority relationship, connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State. 44 And this, too, is the
sense in which the term is commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property
alleged to constitute "ill-gotten wealth" "from transferring, conveying, encumbering
or otherwise depleting or concealing such property, or from assisting or taking part
in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it
commands the possessor to hold the property and conserve it subject to the orders
and disposition of the authority decreeing such freezing. In this sense, it is akin to a
garnishment by which the possessor or ostensible owner of property is enjoined not
to deliver, transfer, or otherwise dispose of any effects or credits in his possession or
control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the
apparent distinction between "ill gotten" "business enterprises and entities" (going
concerns, businesses in actual operation), generally, as to which the remedy of
sequestration applies, it being necessarily inferred that the remedy entails no
interference, or the least possible interference with the actual management and
operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons close
to him," in particular, as to which a "provisional takeover" is authorized, "in the public
interest or to prevent disposal or dissipation of the enterprises." 48 Such a
"provisional takeover" imports something more than sequestration or freezing, more
than the placing of the business under physical possession and control, albeit without
or with the least possible interference with the management and carrying 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 control not only over things, but over operations
or on- going activities. But, to repeat, such a "provisional takeover" is allowed only as
regards "business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
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." These remedies may be resorted to only
for a particular exigency: to prevent in the public interest the disappearance or
dissipation of property or business, and conserve it pending adjudgment in
appropriate proceedings of the primary issue of whether or not the acquisition of
title or other right thereto by the apparent owner was attended by some vitiating
anomaly. None of the remedies is meant to deprive the owner or possessor of his
title or any right to the property sequestered, frozen or taken over and vest it in the
sequestering agency, the Government or other person. This can be done only for the
causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take
over is to be understood and exercised, the language of the executive orders in
question leaves no doubt. Executive Order No. 1 declares that the sequestration of
property the acquisition of which is suspect shall last "until the transactions leading
to such acquisition * * can be disposed of by the appropriate authorities." 49 Executive
Order No. 2 declares that the assets or properties therein mentioned shall remain
frozen "pending the outcome of appropriate proceedings in the Philippines to
determine whether any such assets or properties were acquired" by illegal
means. Executive Order No. 14 makes clear that judicial proceedings are essential for
the resolution of the basic issue of whether or not particular assets are "ill-gotten,"
and resultant recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The
Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that sequestration,
freezing or provisional takeover is designed to be an end in itself, that it is the device
through which persons may be deprived of 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 is not so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the
duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays
down the relevant rule in plain terms, apart from extending ratification or
confirmation (although not really necessary) to the institution by presidential fiat of
the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under
Proclamation No. 3 dated March 25, 1986 in relation to the
recovery of ill-gotten wealth shag remain operative for not more
than eighteen months after the ratification of this Constitution.
However, in the national interest, as certified by the President,
the Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing
of a prima facie case. The order and the list of the sequestered or
frozen properties shall forthwith be registered with the proper
court. For orders issued before the ratification of this Constitution,
the corresponding judicial action or proceeding shall be filed within
six months from its ratification. For those issued after such
 ratification, the judicial action or proceeding shall be commenced
within six months from the issuance thereof.
The sequestration or freeze order is deemed automatically lifted if
no judicial action or proceeding is commenced as herein
provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin to the
provisional remedy of preliminary attachment, or receivership. 53 By attachment, a
sheriff seizes property of a defendant in a civil suit so that it may stand as security for
the satisfaction of any judgment that may be obtained, and not disposed of, or
dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership,
property, real or personal, which is subject of litigation, is placed in the possession
and control of a receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it. 55 All these remedies —
sequestration, freezing, provisional, takeover, attachment and receivership — are
provisional, temporary, designed for-particular exigencies, attended by no character
of permanency or finality, and always subject to the control of the issuing court or
agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not
issued by a court is of no moment. The Solicitor General draws attention to the writ
of distraint and levy which since 1936 the Commissioner of Internal Revenue has
been by law authorized to issue against property of a delinquent taxpayer. 56 BASECO
itself declares 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 to a point
that makes it insensitive to change." What it insists on, what it pronounces to be its
"unyielding position, is that any change in procedure, or the institution of a new one,
should conform to due process and the other prescriptions of the Bill of Rights of the
Constitution." 57 It is, to be sure, a proposition on which there can be no
disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of
personal property in replevin suits, sequestration and provisional takeover writs may
issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of
personality, no objection of any significance may be raised to the ex parte issuance
of an order of sequestration, freezing or takeover, given its fundamental character of
temporariness or conditionality; and taking account specially of the constitutionally
expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-
gotten wealth" and thereby cause that disappearance or loss of property precisely
sought to be prevented, and the fact, just as self-evident, that "any transfer,
disposition, concealment or disappearance of said assets and properties would
frustrate, obstruct or hamper the efforts of the Government" at the just recovery
thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and receivership,
there exist a prima facie factual foundation, at least, for the sequestration, freeze or
takeover order, and adequate and fair opportunity to contest it and endeavor to
cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of
fairness and due process." 62Executive Order No. 2 declares that with respect to
claims on allegedly "ill-gotten" assets and properties, "it is the position of the new
democratic government that President Marcos * * (and other parties affected) be
afforded fair opportunity to contest these claims before appropriate Philippine
authorities." 63 Section 7 of the Commission's Rules and Regulations provides that
sequestration or freeze (and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested
party, or motu proprio when the Commission has reasonable grounds to believe that
the issuance thereof is warranted. 64 A similar requirement is now found in Section
26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze
order shall be issued only upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by
which a party may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of
sequestration or freeze or hold order is directed may request the
lifting thereof in writing, either personally or through counsel
within five (5) days from receipt of the writ or order, or in the case
of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing
or motu proprio for good cause shown, the Commission may lift the
writ or order unconditionally or subject to such conditions as it may
deem necessary, taking into consideration the evidence and the
circumstance of the case. The resolution of the commission may be
appealed by the party concerned to the Office of the President of
the Philippines within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten
wealth" were not expressly imposed by some rule or regulation as a condition to
warrant the sequestration or freezing of property contemplated in the executive
orders in question, it would nevertheless be exigible in this jurisdiction in which the
Rule of Law prevails and official acts which are devoid of rational basis in fact or law,
or are whimsical and capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to the 12. Organization and Stock Distribution of BASECO
validity and propriety of sequestration, freeze and takeover orders, it should be BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *
dispelled by the fact that these particular remedies and the authority of the PCGG to incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a
issue them have received constitutional approbation and sanction. As already consortium of Filipino shipowners and shipping executives. Its main office is at
mentioned, the Provisional or "Freedom" Constitution recognizes the power and Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed, and
duty of the President to enact "measures to achieve the mandate of the people to * its main shipyard is located at Mariveles Bataan." 73 Its Articles of Incorporation
* * (recover ill- gotten properties amassed by the leaders and supporters of the disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares,
previous regime and protect the interest of the people through orders of of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on
sequestration or freezing of assets or accounts." And as also already adverted to, said subscription, the aggregate sum of P3,035,000.00 has been paid by the
Section 26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the incorporators. 74The same articles Identify the incorporators, numbering fifteen (15),
"authority to issue sequestration or freeze orders under Proclamation No. 3 dated as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P.
March 25, 1986." Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8)
The institution of these provisional remedies is also premised upon the State's Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12)
inherent police power, regarded, as t lie power of promoting the public welfare by Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo
restraining and regulating the use of liberty and property," 68 and as "the most Torres.
essential, insistent and illimitable of powers * * in the promotion of general welfare By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be
and the public interest," 69and said to be co-extensive with self-protection and * * stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias
not inaptly termed (also) the'law of overruling necessity." " 70 Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this
10. PCGG not a "Judge"; General Functions year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and
It should also by now be reasonably evident from what has thus far been said that Transfer Book. 75Their names and the number of shares respectively held by them
the PCGG is not, and was never intended to act as, a judge. Its general function is to are as follows:
conduct investigations in order to collect evidence establishing instances of "ill-
1. Jose A. Rojas 1,248 shares
gotten wealth;" issue sequestration, and such orders as may be warranted by the
evidence thus collected and as may be necessary to preserve and conserve the assets 2. Severino G. de la 1,248 shares
of which it takes custody and control and prevent their disappearance, loss or Cruz
dissipation; and eventually file and prosecute in the proper court of competent
jurisdiction all cases investigated by it as may be warranted by its findings. It does not 3. Emilio T. Yap 2,508 shares
try and decide, or hear and determine, or adjudicate with any character of finality or
compulsion, cases involving the essential issue of whether or not property should be 4. Jose Fernandez 1,248 shares
forfeited and transferred to the State because "ill-gotten" within the meaning of the
Constitution and the executive orders. This function is reserved to the designated 5. Jose Francisco 128 shares
court, in this case, the Sandiganbayan. 71 There can therefore be no serious regard
accorded to the accusation, leveled by BASECO, 72that the PCGG plays the perfidious 6. Manuel S. 96 shares
role of prosecutor and judge at the same time. Mendoza
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by the 7. Anthony P. Lee 1,248 shares
record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari
8. Hilario M. Ruiz 32 shares
and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by 9. Constante L. 8 shares
President Marcos "during his administration, through nominees, by taking undue Fariñas
advantage of his public office and/or using his powers, authority, or influence, " and
that it was by and through the same means, that BASECO had taken over the business 10. Fidelity 65,882 shares
and/or assets of the National Shipyard and Engineering Co., Inc., and other Management, Inc.
government-owned or controlled entities.
 on October 9, 1973, entitled "Memorandum Agreement," and was signed for
11. Trident 7,412 shares
NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors, and
Management
David R. Ines, as General Manager. 77 This agreement bore, at the top right corner of
12. United Phil. Lines 1,240 shares the first page, the word "APPROVED" in the handwriting of President
Marcos, followed by his usual full signature. The document recited that a down
13. Renato M. 8 shares payment of P5,862,310.00 had been made by BASECO, and the balance of
Tanseco P19,449,240.00 was payable in equal semi-annual installments over nine (9) years
after a grace period of two (2) years, with interest at 7% per annum.
14. Fidel Ventura 8 shares 15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land in
15. Metro Bay 136,370 Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00
Drydock shares of which, as set out in the document of sale, P2,000.000.00 was paid upon its
execution, and the balance stipulated to be payable in installments. 78
16. Manuel Jacela 1 share 16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with
17. Jonathan G. Lu 1 share
the intervention of President Marcos, acquired ownership of the rest of the assets of
NASSCO which had not been included in the first two (2) purchase documents. This
18. Jose J. Tanchanco 1 share
was accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like
19. Dioscoro Papa 128 shares the Memorandum of Agreement dated October 9, 1973 supra also bore at the upper
right-hand corner of its first page, the handwritten notation of President
20. Edward T. 4 shares Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full
Marcelo signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights
and interests over all equipment and facilities including structures, buildings, shops,
TOTAL 218,819 quarters, houses, plants and expendable or semi-expendable assets, located at the
shares. Engineer Island, known as the Engineer Island Shops, including all the equipment of
the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to
13 Acquisition of NASSCO by BASECO
BASECO but retained by BASECO and all other selected equipment and machineries
Barely six months after its incorporation, BASECO acquired from National Shipyard &
of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO committed
Steel Corporation, or NASSCO, a government-owned or controlled corporation, the
itself to cooperate with BASECO for the acquisition from the National Government or
latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS),
other appropriate Government entity of Engineer Island. Consideration for the sale
and — except for NASSCO's Engineer Island Shops and certain equipment of the BNS,
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been
consigned for future negotiation — all its structures, buildings, shops, quarters,
made, and the balance was stipulated to be paid at 7% interest per annum in equal
houses, plants, equipment and facilities, in stock or in transit. This it did in virtue of a
semi annual installments over a term of nine (9) years, to commence after a grace
"Contract of Purchase and Sale with Chattel Mortgage" executed on February 13,
period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together
1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered
with the general manager, Mr. David R. Ines.
to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four
17. Loans Obtained
(24) hours from completion of the inventory undertaken pursuant to the contract.
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken
The balance of P41,600,000.00, with interest at seven percent (7%) per annum,
from "the last available Japanese war damage fund of $19,000,000.00," to pay for
compounded semi-annually, was stipulated to be paid in equal semi-annual
"Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got
installments over a term of nine (9) years, payment to commence after a grace period
another loan also from the NDC in the amount of P30,000,000.00 (id.). And on
of two (2) years from date of turnover of the shipyard to BASECO. 76
January 28, 1976, it got still another loan, this time from the GSIS, in the sum of
14. Subsequent Reduction of Price; Intervention of Marcos
P12,400,000.00. 81 The claim has been made that not a single centavo has been paid
Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to
on these loans. 82
P24,311,550.00, about eight (8) months later. A document to this effect was executed
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos regarding
BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M.
Ruiz, BASECO president. 83 The second was embodied in a confidential memorandum
dated September 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 relative by
affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that
there had been "no orders or demands for ship construction" for some time and
expressed the fear that if that state of 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 be
a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an
entirely new corporation to be created;" and towards this end, he informed Marcos
that BASECO was —
* * inviting NDC and LUSTEVECO to participate by converting the
NDC shipbuilding loan to BASECO amounting to P341.165M and
assuming and converting a portion of BASECO's shipbuilding loans
from REPACOM amounting to P52.2M or a total of P83.365M as
NDC's equity contribution in the new corporation. LUSTEVECO will
participate by absorbing and converting a portion of the REPACOM
loan of Bay Shipyard and Drydock, Inc., amounting to P32.538M.86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later.
It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a
Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan
obligations due chiefly to the fact that "orders to build ships as expected * * did not
materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4)
Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is
already dead and Mr. Jose A. Rojas had a major heart attack," he made the following
quite revealing, and it may be added, quite cynical and indurate recommendation, to
wit:
* * (that) their replacements (be effected) so we can register their
names in the stock book prior to the implementation of your
instructions to pass a board resolution to legalize the transfers
under SEC regulations;
2. By getting their replacements, the families cannot question us
later on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following documents: 88
1. Stock certificates indorsed and assigned in blank with
assignments and waivers; 89
2. The articles of incorporation, the amended articles, and the by-
laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels
of land in "Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO,
covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO
re-structure and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-
structure and equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re
300 hectares of land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from
NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00
for the housing facilities for BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until such
period when BASECO will have enough orders for ships in order for the company to
meet loan obligations," and that —
An LOI may be issued to government agencies using floating
equipment, that a linkage scheme be applied to a certain percent
of BASECO's net profit as part of BASECO's amortization payments
to make it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or
officer of BASECO, yet he has presented a report on BASECO to President Marcos,
and his report demonstrates intimate familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates' recommendations,
particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's
amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary
Geronimo Velasco of the Philippine National Oil Company and Chairman Constante
Fariñas of the National Development Company, directing them "to participate in the
formation of a new corporation resulting from the spin-off of the shipbuilding
component of BASECO along the following guidelines:
 a. Equity participation of government shall be through LUSTEVECO
and NDC in the amount of P115,903,000 consisting of the
following obligations of BASECO which are hereby authorized to be
converted to equity of the said new corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M
Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non-
voting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-
two (22) days after receiving their president's memorandum, Messrs. Hilario M. Ruiz,
Constante L. Fariñas and Geronimo Z. Velasco, in representation of their respective
corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20,
1977. 93 In it, they undertook to form a shipbuilding corporation to be known as
"PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was actually
named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine National Oil
Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National
Development Company (NDC). What is commanded therein is summarized by the
Solicitor General, with pithy and not inaccurate observations as to the effects thereof
(in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through
reparations be transferred to NDC subject to reimbursement by
NDC to BASECO (of) the amount of s allegedly representing the
handling and incidental expenses incurred by BASECO in the
installation of said equipment (so instead of NDC getting paid on its
loan to BASECO, it was made to pay BASECO instead the amount of
P18.285M); 2) the shipbuilding equipment procured from
reparations through EPZA, now in the possession of BASECO and
BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to
LUSTEVECO through PNOC; and 3) the 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 partnership with the private
sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum,
BASECO's loan obligation to NDC and REPACOM * * in the total
amount of P83.365M and BSD's REPACOM loan of P32.438M were
wiped out and converted into non-voting preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the
actuality of the control by President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President
Marcos not only exercised control over BASECO, but also that he actually owns well
nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were
218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882
shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240
shares. The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of President
Marcos, were certificates corresponding to more than ninety-five percent (95%) of all
the outstanding shares of stock of BASECO, endorsed in blank, together with deeds
of assignment of practically all the outstanding shares of stock of the three (3)
corporations above mentioned (which hold 95.82% of all BASECO stock), signed by
the owners thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity
Management Inc. — which supposedly owns as aforesaid 65,882
shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000
outstanding shares of Metro Bay Drydock Corporation — which
allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident
Management Co., Inc. — which allegedly owns 7,412 shares of
BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819
outstanding shares of BASECO stock; that is, all but 5 % — all
endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this
Court that the BASECO stockholders were still in possession of their respective stock
certificates and had "never endorsed * * them in blank or to anyone else," 100 that
denial is exposed by his own prior and subsequent recorded statements as a mere
gesture of defiance rather than a verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a
period of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock
issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of
the petition.' 101 Counsel thereafter moved for extension; and in his motion dated
October 2, 1986, he declared inter alia that "said certificates of stock are in the
possession of third parties, among whom being the respondents themselves * *
and petitioner is still endeavoring to secure copies thereof from them." 102 On the
same day he filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of the stock
certificates "confirms the fact that stockholders of petitioner corporation are not in
possession of * * (their) certificates of stock," and the reason, according to him, was
"that 95% of said shares * * have been endorsed in blank and found in Malacañang
after the former President and his family fled the country." To this manifestation
BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly
insisting that the firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on November 27,
1986 among other things "to require * * the petitioner * * to deposit upon proper
receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged
to be in its possession or accessible to it, mentioned and described in Annex 'P' of its
petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion
filed on December 5, 1986, 107 BASECO's counsel made the statement, quite
surprising in the premises, that "it will negotiate with the owners (of the BASECO
stock in question) to allow petitioner to borrow from them, if available, the
certificates referred to" but that "it needs a more sufficient time therefor" (sic).
BASECO's counsel however eventually had to confess inability to produce the
originals of the stock certificates, putting up the feeble excuse that while he had
"requested the stockholders to allow * * (him) to borrow said certificates, * * some
of * * (them) claimed that they had delivered the certificates to third parties by way
of pledge and/or to secure performance of obligations, while others allegedly have
entrusted them to third parties in view of last national emergency." 108 He has
conveniently omitted, nor has he offered to give the details of the transactions
adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present
custody of the originals of the 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
circumstances, the Court can only conclude that he could not get the originals from
the stockholders for the simple reason that, as the Solicitor General maintains, said
stockholders in truth no longer have them in their possession, these having already
been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least,
the stockholders and directors of BASECO as of April, 1986 109 were mere
"dummies," nominees or alter egos of President Marcos; at any rate, that they are
no longer owners of any shares of stock in the corporation, the conclusion cannot be
avoided that said stockholders and directors have no basis and no standing whatever
to cause the filing and prosecution of the instant proceeding; and to grant relief to
BASECO, as prayed for in the petition, would in effect be to restore the assets,
properties and business sequestered and taken over by the PCGG to persons who are
"dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed
show that the private corporation known as BASECO was "owned or controlled by
former President Ferdinand E. Marcos * * during his administration, * * through
nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,
authority, influence * *," and that NASSCO and other property of the government
had been taken over by BASECO; and the situation justified the sequestration as well
as the provisional takeover of the corporation in the public interest, in accordance
with the terms of Executive Orders No. 1 and 2, pending the filing of the requisite
actions with the Sandiganbayan to cause divestment of title thereto from Marcos,
and its adjudication in favor of the Republic pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is correct;
accordingly, it sustains the acts of sequestration and takeover by the PCGG as being
in accord with the law, and, in view of 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 which they were done, are fatally defective in not according to the
parties affected prior notice and hearing, or an adequate remedy to impugn, set aside
or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and
judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are a
bill of attainder. 110 "A bill of attainder is a legislative act which inflicts punishment
without judicial trial." 111 "Its essence is the substitution of a legislative for a judicial
determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a
determination or declaration of guilt. On the contrary, the executive orders, inclusive
of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the
amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial
tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the
merest glance at their provisions will immediately make apparent. In no sense,
therefore, may the executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches and
Seizures
BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the 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 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, contracts, records,
statements of accounts and other documents as may be material to the investigation
conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing
with its power to "require all persons in the Philippines holding * * (alleged "ill-
gotten") assets or properties, whether located in the Philippines or abroad, in their
names as nominees, agents or trustees, to make full disclosure of the same * *." The
contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical
persons.
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 refuse to show its hand when charged with an
abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional
protections which private individuals have. * * They are not at all
within the privilege against self-incrimination, although this court
more than once has said 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 cannot refuse to produce its
records in its possession upon the plea that they will either
incriminate him or may incriminate it." (Oklahoma Press Publishing
Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its
charter. Its rights to act as a corporation are only preserved to it so
long as it obeys the laws of its creation. There is a reserve right in
the legislature to investigate its 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 make use of certain
franchises, could not, in the exercise of sovereignty, inquire how
these franchises had been employed, and whether they had been
abused, and demand the production of the corporate books and
papers for that purpose. The defense amounts to this, that an
officer of the corporation which is charged with a criminal 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. 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 refuse to show its hand when charged with an abuse
of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780
[emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14
assures protection to individuals required to produce evidence before the PCGG
against any possible violation of his right against self-incrimination. It gives them
immunity from prosecution on the basis of testimony or information he is compelled
to present. As amended, said Section 4 now provides that —
xxx xxx xxx
The witness may not refuse to comply with the order on the basis
of his privilege against self-incrimination; but no testimony or other
information compelled under the order (or any information directly
or indirectly derived from such testimony, or other information)
may be used against the witness in any criminal case, except a
prosecution for perjury, giving a false statement, or otherwise
failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no
application to the case at bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no seizure on the occasion
thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent
of the powers that may be wielded by the PCGG with regard to the properties or
businesses placed under sequestration or 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 conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise
acts of dominion over property sequestered, frozen or provisionally taken over. AS
already earlier stressed with no little insistence, the act of sequestration; freezing or
provisional takeover of 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
property sequestered, frozen or provisionally taken over, the PCGG is a conservator,
not an owner. Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules where, unlike
cases of receivership, for example, no court exercises effective supervision or can
upon due application and hearing, grant authority for the performance of acts of
dominion.
Equally evident is that the resort to the provisional remedies in question should entail
the least possible interference with business operations or activities so that, in the
event that the accusation of the business enterprise being "ill gotten" be not proven,
it may be returned to its rightful owner as far as possible in the same condition as it
was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, 115 such as to bring and defend actions in 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 may in addition enjoin or restrain any actual or threatened commission of
acts by any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the assistance
of any office, agency or instrumentality of the government. 116 In the case of
sequestered businesses generally (i.e., going concerns, businesses in current
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.
c. Powers over Business Enterprises Taken Over by Marcos or
Entities or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been
"taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos," 117 the PCGG is given power and
authority, as already adverted to, to "provisionally take (it) over in the public interest
or to prevent * * (its) disposal or dissipation;" and since the term is obviously
employed in reference to going concerns, or business enterprises in operation,
something more than mere physical custody is connoted; the PCGG may in this case
exercise some measure of control in the operation, running, or management of the
business itself. But even in this special situation, the intrusion into management
should be restricted to the minimum degree necessary to accomplish the legislative
will, which is "to prevent the disposal or dissipation" of the business enterprise. There
should be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution should be avoided if at all
possible, and undertaken only when justified by demonstrably tenable grounds and
in line with the stated objectives of the PCGG. And it goes without saying that where
replacement of management officers may be called for, the greatest prudence,
circumspection, care and attention - should accompany that undertaking to the end
that truly competent, experienced and honest managers may be recruited. There
should be no role to be played in this area by rank amateurs, no matter how wen
meaning. The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around 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 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, administration and
control of business enterprises provisionally taken over may legitimately be
exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a
Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG,
"pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of Incorporation, etc."
The Memorandum should be construed in such a manner as to be consistent with,
and not contradictory of the Executive 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 the corporate voting power. The stock is not to be voted to replace directors,
or revise the articles or by-laws, or otherwise bring about 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 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 reason
or rhyme, should indeed be shunned if at an possible, and undertaken only when
essential to prevent disappearance or wastage of corporate property, and always
under such circumstances as assure that the replacements are truly possessed of
competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors
out of office and elect others in their stead because the evidence showed prima
facie that the former were just tools of President Marcos and were no longer owners
of any stock in the firm, if they ever were at all. This is why, in its Resolution of
October 28, 1986; 118 this Court declared that —
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the
Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can,
through its designated directors, properly exercise control and
management over what appear to be properties and assets owned
and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show
any right or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in the
BASECO Board in the management of the company's affairs should henceforth be
guided and governed by the norms herein laid down. They should never for a
moment allow themselves to forget that they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree of diligence and
rectitude is, in the premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or
revision, and the execution of certain contracts, 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
arising therefrom may and will be left for initial determination in the appropriate
action. But the Court will state that absent any showing of any important cause
therefor, it will not normally substitute its judgment for that of the PCGG in these
individual transactions. It is clear however, that as things now stand, the petitioner
cannot be said to have established the correctness of its submission that the acts of
the PCGG in question were done without or in excess of its powers, or with grave
abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued on
October 14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.
Separate Opinions
TEEHANKEE, CJ., concurring:
I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of
disposing of the issues raised by petitioner BASECO in the case at bar, it
comprehensively discusses the laws and principles governing the Presidential
Commission on Good Government (PCGG) and defines the scope and extent of its
powers in the discharge of its monumental task of recovering the "ill-gotten wealth,
accumulated by former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, whether located in the Philippines or
abroad (and) business enterprises and entities owned or controlled by them during I
. . .(the Marcos) administration, directly or through nominees, by taking undue
advantage of their public office and/or using their powers, authority, influence,
connections or relationship." 1
The Court is unanimous insofar as the judgment at bar upholds the imperative need
of recovering the ill-gotten properties amassed by the previous regime, which
"deserves the fullest support of the judiciary and all sectors of society." 2 To quote
the pungent language of Mr. Justice Cruz, "(T)here is no question that all lawful
efforts should be taken to recover the tremendous wealth plundered from the people
by the past regime in the most execrable thievery perpetrated in all history. No right-
thinking Filipino can quarrel with this necessary objective, and on this score I am
happy to concur with the ponencia." 3
The Court is likewise unanimous in its judgment dismissing the petition to declare
unconstitutional and void Executive Orders Nos. 1 and 2 to annul the sequestration
order of April 14, 1986. For indeed, the 1987 Constitution overwhelmingly adopted
by the people at the February 2, 1987 plebiscite expressly recognized in Article XVIII,
section 26 thereof 4 the vital functions of respondent PCGG to achieve the mandate
of the people to recover such ill-gotten wealth and properties as ordained by
Proclamation No. 3 promulgated on March 25, 1986.
The Court is likewise unanimous as to the general rule set forth in the main opinion
that "the PCGG cannot exercise acts of dominion over property sequestered, frozen
or provisionally taken over" and "(T)he PCGG may thus exercise only powers of
administration over the property or business sequestered or provisionally taken over,
much like a court-appointed receiver, such as to bring and defend actions in 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 may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual its efforts to carry out its task;
punish for direct or indirect contempt in accordance with the Rules of Court; and seek
and secure the assistance of any office, agency or instrumentality of the government.
In the case of sequestered businesses generally (i.e. going concerns, business in
current 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." 5
Now, the case at bar involves one where the third and most encompassing and rarely
invoked of provisional remedies, 6 the provisional takeover of the Baseco properties
and business operations has been availed of by the PCGG, simply because the
evidence on hand, not only prima facie but convincingly with substantial and
documentary evidence of record establishes that the corporation known as
petitioner BASECO "was owned or controlled by President Marcos 'during his
administration, through nominees, by taking undue advantage of his public office
and/or using his powers, authority, or influence;' and that it was by and through the
same means, that BASECO had taken over the business and/or assets of the
[government-owned] National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities." The documentary evidence shows that
petitioner BASECO (read Ferdinand E. Marcos) in successive transactions all directed
and approved by the former President-in an orgy of what according to the PCGG's
then chairman, Jovito Salonga, in his statement before the 1986 Constitutional
Commission, "Mr. Ople once called 'organized pillage' "-gobbled up the government
corporation National Shipyard & Steel Corporation NASSCO its shipyard at Mariveles,
300 hectares of land in Mariveles from the Export Processing Zone Authority,
Engineer Island itself in Manila and its complex of equipment and facilities including
structures, buildings, shops, quarters, houses, plants and expendable or semi-
expendable assets and obtained huge loans of $19,000,000.00 from the last available
Japanese war damage fund, P30,000,000.00 from the NDC and P12,400,000.00 from
the GSIS. The sordid details are set forth in detail in Paragraphs 1 1 to 20 of the main
opinion. They include confidential reports from then BASECO president Hilario M.
Ruiz and the deposed President's brother-in- law, then Captain (later Commodore)
Alfredo Romualdez, who although not on record as an officer or stockholder of
BASECO reported directly to the deposed President on its affairs and made the
recommendations, all approved by the latter, for the gobbling up by BASECO of all
the choice government assets and properties.
All this evidence has been placed of record in the case at bar. And petitioner has had
all the time and opportunity to refute it, submittals to the contrary notwithstanding,
but has dismally failed to do so. To cite one glaring instance: as stated in the main
opinion, the evidence submitted to this Court by the Solicitor General "proves that
President Marcos not only exercised control over BASECO, but also that he actually
owns well nigh one hundred percent of its outstanding stock." It cites the fact that
three corporations, evidently front or dummy corporations, among twenty
shareholders, in name, of BASECO, namely Metro Bay Drydock, Fidelity Management,
Inc. and Trident Management hold 209,664 shares or 95.82%, of BASECO's
outstanding stock. Now, the Solicitor General points out further than BASECO
certificates "corresponding to more than ninety-five percent (95%) of all the
outstanding shares of stock of BASECO, endorsed in blank, together with deeds of
assignment of practically all the outstanding shares of stock of the three (3)
corporations above mentioned (which hold 95.82% of all BASECO stock), signed by
the owners thereof although not notarized" 7 were found in Malacañang shortly after
the deposed President's sudden flight from the country on the night of February 25,
1986. Thus, the main opinion's unavoidable conclusion that "(W)hile the petitioner's
counsel was quick to dispute this asserted fact, assuring this Court that the BASECO
stockholders were still in possession of their respective stock certificates and had
'never endorsed * * * them in blank or to anyone else,' that denial is exposed by his
own prior and subsequent recorded statements as a mere gesture of defiance rattler
than a verifiable factual declaration . . . . Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the simple
reason that as the Solicitor General maintains, said stockholders in truth no longer
have them in their possession, these having already been assigned in blank to
President Marcos."8
With this strong unrebutted evidence of record in this Court, Justice Melencio-
Herrera, joined by Justice Feliciano, expressly concurs with the main opinion
upholding the commission's take-over, stating that "(I) have no objection to
according the right to vote sequestered stock in case of a takeover of business
actually belonging to the government or whose capitalization comes from public
funds but which, somehow, landed in the hands of private persons, as in the case of
BASECO." They merely qualify their concurrence with the injunction that such
takeovers be exercised with "caution and prudence" pending the determination of
"the true and real ownership" of the sequestered shares. Suffice it to say in this
regard that each case has to be judged from the pertinent facts and circumstances
and that the main opinion emphasizes sufficiently that it is only in the special
instances specified in the governing laws grounded on the superior national interest
and welfare and the practical necessity of preserving the property and preventing its
loss or disposition that the provisional remedy of provisional take-over is exercised.
Here, according to the dissenting opinion, "the PCGG concludes that sequestered
property is ill-gotten wealth and proceeds to exercise acts of ownership over said
properties . . . . and adds that "the fact of ownership must be established in a proper
suit before a court of justice"-which this Court has preempted with its finding that "in
the context of the proceedings at bar, the actuality of the control by President Marcos
of BASECO has been sufficiently shown."
But BASECO who has instituted this action to set aside the sequestration and take-
over orders of respondent commission has chosen to raise these very issues in this
Court. We cannot ostrich-like hide our head in the sand and say that it has not yet
been established in the proper court that what the PCGG has taken over here
are government properties, as a matter of record and public notice and knowledge,
like the NASSCO, its Engineer Island and Mariveles Shipyard and entire complex,
which have been pillaged and placed in the name of the dummy or front company
named BASECO but from all the documentary evidence of record shown by its street
certificates all found in Malacanang should in reality read "Ferdinand E. Marcos"
and/or his brother-in-law. Such take-over can in no way be termed "lawless
usurpation," for the government does not commit any act of usurpation in taking
over its own properties that have been channeled to dummies, who are called upon
to prove in the proper court action what they have failed to do in this Court, that they
have lawfully acquired ownership of said properties, contrary to the documentary
evidence of record, which they must likewise explain away. This Court, in the exercise
of its jurisdiction on certiorari and as the guardian of the Constitution and protector
of the people's basic constitutional rights, has entertained many petitions on the part
of parties claiming to be adversely affected by sequestration and other orders of the
PCGG, This Court set the criterion that such orders should issue only upon showing
of a prima facie case, which criterion was adopted in the 1987 Constitution. The
Court's judgment cannot be faulted if much more than a prima facie has been shown
in this case, which the faceless figures claiming to represent BASECO have failed to
refute or disprove despite all the opportunity to do so.
The record plainly shows that petitioner BASECO which is but a mere shell to mask
its real owner did not and could not explain how and why they received such favored
and preferred treatment with tailored Letters of Instruction and handwritten
personal approval of the deposed President that handed it on a silver platter the
whole complex and properties of NASSCO and Engineer Island and the Mariveles
Shipyard.
It certainly would be the height of absurdity and helplessness if this government
could not here and now take over the possession and custody of its very own
properties and assets that had been stolen from it and which it had pledged to
recover for the benefit and in the greater interest of the Filipino people, whom the
past regime had saddled with a huge $27-billion foreign debt that has since ballooned
to $28.5-billion.
Thus, the main opinion correctly concludes that "(I)n the light of the affirmative
showing by the Government that, prima facie at least, the stockholders and directors
of BASECO as of April, 1986 were mere 'dummies,' nominees or alter egos of
President Marcos; at any rate, that they are no longer owners of any shares of stock
in the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and prosecution
of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition,
would in effect be to restore the assets, properties and business sequestered and
taken over by the PCGG to persons who are 'dummies' nominees or alter egos of
the former President." 9
And Justice Padilla in his separate concurrence "called a spade a spade," citing the
street certificates representing 95 % of BASECO's outstanding stock found in
Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the
control he exercised over policy decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial proceedings, I am convinced that the Republic
of the Philippines, thru the PCGG, has the right and even the duty to take over full
control and supervision of BASECO."
Indeed, the provisional remedies available to respondent commission are rooted in
the police power of the State, the most pervasive and the least limitable of the
powers of Government since it represents "the power of sovereignty, the power to
govern men and things within the limits of its domain." 10 Police power has been
defined as the power inherent in the State "to prescribe regulations to promote the
health, morals, education, good order or safety, and general welfare of the
people." 11 Police power rests upon public necessity and upon the right of the State
and of the public to self-protection. 12 "Salus populi suprema est lex" or "the welfare
of the people is the Supreme Law." 13 For this reason, it is co-extensive with the
necessities of the case and the safeguards of public interest. 14 Its scope expands
and contracts with changing needs. 15 "It may be said in a general way that the police
power extends to all the great public needs. It may be put forth in aid of what is
sanctioned by usage, or held by the prevailing morality or strong and preponderant
opinion to be greatly and immediately necessary to the public welfare." 16 That the
public interest or the general welfare is subserved by sequestering the purported ill-
gotten assets and properties and taking over stolen properties of the government
channeled to dummy or front companies is stating the obvious. The recovery of these
ill-gotten assets and properties would greatly aid our financially crippled government
and hasten our national economic recovery, not to mention the fact that they
rightfully belong to the people. While as a measure of self-protection, if, in the
interest of general welfare, police power may be exercised to protect citizens and
their businesses in financial and economic matters, it may similarly be exercised to
protect the government itself against potential financial loss and the possible
disruption of governmental functions. 17 Police power as the power of self-
protection on the part of the community bears the same relation to the community
that the principle of self-defense bears to the individual. 18 Truly, it may be said that
even more than self- defense, the recovery of ill-gotten wealth and of the
government's own properties involves the material and moral survival of the nation,
marked as the past regime was by the obliteration of any line between private funds
and the public treasury and abuse of unlimited power and elimination of any
accountability in public office, as the evidence of record amply shows.
It should be mentioned that the tracking down of the deposed President's actual
ownership of the BASECO shares was fortuitously facilitated by the recovery of the
street certificates in Malacañang after his hasty flight from the country last year. This
is not generally the case.
For example, in the ongoing case filed by the government to recover from the
Marcoses valuable real estate holdings in New York and the Lindenmere estate in
Long Island, former PCGG chairman Jovito Salonga has revealed that their names "do
not appear on any title to the property. Every building in New York is titled in the
name of a Netherlands Antilles corporation, which in turn is purportedly owned by
three Panamanian corporations, with bearer shares. This means that the shares of
this corporation can change hands any time, since they can be transferred, under the
law of Panama, without previous registration on the books of the corporation. One
of the first documents that we discovered shortly after the February revolution was
a declaration of trust handwritten by Mr. Joseph Bernstein on April 4, 1982 on a
Manila Peninsula Hotel stationery stating that he would act as a trustee for the
benefit of President Ferdinand Marcos and would act solely pursuant to the
instructions of Marcos with respect to the Crown Building in New York." 19
This is just to stress the difficulties of the tasks confronting respondent PCGG, which
nevertheless has so far commendably produced unprecedented positive results. As
stated by then chairman Salonga:
PCGG has turned over to the Office of the President around 2 billion
pesos in cash, free of any lien. It has also delivered to the President-
as a result of a compromise settlement-around 200 land titles
involving vast tracks of land in Metro Manila, Rizal, Laguna, Cavite,
and Bataan, worth several billion pesos. These lands are now
available for low-cost housing projects for the benefit of the poor
and the dispossessed amongst our people.
In the legal custody of the Commission as a result of sequestration
proceedings, are expensive jewelry amounting to 310 million
pesos, 42 aircraft amounting to 718 million pesos, vessels
amounting to 748 million pesos, and shares of stock amounting to
around 215 million pesos.
But, as I said, the bulk of the ill-gotten wealth is located abroad, not
in the Philippines. Through the efforts of the PCGG, we have caused
the freezing or sequestration of properties, deposits, and securities
probably worth many billions of pesos in New York, New Jersey,
Hawaii, California, and more importantly-in Switzerland. Due to
favorable developments in Switzerland, we may expect, according
to our Swiss lawyers, the first deliveries of the Swiss deposits in the
foreseeable future, perhaps in less than a year's time. In New York,
PCGG through its lawyers who render their services free of cost to
the Philippine government, succeeded in getting injunctive relief
 against Mr. and Mrs. Marcos and their nominees and agents. There
is now an offer for settlement that is being studied and explored by
our lawyers there.
If we succeed in recovering not an (since this is impossible) but a
substantial part of the ill-gotten wealth here and in various
countries of the world — something the revolutionary
governments of China, Ethiopia, Iran and Nicaragua were not able
to accomplish at all with respect to properties outside their
territorial boundaries — the Presidential Commission on Good
Government, which has undertaken the difficult and thankless task
of trying to undo what had been done so secretly and effectively in
the last twenty years, shall have more than justified its existence. 20
The misdeeds of some PCGG volunteers and personnel cited in the dissenting opinion
do not detract at an from the PCGG's accomplishments, just as no one would do away
with newspapers because of some undesirable elements. The point is that all such
misdeeds have been subject to public exposure and as stated in the dissent itself, the
erring PCGG representatives have been forthwith dismissed and replaced.
The magnitude of the tasks that confront respondent PCGG with its limited resources
and staff support and volunteers should be appreciated, together with the assistance
that foreign governments and lawyers have spontaneously given the commission.
A word about the PCGG's firing of the BASECO lawyers who filed the present petition
challenging its questioned orders, filing a motion to withdraw the petition, after it
had put in eight of its representatives as directors of the BASECO board of directors.
This was entirely proper and in accordance with the Court's Resolution of October
28, 1986, which denied BASECO's motion for the issuance of a restraining order
against such take-over and declared that "the government can, through its
designated directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government itself and over
which the persons who appear in this case on behalf of BASECO have failed to show
any eight or even any shareholding in said corporation." In other words, these
dummies or fronts cannot seek to question the government's right to recover the
very properties and assets that have been stolen from it by using the very same stolen
properties and funds derived therefrom. If they wish to pursue their own empty
claim, they must do it on their own, after first establishing that they indeed have a
lawful right and/or shareholding in BASECO.
Under the 1987 Constitution, the PCGG is called upon to file the judicial proceedings
for forfeiture and recovery of the sequestered or frozen properties covered by its
orders issued before the ratification of the Constitution on February 2, 1987, within
six months from such ratification, or by August 2, 1987. (For those orders issued after
such ratification, the judicial action or proceeding must be commenced within six
months from the issuance thereof.) The PCGG has not really been given much time,
considering the magnitude of its tasks. It is entitled to some forbearance, in availing
of the maximum time granted it for the filing of the corresponding judicial action with
the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice Narvasa maintains and upholds the valid
distinction between acts of conservation and preservation of assets and acts of
ownership. Sequestration, freeze and temporary take-over encompass the first type
of acts. They do not include the second type of acts which are reserved only to the
rightful owner of the assets or business sequestered or temporarily taken over.
The removal and election of members of the board of directors of a corporate
enterprise is, to me, a clear act of ownership on the part of the shareholders of the
corporation. Under ordinary circumstances, I would deny the PCGG the authority to
change and elect the members of BASECO's Board of Directors. However, under the
facts as disclosed by the records, it appears that the certificates of stock representing
about ninety-five (95%) per cent of the total ownership in BASECO's capital stock
were found endorsed in blank in Malacanang (presumably in the possession and
control of Mr. Marcos) at the time he and his family fled in February 1986. This
circumstance let alone the extent of the control Mr. Marcos exercised, while in
power, over policy decisions affecting BASECO, entirely satisfies my mind that
BASECO was owned and controlled by Mr. Marcos. This is calling a spade a spade. I
am also entirely satisfied in my mind that Mr. Marcos could not have acquired the
ownership of BASECO out of his lawfully-gotten wealth.
Consequently, even ahead of judicial proceedings, I am convinced that the Republic
of the Philippines, through the PCGG, has the right and even the duty to take-over
full control and supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far as the voting of sequestered stork is
concerned.
The voting of sequestered stock is, to my mind, an exercise of an attribute of
ownership. It goes beyond the purpose of a writ of sequestration, which is essentially
to preserve the property in litigation (Article 2005, Civil Code). Sequestration is in the
nature of a judicial deposit (ibid.).
I have no objection to according the right to vote sequestered stock in case of a take-
over of business actually belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands of private persons, as in
the case of BASECO. To my mind, however, caution and prudence should be exercised
in the case of sequestered shares of an on-going private business enterprise, specially
the sensitive ones, since the true and real ownership of said shares is yet to be
determined and proven more conclusively by the Courts.
It would be more in keeping with legal norms if forfeiture proceedings provided for
under Republic Act No. 1379 be filed in Court and the PCGG seek judicial appointment
as a receiver or administrator, in which case, it would be empowered to vote
sequestered shares under its custody (Section 55, Corporation Code). Thereby, the
assets in litigation are brought within the Court's jurisdiction and the presence of an
impartial Judge, as a requisite of due process, is assured. For, even in its historical
context, sequestration is a judicial matter that is best handled by the Courts.
I consider it imperative that sequestration measures be buttressed by judicial
proceedings the soonest possible in order to settle the matter of ownership of
sequestered shares and to determine whether or not they are legally owned by the
stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of the
State. Sequestration alone, being actually an ancillary remedy to a principal action,
should not be made the basis for the exercise of acts of dominion for an indefinite
period of time.
Sequestration is an extraordinary, harsh, and severe remedy. It should be confined
to its lawful parameters and exercised, with due regard, in the words of its enabling
laws, to the requirements of fairness, due process (Executive Order No. 14, palay 7,
1986), and Justice (Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.
GUTIERREZ, JR., J., concurring and dissenting:
I concur, in part, in the erudite opinion penned for the Court by my distinguished
colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the principles
which must govern PCGG sequestrations and emphasizes the limitations in the
exercise of its broad grant of powers.
I concur in the general propositions embodied in or implied from the majority
opinion, among them:
(1) The efforts of Government to recover ill-gotten properties amassed by the
previous regime deserve the fullest support of the judiciary and all sectors of society.
I believe, however, that a nation professing adherence to the rule of law and fealty
to democratic processes must adopt ways and means which are always within the
bounds of lawfully granted authority and which meet the tests of due process and
other Bill of Rights protections.
(2) Sequestration is intended to prevent the destruction, concealment, or dissipation
of ill-gotten wealth. The object is conservation and preservation. Any exercise of
power beyond these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are granted by law and not proscribed
by the Constitution. The remedies it enforces are provisional and contingent.
Whether or not sequestered property is indeed ill-gotten must be-determined by a
court of justice. The PCGG has absolutely no power to divest title over sequestered
property or to act as if its findings are final.
(4) The PCGG does not own sequestered property. It cannot and must not exercise
acts of ownership. To quote the majority opinion, "one thing is certain ..., the PCGG
cannot exercise acts of dominion."
(5) The provisional takeover in a sequestration should not be indefinitely maintained.
It is the duty of the PCGG to immediately file appropriate criminal or civil cases once
the evidence has been gathered.
It is the difference between what the Court says and what the PCGG does which
constrains me to dissent. Even as the Court emphasizes principles of due process and
fair play, it has unfortunately validated ultra vires acts violative of those very same
principles. While we stress the rules which must govern the PCGG in the exercise of
its powers, the Court has failed to stop or check acts which go beyond the power of
sequestration given by law to the PCGG.
We are all agreed in the Court that the PCGG is not a judge. It is an investigator and
prosecutor. Sequestration is only a preliminary or ancillary remedy. There must be a
principal and independent suit filed in court to establish the true ownership of
sequestered properties. The factual premise that a sequestered property was ill-
gotten by former President Marcos, his family, relatives, subordinates, and close
associates cannot be assumed. The fact of ownership must be established in a proper
suit before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are dedicated to a statement of facts
which conclusively and indubitably shows that BASECO is owned by President
Marcos-and that it was acquired and vastly enlarged by the former President's taking
undue advantage of his public office and using his powers, authority, or influence.
There has been no court hearing, no trial, and no presentation of evidence. All that
we have is what the PCGG has given us. The petitioner has not even been allowed to
see the evidence, much less refute it.
What the PCGG has gathered in the course of its seizures and investigations may be
gospel truth. However, that truth must be properly established in a trial court, not
unilaterally determined by the PCGG or declared by this Court in a special proceeding
which only asks us to set aside or enjoin an illegal exercise of power. After this
decision, there is nothing more for a trial court to ascertain. Certainly, no lower court
would dare to arrive at findings contrary to this Court's conclusions, no matter how
insistent we may be in labelling such conclusions as "prima facie." To me, this is the
basic flaw in PCGG procedures that the Court is, today, unwittingly legitimating. Even
before the institution of a court case, the PCGG concludes that sequestered property
is ill-gotten wealth and proceeds to exercise acts of ownership over said properties.
It treats sequestered property as its own even before the oppositor-owners have
been divested of their titles.
The Court declares that a state of seizure is not to be indefinitely maintained. This
means that court proceedings to either forfeit the sequestered properties or clear
the names and titles of the petitioners must be filed as soon as possible.
This case is a good example of disregard or avoidance of this requirement. With the
kind of evidence which the PCGG professes to possess, the forfeiture case could have
been filed simultaneously with the issuance of sequestration orders or shortly
thereafter.
And yet, the records show that the PCGG appears to concentrate more on the means
rather than the ends, in running the BASECO, taking over the board of directors and
management, getting rid of security guards, disposing of scrap, entering into new
contracts and otherwise behaving as if it were already the owner. At this late date
and with all the evidence PCGG claims to have, no court case has been filed.
Among the interesting items elicited during the oral arguments or found in the
records of this petition are:
(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging up
paved premises with jack hammers in a frantic search for buried gold bars.
(2) Two top PCGG volunteers charged each other with stealing properties under their
custody. The PCGG had to step in, dismiss the erring representatives, and replace
them with new ones.
(3) The petitioner claims that the lower bid of a rock quarry operator was accepted
even as a higher and more favorable bid was offered. When the questionable deal
was brought to our attention, the awardee allegedly raised his bid to the level of the
better offer. The successful bidder later submitted a comment in intervention
explaining his side. Whoever is telling the truth, the fact remains that multi-million
peso contracts involving the operations of sequestered companies should be entered
into under the supervision of a court, not freely executed by the PCGG even when
the petitioner-owners question the propriety and integrity of those transactions.
(4) The PCGG replaced eight out of eleven members of the BASECO board of directors
with its own men. Upon taking over full control of the corporation, the newly installed
board reversed the efforts of the former owners to protect their interests. The new
board fired the BASECO lawyers who instituted the instant petition. It then filed a
motion to withdraw this very same petition we are now deciding. In other words, the
"new owners" did not want the Supreme Court to continue poking into the legality
of their acts. They moved to abort the petition filed with us.
Any suspicion of impropriety would have been avoided if the PCGG had filed the
required court proceedings and exercised its acts of management and control under
court supervision. The requirements of due process would have been met.
One other matter I wish to discuss in this separate opinion is PCGG's selection of eight
out of the eleven members of the BASECO board of directors.
The election of the members of a board of directors is distinctly and unqualifiedly an
act of ownership. When stockholders of a corporation elect or remove members of a
board of directors, they exercise their right of ownership in the company they own,
By no stretch of the imagination can the revamp of a board of directors be considered
as a mere act of conserving assets or preventing the dissipation of sequestered
assets. The broad powers of a sequestrator are more than enough to protect
sequestered assets. There is no need and no legal basis to reach out further and
exercise ultimate acts of ownership.
Under the powers which PCGG has assumed and wields, it can amend the articles and
by-laws of a sequestered corporation, decrease the capital stock, or sell substantially
all corporate assets without any effective check from the owners not yet divested of
their titles or from a court of justice. The PCGG is tasked to preserve assets but when
it exercises the acts of an owner, it could also very well destroy. I hope that the case
of the Philippine Daily Express, a major newspaper closed by the PCGG, is an isolated
example. Otherwise, banks, merchandizing firms, investment institutions, and other
sensitive businesses will find themselves in a similar quandary.
I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts
which made possible the accumulation of ill-gotten wealth. I, however, dissent when
authoritarian and ultra vires methods are used to recover that stolen wealth. One
wrong cannot be corrected by the employment of another wrong.
I, therefore, vote to grant the petition. Pending the filing of an appropriate case in
court, the PCGG must be enjoined from exercising any and all acts of ownership over
the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.
CRUZ, J., dissenting:
My brother Narvasa has written a truly outstanding decision that bespeaks a
penetrating and analytical mind and a masterly grasp of the serious problem we are
asked to resolve. He deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should be taken to recover the tremendous
wealth plundered from the people by the past regime in the most execrable thievery
perpetrated in all history. No right-thinking Filipino can quarrel with this necessary
objective, and on this score I am happy to concur with the ponencia.
But for all my full agreement with the basic thesis of the majority, I regret I find myself
unable to support its conclusions in favor Of the respondent PCGG. My view is that
these conclusions clash with the implacable principles of the free society. foremost
among which is due process. This demands our reverent regard.
Due process protects the life, liberty and property of every person, whoever he may
be. Even the most despicable criminal is entitled to this protection. Granting this
distinction to Marcos, we are still not justified in depriving him of this guaranty on
the mere justification that he appears to own the BASECO shares.
I am convinced and so submit that the PCGG cannot at this time take over the BASECO
without any court order and exercise thereover acts of ownership without court
supervision. Voting the shares is an act of ownership. Reorganizing the board of
directors is an act of ownership. Such acts are clearly unauthorized. As the majority
opinion itself stresses, the PCGG is merely an administrator whose authority is limited
to preventing the sequestered properties from being dissipated or clandestinely
transferred.
The court action prescribed in the Constitution is not inadequate and is available to
the PCGG. The advantage of this remedy is that, unlike the ad libitum measures now
being take it is authorized and at the same time also limited by the fundamental law.
I see no reason why it should not now be employed by the PCGG, to remove all
doubts regarding the legality of its acts and all suspicions concerning its motives.
Separate Opinions
TEEHANKEE, CJ., concurring:
I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of
disposing of the issues raised by petitioner BASECO in the case at bar, it
comprehensively discusses the laws and principles governing the Presidential
Commission on Good Government (PCGG) and defines the scope and extent of its
powers in the discharge of its monumental task of recovering the "ill-gotten wealth,
accumulated by former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, whether located in the Philippines or
abroad (and) business enterprises and entities owned or controlled by them during I
. . .(the Marcos) administration, directly or through nominees, by taking undue
advantage of their public office and/or using their powers, authority, influence,
connections or relationship." 1
The Court is unanimous insofar as the judgment at bar upholds the imperative need
of recovering the ill-gotten properties amassed by the previous regime, which
"deserves the fullest support of the judiciary and all sectors of society." 2 To quote
the pungent language of Mr. Justice Cruz, "(T)here is no question that all lawful
efforts should be taken to recover the tremendous wealth plundered from the people
by the past regime in the most execrable thievery perpetrated in all history. No right-
thinking Filipino can quarrel with this necessary objective, and on this score I am
happy to concur with the ponencia." 3
The Court is likewise unanimous in its judgment dismissing the petition to declare
unconstitutional and void Executive Orders Nos. 1 and 2 to annul the sequestration
order of April 14, 1986. For indeed, the 1987 Constitution overwhelmingly adopted
by the people at the February 2, 1987 plebiscite expressly recognized in Article XVIII,
section 26 thereof 4 the vital functions of respondent PCGG to achieve the mandate
of the people to recover such ill-gotten wealth and properties as ordained by
Proclamation No. 3 promulgated on March 25, 1986.
The Court is likewise unanimous as to the general rule set forth in the main opinion
that "the PCGG cannot exercise acts of dominion over property sequestered, frozen
or provisionally taken over" and "(T)he PCGG may thus exercise only powers of
administration over the property or business sequestered or provisionally taken over,
much like a court-appointed receiver, such as to bring and defend actions in 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 may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual its efforts to carry out its task;
punish for direct or indirect contempt in accordance with the Rules of Court; and seek
and secure the assistance of any office, agency or instrumentality of the government.
In the case of sequestered businesses generally (i.e. going concerns, business in
current 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." 5
Now, the case at bar involves one where the third and most encompassing and rarely
invoked of provisional remedies, 6 the provisional takeover of the Baseco properties
and business operations has been availed of by the PCGG, simply because the
evidence on hand, not only prima facie but convincingly with substantial and
documentary evidence of record establishes that the corporation known as
petitioner BASECO "was owned or controlled by President Marcos 'during his
administration, through nominees, by taking undue advantage of his public office
and/or using his powers, authority, or influence;' and that it was by and through the
same means, that BASECO had taken over the business and/or assets of the
[government-owned] National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities." The documentary evidence shows that
petitioner BASECO (read Ferdinand E. Marcos) in successive transactions all directed
and approved by the former President-in an orgy of what according to the PCGG's
then chairman, Jovito Salonga, in his statement before the 1986 Constitutional
Commission, "Mr. Ople once called 'organized pillage' "-gobbled up the government
corporation National Shipyard & Steel Corporation NASSCO its shipyard at Mariveles,
300 hectares of land in Mariveles from the Export Processing Zone Authority,
Engineer Island itself in Manila and its complex of equipment and facilities including
structures, buildings, shops, quarters, houses, plants and expendable or semi-
expendable assets and obtained huge loans of $19,000,000.00 from the last available
Japanese war damage fund, P30,000,000.00 from the NDC and P12,400,000.00 from
the GSIS. The sordid details are set forth in detail in Paragraphs 1 1 to 20 of the main
opinion. They include confidential reports from then BASECO president Hilario M.
Ruiz and the deposed President's brother-in- law, then Captain (later Commodore)
Alfredo Romualdez, who although not on record as an officer or stockholder of
BASECO reported directly to the deposed President on its affairs and made the
recommendations, all approved by the latter, for the gobbling up by BASECO of all
the choice government assets and properties.
All this evidence has been placed of record in the case at bar. And petitioner has had
all the time and opportunity to refute it, submittals to the contrary notwithstanding,
but has dismally failed to do so. To cite one glaring instance: as stated in the main
opinion, the evidence submitted to this Court by the Solicitor General "proves that
President Marcos not only exercised control over BASECO, but also that he actually
owns well nigh one hundred percent of its outstanding stock." It cites the fact that
three corporations, evidently front or dummy corporations, among twenty
shareholders, in name, of BASECO, namely Metro Bay Drydock, Fidelity Management,
Inc. and Trident Management hold 209,664 shares or 95.82%, of BASECO's
outstanding stock. Now, the Solicitor General points out further than BASECO
certificates "corresponding to more than ninety-five percent (95%) of all the
outstanding shares of stock of BASECO, endorsed in blank, together with deeds of
assignment of practically all the outstanding shares of stock of the three (3)
corporations above mentioned (which hold 95.82% of all BASECO stock), signed by
the owners thereof although not notarized" 7 were found in Malacañang shortly after
the deposed President's sudden flight from the country on the night of February 25,
1986. Thus, the main opinion's unavoidable conclusion that "(W)hile the petitioner's
counsel was quick to dispute this asserted fact, assuring this Court that the BASECO
stockholders were still in possession of their respective stock certificates and had
'never endorsed * * * them in blank or to anyone else,' that denial is exposed by his
own prior and subsequent recorded statements as a mere gesture of defiance rattler
than a verifiable factual declaration . . . . Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the simple
reason that as the Solicitor General maintains, said stockholders in truth no longer
have them in their possession, these having already been assigned in blank to
President Marcos."8
With this strong unrebutted evidence of record in this Court, Justice Melencio-
Herrera, joined by Justice Feliciano, expressly concurs with the main opinion
upholding the commission's take-over, stating that "(I) have no objection to
according the right to vote sequestered stock in case of a takeover of business
actually belonging to the government or whose capitalization comes from public
funds but which, somehow, landed in the hands of private persons, as in the case of
BASECO." They merely qualify their concurrence with the injunction that such
takeovers be exercised with "caution and prudence" pending the determination of
"the true and real ownership" of the sequestered shares. Suffice it to say in this
regard that each case has to be judged from the pertinent facts and circumstances
and that the main opinion emphasizes sufficiently that it is only in the special
instances specified in the governing laws grounded on the superior national interest
and welfare and the practical necessity of preserving the property and preventing its
loss or disposition that the provisional remedy of provisional take-over is exercised.
Here, according to the dissenting opinion, "the PCGG concludes that sequestered
property is ill-gotten wealth and proceeds to exercise acts of ownership over said
properties . . . . and adds that "the fact of ownership must be established in a proper
suit before a court of justice"-which this Court has preempted with its finding that "in
the context of the proceedings at bar, the actuality of the control by President Marcos
of BASECO has been sufficiently shown."
But BASECO who has instituted this action to set aside the sequestration and take-
over orders of respondent commission has chosen to raise these very issues in this
Court. We cannot ostrich-like hide our head in the sand and say that it has not yet
been established in the proper court that what the PCGG has taken over here
are government properties, as a matter of record and public notice and knowledge,
like the NASSCO, its Engineer Island and Mariveles Shipyard and entire complex,
which have been pillaged and placed in the name of the dummy or front company
named BASECO but from all the documentary evidence of record shown by its street
certificates all found in Malacanang should in reality read "Ferdinand E. Marcos"
and/or his brother-in-law. Such take-over can in no way be termed "lawless
usurpation," for the government does not commit any act of usurpation in taking
over its own properties that have been channeled to dummies, who are called upon
to prove in the proper court action what they have failed to do in this Court, that they
have lawfully acquired ownership of said properties, contrary to the documentary
evidence of record, which they must likewise explain away. This Court, in the exercise
of its jurisdiction on certiorari and as the guardian of the Constitution and protector
of the people's basic constitutional rights, has entertained many petitions on the part
of parties claiming to be adversely affected by sequestration and other orders of the
PCGG, This Court set the criterion that such orders should issue only upon showing
of a prima facie case, which criterion was adopted in the 1987 Constitution. The
Court's judgment cannot be faulted if much more than a prima facie has been shown
in this case, which the faceless figures claiming to represent BASECO have failed to
refute or disprove despite all the opportunity to do so.
The record plainly shows that petitioner BASECO which is but a mere shell to mask
its real owner did not and could not explain how and why they received such favored
and preferred treatment with tailored Letters of Instruction and handwritten
personal approval of the deposed President that handed it on a silver platter the
whole complex and properties of NASSCO and Engineer Island and the Mariveles
Shipyard.
It certainly would be the height of absurdity and helplessness if this government
could not here and now take over the possession and custody of its very own
properties and assets that had been stolen from it and which it had pledged to
recover for the benefit and in the greater interest of the Filipino people, whom the
past regime had saddled with a huge $27-billion foreign debt that has since ballooned
to $28.5-billion.
Thus, the main opinion correctly concludes that "(I)n the light of the affirmative
showing by the Government that, prima facie at least, the stockholders and directors
of BASECO as of April, 1986 were mere 'dummies,' nominees or alter egos of
President Marcos; at any rate, that they are no longer owners of any shares of stock
in the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and prosecution
of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition,
would in effect be to restore the assets, properties and business sequestered and
taken over by the PCGG to persons who are 'dummies' nominees or alter egos of
the former President." 9
And Justice Padilla in his separate concurrence "called a spade a spade," citing the
street certificates representing 95 % of BASECO's outstanding stock found in
Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the
control he exercised over policy decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial proceedings, I am convinced that the Republic
of the Philippines, thru the PCGG, has the right and even the duty to take over full
control and supervision of BASECO."
Indeed, the provisional remedies available to respondent commission are rooted in
the police power of the State, the most pervasive and the least limitable of the
powers of Government since it represents "the power of sovereignty, the power to
govern men and things within the limits of its domain." 10 Police power has been
defined as the power inherent in the State "to prescribe regulations to promote the
health, morals, education, good order or safety, and general welfare of the
people." 11 Police power rests upon public necessity and upon the right of the State
and of the public to self-protection. 12 "Salus populi suprema est lex" or "the welfare
of the people is the Supreme Law." 13 For this reason, it is co-extensive with the
necessities of the case and the safeguards of public interest. 14 Its scope expands
and contracts with changing needs. 15 "It may be said in a general way that the police
power extends to all the great public needs. It may be put forth in aid of what is
sanctioned by usage, or held by the prevailing morality or strong and preponderant
opinion to be greatly and immediately necessary to the public welfare." 16 That the
public interest or the general welfare is subserved by sequestering the purported ill-
gotten assets and properties and taking over stolen properties of the government
channeled to dummy or front companies is stating the obvious. The recovery of these
ill-gotten assets and properties would greatly aid our financially crippled government
and hasten our national economic recovery, not to mention the fact that they
rightfully belong to the people. While as a measure of self-protection, if, in the
interest of general welfare, police power may be exercised to protect citizens and
their businesses in financial and economic matters, it may similarly be exercised to
protect the government itself against potential financial loss and the possible
disruption of governmental functions. 17 Police power as the power of self-
protection on the part of the community bears the same relation to the community
that the principle of self-defense bears to the individual. 18 Truly, it may be said that
even more than self- defense, the recovery of ill-gotten wealth and of the
government's own properties involves the material and moral survival of the nation,
marked as the past regime was by the obliteration of any line between private funds
and the public treasury and abuse of unlimited power and elimination of any
accountability in public office, as the evidence of record amply shows.
It should be mentioned that the tracking down of the deposed President's actual
ownership of the BASECO shares was fortuitously facilitated by the recovery of the
street certificates in Malacañang after his hasty flight from the country last year. This
is not generally the case.
For example, in the ongoing case filed by the government to recover from the
Marcoses valuable real estate holdings in New York and the Lindenmere estate in
Long Island, former PCGG chairman Jovito Salonga has revealed that their names "do
not appear on any title to the property. Every building in New York is titled in the
name of a Netherlands Antilles corporation, which in turn is purportedly owned by
three Panamanian corporations, with bearer shares. This means that the shares of
this corporation can change hands any time, since they can be transferred, under the
law of Panama, without previous registration on the books of the corporation. One
of the first documents that we discovered shortly after the February revolution was
a declaration of trust handwritten by Mr. Joseph Bernstein on April 4, 1982 on a
Manila Peninsula Hotel stationery stating that he would act as a trustee for the
benefit of President Ferdinand Marcos and would act solely pursuant to the
instructions of Marcos with respect to the Crown Building in New York." 19
This is just to stress the difficulties of the tasks confronting respondent PCGG, which
nevertheless has so far commendably produced unprecedented positive results. As
stated by then chairman Salonga:
PCGG has turned over to the Office of the President around 2 billion
pesos in cash, free of any lien. It has also delivered to the President-
as a result of a compromise settlement-around 200 land titles
involving vast tracks of land in Metro Manila, Rizal, Laguna, Cavite,
and Bataan, worth several billion pesos. These lands are now
available for low-cost housing projects for the benefit of the poor
and the dispossessed amongst our people.
In the legal custody of the Commission as a result of sequestration
proceedings, are expensive jewelry amounting to 310 million
pesos, 42 aircraft amounting to 718 million pesos, vessels
amounting to 748 million pesos, and shares of stock amounting to
around 215 million pesos.
But, as I said, the bulk of the ill-gotten wealth is located abroad, not
in the Philippines. Through the efforts of the PCGG, we have caused
the freezing or sequestration of properties, deposits, and securities
probably worth many billions of pesos in New York, New Jersey,
Hawaii, California, and more importantly-in Switzerland. Due to
favorable developments in Switzerland, we may expect, according
to our Swiss lawyers, the first deliveries of the Swiss deposits in the
foreseeable future, perhaps in less than a year's time. In New York,
PCGG through its lawyers who render their services free of cost to
the Philippine government, succeeded in getting injunctive relief
against Mr. and Mrs. Marcos and their nominees and agents. There
is now an offer for settlement that is being studied and explored by
our lawyers there.
If we succeed in recovering not an (since this is impossible) but a
substantial part of the ill-gotten wealth here and in various
countries of the world-something the revolutionary governments
of China, Ethiopia, Iran and Nicaragua were not able to accomplish
at all with respect to properties outside their territorial boundaries-
the Presidential Commission on Good Government, which has
undertaken the difficult and thankless task of trying to undo what
had been done so secretly and effectively in the last twenty years,
shall have more than justified its existence. 20
The misdeeds of some PCGG volunteers and personnel cited in the dissenting opinion
do not detract at an from the PCGG's accomplishments, just as no one would do away
with newspapers because of some undesirable elements. The point is that all such
misdeeds have been subject to public exposure and as stated in the dissent itself, the
erring PCGG representatives have been forthwith dismissed and replaced.
The magnitude of the tasks that confront respondent PCGG with its limited resources
and staff support and volunteers should be appreciated, together with the assistance
that foreign governments and lawyers have spontaneously given the commission.
A word about the PCGG's firing of the BASECO lawyers who filed the present petition
challenging its questioned orders, filing a motion to withdraw the petition, after it
had put in eight of its representatives as directors of the BASECO board of directors.
This was entirely proper and in accordance with the Court's Resolution of October
28, 1986, which denied BASECO's motion for the issuance of a restraining order
against such take-over and declared that "the government can, through its
designated directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government itself and over
which the persons who appear in this case on behalf of BASECO have failed to show
any eight or even any shareholding in said corporation." In other words, these
dummies or fronts cannot seek to question the government's right to recover the
very properties and assets that have been stolen from it by using the very same stolen
properties and funds derived therefrom. If they wish to pursue their own empty
claim, they must do it on their own, after first establishing that they indeed have a
lawful right and/or shareholding in BASECO.
Under the 1987 Constitution, the PCGG is called upon to file the judicial proceedings
for forfeiture and recovery of the sequestered or frozen properties covered by its
orders issued before the ratification of the Constitution on February 2, 1987, within
six months from such ratification, or by August 2, 1987. (For those orders issued after
such ratification, the judicial action or proceeding must be commenced within six
months from the issuance thereof.) The PCGG has not really been given much time,
considering the magnitude of its tasks. It is entitled to some forbearance, in availing
of the maximum time granted it for the filing of the corresponding judicial action with
the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice Narvasa maintains and upholds the valid
distinction between acts of conservation and preservation of assets and acts of
ownership. Sequestration, freeze and temporary take-over encompass the first type
of acts. They do not include the second type of acts which are reserved only to the
rightful owner of the assets or business sequestered or temporarily taken over.
The removal and election of members of the board of directors of a corporate
enterprise is, to me, a clear act of ownership on the part of the shareholders of the
corporation. Under ordinary circumstances, I would deny the PCGG the authority to
change and elect the members of BASECO's Board of Directors. However, under the
facts as disclosed by the records, it appears that the certificates of stock representing
about ninety-five (95%) per cent of the total ownership in BASECO's capital stock
were found endorsed in blank in Malacanang (presumably in the possession and
control of Mr. Marcos) at the time he and his family fled in February 1986. This
circumstance let alone the extent of the control Mr. Marcos exercised, while in
power, over policy decisions affecting BASECO, entirely satisfies my mind that
BASECO was owned and controlled by Mr. Marcos. This is calling a spade a spade. I
am also entirely satisfied in my mind that Mr. Marcos could not have acquired the
ownership of BASECO out of his lawfully-gotten wealth.
Consequently, even ahead of judicial proceedings, I am convinced that the Republic
of the Philippines, through the PCGG, has the right and even the duty to take-over
full control and supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far as the voting of sequestered stork is
concerned.
The voting of sequestered stock is, to my mind, an exercise of an attribute of
ownership. It goes beyond the purpose of a writ of sequestration, which is essentially
to preserve the property in litigation (Article 2005, Civil Code). Sequestration is in the
nature of a judicial deposit (ibid.).
I have no objection to according the right to vote sequestered stock in case of a take-
over of business actually belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands of private persons, as in
the case of BASECO. To my mind, however, caution and prudence should be exercised
in the case of sequestered shares of an on-going private business enterprise, specially
the sensitive ones, since the true and real ownership of said shares is yet to be
determined and proven more conclusively by the Courts.
It would be more in keeping with legal norms if forfeiture proceedings provided for
under Republic Act No. 1379 be filed in Court and the PCGG seek judicial appointment
as a receiver or administrator, in which case, it would be empowered to vote
sequestered shares under its custody (Section 55, Corporation Code). Thereby, the
assets in litigation are brought within the Court's jurisdiction and the presence of an
impartial Judge, as a requisite of due process, is assured. For, even in its historical
context, sequestration is a judicial matter that is best handled by the Courts.
I consider it imperative that sequestration measures be buttressed by judicial
proceedings the soonest possible in order to settle the matter of ownership of
sequestered shares and to determine whether or not they are legally owned by the
stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of the
State. Sequestration alone, being actually an ancillary remedy to a principal action,
should not be made the basis for the exercise of acts of dominion for an indefinite
period of time.
Sequestration is an extraordinary, harsh, and severe remedy. It should be confined
to its lawful parameters and exercised, with due regard, in the words of its enabling
laws, to the requirements of fairness, due process (Executive Order No. 14, palay 7,
1986), and Justice (Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.
GUTIERREZ, JR., J., concurring and dissenting:
I concur, in part, in the erudite opinion penned for the Court by my distinguished
colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the principles
which must govern PCGG sequestrations and emphasizes the limitations in the
exercise of its broad grant of powers.
I concur in the general propositions embodied in or implied from the majority
opinion, among them:
(1) The efforts of Government to recover ill-gotten properties amassed by the
previous regime deserve the fullest support of the judiciary and all sectors of society.
I believe, however, that a nation professing adherence to the rule of law and fealty
to democratic processes must adopt ways and means which are always within the
bounds of lawfully granted authority and which meet the tests of due process and
other Bill of Rights protections.
(2) Sequestration is intended to prevent the destruction, concealment, or dissipation
of ill-gotten wealth. The object is conservation and preservation. Any exercise of
power beyond these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are granted by law and not proscribed
by the Constitution. The remedies it enforces are provisional and contingent.
Whether or not sequestered property is indeed ill-gotten must be-determined by a
court of justice. The PCGG has absolutely no power to divest title over sequestered
property or to act as if its findings are final.
(4) The PCGG does not own sequestered property. It cannot and must not exercise
acts of ownership. To quote the majority opinion, "one thing is certain ..., the PCGG
cannot exercise acts of dominion."
(5) The provisional takeover in a sequestration should not be indefinitely maintained.
It is the duty of the PCGG to immediately file appropriate criminal or civil cases once
the evidence has been gathered.
It is the difference between what the Court says and what the PCGG does which
constrains me to dissent. Even as the Court emphasizes principles of due process and
fair play, it has unfortunately validated ultra vires acts violative of those very same
principles. While we stress the rules which must govern the PCGG in the exercise of
its powers, the Court has failed to stop or check acts which go beyond the power of
sequestration given by law to the PCGG.
We are all agreed in the Court that the PCGG is not a judge. It is an investigator and
prosecutor. Sequestration is only a preliminary or ancillary remedy. There must be a
principal and independent suit filed in court to establish the true ownership of
sequestered properties. The factual premise that a sequestered property was ill-
gotten by former President Marcos, his family, relatives, subordinates, and close
associates cannot be assumed. The fact of ownership must be established in a proper
suit before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are dedicated to a statement of facts
which conclusively and indubitably shows that BASECO is owned by President
Marcos-and that it was acquired and vastly enlarged by the former President's taking
undue advantage of his public office and using his powers, authority, or influence.
There has been no court hearing, no trial, and no presentation of evidence. All that
we have is what the PCGG has given us. The petitioner has not even been allowed to
see the evidence, much less refute it.
What the PCGG has gathered in the course of its seizures and investigations may be
gospel truth. However, that truth must be properly established in a trial court, not
unilaterally determined by the PCGG or declared by this Court in a special proceeding
which only asks us to set aside or enjoin an illegal exercise of power. After this
decision, there is nothing more for a trial court to ascertain. Certainly, no lower court
would dare to arrive at findings contrary to this Court's conclusions, no matter how
insistent we may be in labelling such conclusions as "prima facie." To me, this is the
basic flaw in PCGG procedures that the Court is, today, unwittingly legitimating. Even
before the institution of a court case, the PCGG concludes that sequestered property
is ill-gotten wealth and proceeds to exercise acts of ownership over said properties.
It treats sequestered property as its own even before the oppositor-owners have
been divested of their titles.
The Court declares that a state of seizure is not to be indefinitely maintained. This
means that court proceedings to either forfeit the sequestered properties or clear
the names and titles of the petitioners must be filed as soon as possible.
This case is a good example of disregard or avoidance of this requirement. With the
kind of evidence which the PCGG professes to possess, the forfeiture case could have
been filed simultaneously with the issuance of sequestration orders or shortly
thereafter.
And yet, the records show that the PCGG appears to concentrate more on the means
rather than the ends, in running the BASECO, taking over the board of directors and
management, getting rid of security guards, disposing of scrap, entering into new
contracts and otherwise behaving as if it were already the owner. At this late date
and with all the evidence PCGG claims to have, no court case has been filed.
Among the interesting items elicited during the oral arguments or found in the
records of this petition are:
(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging up
paved premises with jack hammers in a frantic search for buried gold bars.
(2) Two top PCGG volunteers charged each other with stealing properties under their
custody. The PCGG had to step in, dismiss the erring representatives, and replace
them with new ones.
(3) The petitioner claims that the lower bid of a rock quarry operator was accepted
even as a higher and more favorable bid was offered. When the questionable deal
was brought to our attention, the awardee allegedly raised his bid to the level of the
better offer. The successful bidder later submitted a comment in intervention
explaining his side. Whoever is telling the truth, the fact remains that multi-million
peso contracts involving the operations of sequestered companies should be entered
into under the supervision of a court, not freely executed by the PCGG even when
the petitioner-owners question the propriety and integrity of those transactions.
(4) The PCGG replaced eight out of eleven members of the BASECO board of directors
with its own men. Upon taking over full control of the corporation, the newly installed
board reversed the efforts of the former owners to protect their interests. The new
board fired the BASECO lawyers who instituted the instant petition. It then filed a
motion to withdraw this very same petition we are now deciding. In other words, the
"new owners" did not want the Supreme Court to continue poking into the legality
of their acts. They moved to abort the petition filed with us.
Any suspicion of impropriety would have been avoided if the PCGG had filed the
required court proceedings and exercised its acts of management and control under
court supervision. The requirements of due process would have been met.
One other matter I wish to discuss in this separate opinion is PCGG's selection of eight
out of the eleven members of the BASECO board of directors.
The election of the members of a board of directors is distinctly and unqualifiedly an
act of ownership. When stockholders of a corporation elect or remove members of a
board of directors, they exercise their right of ownership in the company they own, to preventing the sequestered properties from being dissipated or clandestinely
By no stretch of the imagination can the revamp of a board of directors be considered transferred.
as a mere act of conserving assets or preventing the dissipation of sequestered The court action prescribed in the Constitution is not inadequate and is available to
assets. The broad powers of a sequestrator are more than enough to protect the PCGG. The advantage of this remedy is that, unlike the ad libitum measures now
sequestered assets. There is no need and no legal basis to reach out further and being take it is authorized and at the same time also limited by the fundamental law.
exercise ultimate acts of ownership. I see no reason why it should not now be employed by the PCGG, to remove all
Under the powers which PCGG has assumed and wields, it can amend the articles and doubts regarding the legality of its acts and all suspicions concerning its motives.
by-laws of a sequestered corporation, decrease the capital stock, or sell substantially
all corporate assets without any effective check from the owners not yet divested of
their titles or from a court of justice. The PCGG is tasked to preserve assets but when
it exercises the acts of an owner, it could also very well destroy. I hope that the case
of the Philippine Daily Express, a major newspaper closed by the PCGG, is an isolated
example. Otherwise, banks, merchandizing firms, investment institutions, and other
sensitive businesses will find themselves in a similar quandary.
I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts
which made possible the accumulation of ill-gotten wealth. I, however, dissent when
authoritarian and ultra vires methods are used to recover that stolen wealth. One
wrong cannot be corrected by the employment of another wrong.
I, therefore, vote to grant the petition. Pending the filing of an appropriate case in
court, the PCGG must be enjoined from exercising any and all acts of ownership over
the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.

CRUZ, J., dissenting:

My brother Narvasa has written a truly outstanding decision that bespeaks a
penetrating and analytical mind and a masterly grasp of the serious problem we are
asked to resolve. He deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should be taken to recover the tremendous
wealth plundered from the people by the past regime in the most execrable thievery
perpetrated in all history. No right-thinking Filipino can quarrel with this necessary
objective, and on this score I am happy to concur with the ponencia.
But for all my full agreement with the basic thesis of the majority, I regret I find myself
unable to support its conclusions in favor Of the respondent PCGG. My view is that
these conclusions clash with the implacable principles of the free society. foremost
among which is due process. This demands our reverent regard.
Due process protects the life, liberty and property of every person, whoever he may
be. Even the most despicable criminal is entitled to this protection. Granting this
distinction to Marcos, we are still not justified in depriving him of this guaranty on
the mere justification that he appears to own the BASECO shares.
I am convinced and so submit that the PCGG cannot at this time take over the BASECO
without any court order and exercise thereover acts of ownership without court
supervision. Voting the shares is an act of ownership. Reorganizing the board of
directors is an act of ownership. Such acts are clearly unauthorized. As the majority
opinion itself stresses, the PCGG is merely an administrator whose authority is limited
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. request; an application for search warrant already filled up but still unsigned by
JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of respondent De Leon; an affidavit of respondent Logronio subscribed before
Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, respondent De Leon; a deposition in printed form of respondent Logronio already
MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN accomplished and signed by him but not yet subscribed; and a search warrant already
DOE, Respondents. accomplished but still unsigned by respondent Judge.

San Juan, Africa, Gonzales & San Agustin, for Petitioners. At that time respondent Judge was hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the depositions of respondents De Leon
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, and Logronio. After the session had adjourned, respondent Judge was informed that
Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents. the depositions had already been taken. The stenographer, upon request of
respondent Judge, read to him her stenographic notes; and thereafter, respondent
Judge asked respondent Logronio to take the oath and warned him that if his
DECISION deposition was found to be false and without legal basis, he could be charged for
perjury. Respondent Judge signed respondent de Leon’s application for search
warrant and respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then
VILLAMOR, J.: sign by respondent Judge and accordingly issued.

This is an original action of certiorari, prohibition and mandamus, with prayer for a
writ of preliminary mandatory and prohibitory injunction. In their petition Bache &
Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the
Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null
and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25,
1970; to order respondents to desist from enforcing the same and/or keeping the
documents, papers and effects seized by virtue thereof, as well as from enforcing the
tax assessments on petitioner corporation alleged by petitioners to have been made
on the basis of the said documents, papers and effects, and to order the return of the
latter to petitioners. We gave due course to the petition but did not issue the writ of
preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es
virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue,
wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the
issuance of a search warrant against petitioners for violation of Section 46(a) of the
National Internal Revenue Code, in relation to all other pertinent provisions thereof,
particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner
Rodolfo de Leon, one of herein respondents, to make and file the application for
search warrant which was attached to the letter.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents
served the search warrant petitioners at the offices of petitioner corporation on
Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the search on the ground
that no formal complaint or transcript of testimony was attached to the warrant. The
agents nevertheless proceeded with their search which yielded six boxes of
documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal
praying that the search warrant be quashed, dissolved or recalled, that preliminary
prohibitory and mandatory writs of injunction be issued, that the search warrant be
declared null and void, and that the respondents be ordered to pay petitioners,
jointly and severally, damages and attorney’s fees. On March 18, 1970, the
respondents, thru the Solicitor General, filed an answer to the petition. After hearing,
the court, presided over by respondent Judge, issued on July 29, 1970, an order
dismissing the petition for dissolution of the search warrant. In the meantime, or on
April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner
corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the
documents thus seized. Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw
library
1. Respondent Judge failed to personally examine the complainant and his witness.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his The pertinent provisions of the Constitution of the Philippines and of the Revised
witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. Rules of Court are:jgc:chanrobles.com.ph
They brought with them the following papers: respondent Vera’s aforesaid letter-
"(3) The right of the people to be secure in their persons, houses, papers and effects
against unreasonable searches and seizures shall not be violated, and no warrants
shall issue but upon probable cause, to be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or things to be
seized." (Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but
upon probable cause in connection with one specific offense to be determined by the
judge or justice of the peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place
to be searched and the persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. — The judge or justice of the peace must,
before issuing the warrant, personally examine on oath or affirmation the
complainant and any witnesses he may produce and take their depositions in writing,
and attach them to the record, in addition to any affidavits presented to him." (Rule
126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by
Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised
Rules of Court, should be conducted by the judge himself and not by others. The
phrase "which shall be determined by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce," appearing in the
said constitutional provision, was introduced by Delegate Francisco as an
amendment to the draft submitted by the Sub-Committee of Seven. The following
discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine
Constitutional Convention, Vol. III, pp. 755-757) is
enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los
fines de la justicia mediante el registro inmediato y la incautacion del cuerpo del
delito, no cree Su Señoria que causaria cierta demora el procedimiento apuntado en
su enmienda en tal forma que podria frustrar los fines de la justicia o si Su Señoria
encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia
con los derechos del individuo en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria
pregunta por la siguiente razon: el que solicita un mandamiento de registro tiene que
hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya
el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el
registro puede ser el mismo denunciante o alguna persona que solicita dicho
mandamiento de registro. Ahora toda la enmienda en esos casos consiste en que
haya peticion de registro y el juez no se atendra solamente a sea peticion sino que el
juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.
"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por
escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos
en todo lo posible las vejaciones injustas con la expedicion arbitraria de los
mandamientos de registro. Creo que entre dos males debemos escoger. el menor.
x x x
"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we
are incorporating in our constitution something of a fundamental character. Now,
before a judge could issue a search warrant, he must be under the obligation to
examine personally under oath the complainant and if he has any witness, the
witnesses that he may produce . . ."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more
emphatic and candid, for it requires the judge, before issuing a search warrant, to
"personally examine on oath or affirmation the complainant and any witnesses he
may produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant and his witnesses is necessary
to enable him to determine the existence or non-existence of a probable cause,
pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the
Revised Rules of Court, both of which prohibit the issuance of warrants except "upon
probable cause." The determination of whether or not a probable cause exists calls
for the exercise of judgment after a judicial appraisal of facts and should not be
allowed to be delegated in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge
of the complainant (respondent De Leon) and his witness (respondent Logronio).
While it is true that the complainant’s application for search warrant and the witness’
printed-form deposition were subscribed and sworn to before respondent Judge, the
latter did not ask either of the two any question the answer to which could possibly
be the basis for determining whether or not there was probable cause against herein
petitioners. Indeed, the participants seem to have attached so little significance to
the matter that notes of the proceedings before respondent Judge were not even
taken. At this juncture it may be well to recall the salient facts. The transcript of
stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the
hearing of this case in the court below shows that per instruction of respondent stenographic notes to respondent Judge did not constitute sufficient compliance with
Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions the constitutional mandate and the rule; for by that manner respondent Judge did
of the complainant and his witness, and that stenographic notes thereof were taken not have the opportunity to observe the demeanor of the complainant and his
by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a case. After witness, and to propound initial and follow-up questions which the judicial mind, on
respondent Judge was through with the hearing, Deputy Clerk Gonzales, account of its training, was in the best position to conceive. These were important in
stenographer Gaspar, complainant De Leon and witness Logronio went to arriving at a sound inference on the all-important question of whether or not there
respondent Judge’s chamber and informed the Judge that they had finished the was probable cause.
depositions. Respondent Judge then requested the stenographer to read to him her
stenographic notes. Special Deputy Clerk Gonzales testified as 2. The search warrant was issued for more than one specific offense.
follows:jgc:chanrobles.com.ph
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National
"A And after finishing reading the stenographic notes, the Honorable Judge Internal Revenue Code in relation to all other pertinent provisions thereof
requested or instructed them, requested Mr. Logronio to raise his hand and warned particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said search
him if his deposition will be found to be false and without legal basis, he can be warrant issued "in connection with one specific offense," as required by Sec. 3, Rule
charged criminally for perjury. The Honorable Court told Mr. Logronio whether he 126?
affirms the facts contained in his deposition and the affidavit executed before Mr.
Rodolfo de Leon. To arrive at the correct answer it is essential to examine closely the provisions of the
Tax Code referred to above. Thus we find the following:chanrob1es virtual 1aw
"Q And thereafter? library

"A And thereafter, he signed the deposition of Mr. Logronio. Sec. 46(a) requires the filing of income tax returns by corporations.

"Q Who is this he? Sec. 53 requires the withholding of income taxes at source.

"A The Honorable Judge. Sec. 72 imposes surcharges for failure to render income tax returns and for rendering
false and fraudulent returns.
"Q The deposition or the affidavit?
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to
"A The affidavit, Your Honor."cralaw virtua1aw library supply the information required under the Tax Code.

Thereafter, respondent Judge signed the search
The participation of respondent Judge in the proceedings which led to the issuance
of Search Warrant No. 2-M-70 was thus limited to listening to the stenographer’s
readings of her notes, to a few words of warning against the commission of perjury,
and to administering the oath to the complainant and his witness. This cannot be
consider a personal examination. If there was an examination at all of the
complainant and his witness, it was the one conducted by the Deputy Clerk of Court.
But, as stated, the Constitution and the rules require a personal examination by the
judge. It was precisely on account of the intention of the delegates to the
Constitutional Convention to make it a duty of the issuing judge to personally
examine the complainant and his witnesses that the question of how much time
would be consumed by the judge in examining them came up before the Convention,
as can be seen from the record of the proceedings quoted above. The reading of the
warrant. Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or
manufactures any article subject to a specific tax, without having paid the privilege
tax therefore, or who aids or abets in the conduct of illicit distilling, rectifying,
compounding, or illicit manufacture of any article subject to specific tax . . .," and
provides that in the case of a corporation, partnership, or association, the official
and/or employee who caused the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross
value of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under
the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of
income tax returns), which are interrelated. The second is the violation of Sec. 53
(withholding of income taxes at source). The third is the violation of Sec. 208
(unlawful pursuit of business or occupation); and the fourth is the violation of Sec. said:jgc:chanrobles.com.ph
209 (failure to make a return of receipts, sales, business or gross value of output
actually removed or to pay the tax due thereon). Even in their classification the six "The grave violation of the Constitution made in the application for the contested
above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 search warrants was compounded by the description therein made of the effects to
and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V be searched for and seized, to wit:chanrob1es virtual 1aw library
(Privilege Tax on Business and Occupation).
‘Books of accounts, financial records, vouchers, journals, correspondence, receipts,
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 ledgers, portfolios, credit journals, typewriters, and other documents and/or paper
SCRA 383), is not applicable, because there the search warrants were issued for showing all business transactions including disbursement receipts, balance sheets
"violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;" and related profit and loss statements.’
whereas, here Search Warrant No 2-M-70 was issued for violation of only one code,
i.e., the National Internal Revenue Code. The distinction more apparent than real, "Thus, the warrants authorized the search for and seizure of records pertaining to all
because it was precisely on account of the Stonehill incident, which occurred business transactions of petitioners herein, regardless of whether the transactions
sometime before the present Rules of Court took effect on January 1, 1964, that this were legal or illegal. The warrants sanctioned the seizure of all records of the
Court amended the former rule by inserting therein the phrase "in connection with petitioners and the aforementioned corporations, whatever their nature, thus openly
one specific offense," and adding the sentence "No search warrant shall issue for contravening the explicit command of our Bill of Rights — that the things to be seized
more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said in be particularly described — as well as tending to defeat its major objective: the
Stonehill:jgc:chanrobles.com.ph elimination of general warrants."cralaw virtua1aw library

"Such is the seriousness of the irregularities committed in connection with the While the term "all business transactions" does not appear in Search Warrant No. 2-
disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule M-70, the said warrant nevertheless tends to defeat the major objective of the Bill of
122 of the former Rules of Court that ‘a search warrant shall not issue but upon Rights, i.e., the elimination of general warrants, for the language used therein is so
probable cause in connection with one specific offense.’ Not satisfied with this all-embracing as to include all conceivable records of petitioner corporation, which,
qualification, the Court added thereto a paragraph, directing that ‘no search warrant if seized, could possibly render its business inoperative.
shall issue for more than one specific offense.’"
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion
3. The search warrant does not particularly describe the things to be seized. to explain the purpose of the requirement that the warrant should particularly
describe the place to be searched and the things to be seized, to
The documents, papers and effects sought to be seized are described in Search wit:jgc:chanrobles.com.ph
Warrant No. 2-M-70 in this manner:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts require that a search warrant should particularly describe the place to be searched
and disbursements books, customers ledgers); receipts for payments received; and the things to be seized. The evident purpose and intent of this requirement is to
certificates of stocks and securities; contracts, promissory notes and deeds of sale; limit the things to be seized to those, and only those, particularly described in the
telex and coded messages; business communications, accounting and business search warrant — to leave the officers of the law with no discretion regarding what
records; checks and check stubs; records of bank deposits and withdrawals; and articles they shall seize, to the end that ‘unreasonable searches and seizures’ may
records of foreign remittances, covering the years 1966 to 1970."cralaw virtua1aw not be made, — that abuses may not be committed. That this is the correct
library interpretation of this constitutional provision is borne out by American
authorities."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution,
and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should The purpose as thus explained could, surely and effectively, be defeated under the
particularly describe the things to be seized. search warrant issued in this case.

In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, A search warrant may be said to particularly describe the things to be seized when
the description therein is as specific as the circumstances will ordinarily allow (People
v. Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact — not
of law — by which the warrant officer may be guided in making the search and seizure
(idem., dissent of Abad Santos, J.,); or when the things described are limited to those
which bear direct relation to the offense for which the warrant is being issued (Sec.
2, Rule 126, Revised Rules of Court). The herein search warrant does not conform to
any of the foregoing tests. If the articles desired to be seized have any direct relation
to an offense committed, the applicant must necessarily have some evidence, other
than those articles, to prove the said offense; and the articles subject of search and
seizure should come in handy merely to strengthen such evidence. In this event, the
description contained in the herein disputed warrant should have mentioned, at
least, the dates, amounts, persons, and other pertinent data regarding the receipts
of payments, certificates of stocks and securities, contracts, promissory notes, deeds
of sale, messages and communications, checks, bank deposits and withdrawals,
records of foreign remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a
motion for reconsideration of respondent Judge’s order of July 29, 1970. The
contention is without merit. In the first place, when the questions raised before this
Court are the same as those which were squarely raised in and passed upon by the
court below, the filing of a motion for reconsideration in said court
before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc.,
Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing
of a motion for reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering the
circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of
the essence in view of the tax assessments sought to be enforced by respondent
officers of the Bureau of Internal Revenue against petitioner corporation, On account
of which immediate and more direct action becomes necessary. (Matute v. Court of
Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case,
the deprivation of petitioners’ fundamental right to due process taints the
proceeding against them in the court below not only with irregularity but also with
nullity. (Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection
against unreasonable search and seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a
corporation which is charged with a violation of a statute of the state of its creation,
or of an act of Congress passed in the exercise of its constitutional powers, cannot
refuse to produce the books and papers of such corporation, we do not wish to be
understood as holding that a corporation is not entitled to immunity, under the 4th
Amendment, against unreasonable searches and seizures. A corporation is, after all,
but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without compensation. It can
only be proceeded against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L.
ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a
different rule applied to a corporation, the ground that it was not privileged from
producing its books and papers. But the rights of a corporation against unlawful
search and seizure are to be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of
America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right
of a corporation to object against unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action
to assail the legality of the contested warrants and of the seizures made in pursuance
thereof, for the simple reason that said corporations have their respective
personalities, separate and distinct from the personality of herein petitioners,
regardless of the amount of shares of stock or the interest of each of them in said
corporations, whatever, the offices they hold therein may be. Indeed, it is well settled
that the legality of a seizure can be contested only by the party whose rights have
been impaired thereby, and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties. Consequently, petitioners
herein may not validly object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the corporations adverted
to above, since the right to object to the admission of said papers in evidence belongs
exclusively to the corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in their individual
capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices
documents, papers and effects were searched and seized were the petitioners. In the
case at bar, the corporation to whom the seized documents belong, and whose rights
have thereby been impaired, is itself a petitioner. On that score, petitioner
corporation here stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely — as
claimed by petitioners — at least partly — as in effect admitted by respondents —
based on the documents seized by virtue of Search Warrant No. 2-M-70.
Furthermore, the fact that the assessments were made some one and one-half
months after the search and seizure on February 25, 1970, is a strong indication that
the documents thus seized served as basis for the assessments. Those assessments
should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-
M-70 issued by respondent Judge is declared null and void; respondents are
permanently enjoined from enforcing the said search warrant; the documents,
papers and effects seized thereunder are ordered to be returned to petitioners; and
respondent officials the Bureau of Internal Revenue and their representatives are
permanently enjoined from enforcing the assessments mentioned in Annex "G" of
the present petition, as well as other assessments based on the documents, papers
and effects seized under the search warrant herein nullified, and from using the same
against petitioners in any criminal or other proceeding. No pronouncement as to
costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ.,
concur.
Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
Castro, J., concurs in the result.
Separate Opinions
BARREDO, J., concurring:chanrob1es virtual 1aw library
I concur.
I agree with the ruling that the search warrants in question violates the specific
injunction of Section 3, Rule 126 that "No search warrant shall issue for more than
one specific offense." There is no question in my mind that, as very clearly pointed
out by Mr. Justice Villamor, the phrase "for violation of Section 46 (a) of the National
Internal Revenue Code in relation to all other pertinent provisions thereof,
particularly Sections 53, 72, 73, 208 and 209" refers to more than one specific
offense, considering that the violation of Section 53 which refers to withholding of
income taxes at the sources, Section 208 which punishes pursuit of business or
occupation without payment of the corresponding specific or privilege taxes, and
Section 209 which penalizes failure to make a return of receipts sales, business or
gross value output actually removed or to pay the taxes thereon in connection with
Title V on Privilege Taxes on Business and Occupation can hardly be absorbed in a
charge of alleged violation of Section 46(a), which merely requires the filing of
income tax returns by corporations, so as to constitute with it a single offense. I
perceive here the danger that the result of the search applied for may be used as
basis not only for a charge of violating Section 46(a) but also and separately of Section
53, 208 and 209. Of course, it is to be admitted that Sections 72 and 73, also
mentioned in the application, are really directly related to Section 46(a) because
Section 72 provides for surcharges for failure to render, returns and for rendering
false and fraudulent returns and Section 73 refers to the penalty for failure to file
returns or to pay the corresponding tax. Taken together, they constitute one single
offense penalized under Section 73. I am not and cannot be in favor of any scheme
which amounts to an indirect means of achieving that which not allowed to be done
directly. By merely saying that a party is being charged with violation of one section
of the code in relation to a number of other sections thereof which in truth have no
clear or direct bearing with the first is to me condemnable because it is no less than
a shotgun device which trenches on the basic liberties intended to be protected by
the unequivocal limitations imposed by the Constitution and the Rules of Court on
the privilege to secure a search warrant with the aggravating circumstance of being
coupled with an attempt to mislead the judge before whom the application for its
issuance is presented.
I cannot close this brief concurrence without expressing my vehement disapproval of
the action taken by respondent internal revenue authorities in using the documents
and papers secured during the search, the legality of which was pending resolution
by the court, as basis of an assessment, no matter how highly motivated such action
might have been. This smacks of lack of respect, if not contempt for the court and is
certainly intolerable. At the very least, it appears as an attempt to render the court
proceedings moot and academic, and dealing as this case does with constitutionally
protected rights which are part and parcel of the basic concepts of individual liberty
and democracy, the government agents should have been the first ones to refrain
from trying to make a farce of these court proceedings. Indeed, it is to be regretted
that the government agents and the court have acted irregularly, for it is highly
doubtful if it would be consistent with the sacredness of the rights herein found to
have been violated to permit the filing of another application which complies with
the constitutional requirements above discussed and the making of another search
upon the return of the papers and documents now in their illegal possession. This
could be an instance wherein taxes properly due the State will probably remain
unassessed and unpaid only because the ones in charge of the execution of the laws
did not know how to respect basic constitutional rights and liberties.
G.R. No. 116123 March 13, 1997
SERGIO F. NAGUIAT, doing business under the name and style SERGIO F. NAGUIAT
ENT., INC., & CLARK FIELD TAXI, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION), NATIONAL
ORGANIZATION OF WORKINGMEN and its members, LEONARDO T. GALANG, et
al., respondents.
PANGANIBAN, J.:
Are private respondent-employees of petitioner Clark Field Taxi, Inc., who were
separated from service due the closure of Clark Air Base, entitled to separation pay
and, if so, in what amount? Are officers of corporations ipso facto liable jointly and
severally with the companies they represent for the payment of separation pay?
These questions are answered by the Court in resolving this petition
for certiorari under Rule 65 of the Rules of Court assailing the Resolutions of the
National Labor Relations Commission (Third Division) 1 promulgated on February 28,
1994,2 and May 31, 1994.3 The February 28, 1994 Resolution affirmed with
modifications the decision4of Labor Arbiter Ariel C. Santos in NLRC Case No. RAB-III-
12-2477-91. The second Resolution denied the motion for reconsideration of herein
petitioners.
The NLRC modified the decision of the labor arbiter by granting separation pay to
herein individual respondents in the increased amount of US$120.00 for every year
of service or its peso equivalent, and holding Sergio F. Naguiat Enterprises, Inc.,
Sergio F. Naguiat and Antolin T. Naguiat, jointly and severally liable with Clark Field
Taxi, Inc. ("CFTI").
The Facts
The following facts are derived from the records of the case:
Petitioner CFTI held a concessionaire's contract with the Army Air Force Exchange
Services ("AAFES") for the operation of taxi services within Clark Air Base. Sergio F.
Naguiat was CFTI's president, while Antolin T. Naguiat was its vice-president. Like
Sergio F. Naguiat Enterprises, Incorporated ("Naguiat Enterprises"), a trading firm, it
was a family-owned corporation.
Individual respondents were previously employed by CFTI as taxicab drivers. During
their employment, they were required to pay a daily "boundary fee" in the amount
of US$26.50 for those working from 1:00 a.m. to 12:00 noon, and US$27.00 for those
working from 12:00 noon to 12:00 midnight. All incidental expenses for the
maintenance of the vehicles they were driving were accounted against them,
including gasoline expenses.
The drivers worked at least three to four times a week, depending on the availability
of taxicabs. They earned not less than US$15.00 daily.
In excess of that amount, however, they were required to make cash deposits to the
company, which they could later withdraw every fifteen days.
Due to the phase-out of the US military bases in the Philippines, from which Clark Air
Base was not spared, the AAFES was dissolved, and the services of individual
respondents were officially terminated on November 26, 1991.
The AAFES Taxi Drivers Association ("drivers' union"), through its local president,
Eduardo Castillo, and CFTI held negotiations as regards separation benefits that
should be awarded in favor of the drivers. They arrived at an agreement that the
separated drivers will be given P500.00 for every year of service as severance pay.
Most of the drivers accepted said amount in December 1991 and January 1992.
However, individual respondents herein refused to accept theirs.
Instead, after disaffiliating themselves from the drivers' union, individual
respondents, through the National Organization of Workingmen ("NOWM"), a labor
organization which they subsequently joined, filed a complaint5against "Sergio F.
Naguiat doing business under the name and style Sergio F. Naguiat Enterprises, Inc.,
Army-Air Force Exchange Services (AAFES) with Mark Hooper as Area Service
Manager, Pacific Region, and AAFES Taxi Drivers Association with Eduardo Castillo as
President," for payment of separation pay due to termination/phase-out. Said
complaint was later amended6 to include additional taxi drivers who were similarly
situated as complainants, and CFTI with Antolin T. Naguiat as vice president and
general manager, as party respondent.
In their complaint, herein private respondents alleged that they were regular
employees of Naguiat Enterprises, although their individual applications for
employment were approved by CFTI. They claimed to have been assigned to Naguiat
Enterprises after having been hired by CFTI, and that the former thence managed,
controlled and supervised their employment. They averred further that they were
entitled to separation pay based on their latest daily earnings of US$15.00 for
working sixteen (16) days a month.
In their position paper submitted to the labor arbiter, herein petitioners claimed that
the cessation of business of CFTI on November 26, 1991, was due to "great financial
losses and lost business opportunity" resulting from the phase-out of Clark Air Base
brought about by the Mt. Pinatubo eruption and the expiration of the RP-US military
bases agreement. They admitted that CFTI had agreed with the drivers' union,
through its President Eduardo Castillo who claimed to have had blanket authority to
negotiate with CFTI in behalf of union members, to grant its taxi driver-employees
separation pay equivalent to P500.00 for every year of service.
The labor arbiter, finding the individual complainants to be regular workers of CFTI,
ordered the latter to pay them P1,200.00 for every year of service "for humanitarian
consideration," setting aside the earlier agreement between CFTI and the drivers'
union of P500.00 for every year of service. The labor arbiter rejected the allegation
of CFTI that it was forced to close business due to "great financial losses and lost
business opportunity" since, at the time it ceased operations, CFTI was profitably
earning and the cessation of its business was due to the untimely closure of Clark Air
Base. In not awarding separation pay in accordance with the Labor Code, the labor
arbiter explained:
 To allow respondents exemption from its (sic) obligation to pay
separation pay would be inhuman to complainants but to impose a
monetary obligation to an employer whose profitable business was
abruptly shot (sic) down by force majeure would be unfair and
unjust to say the least.7
and thus, simply awarded an amount for "humanitarian consideration."
Herein individual private respondents appealed to the NLRC. In its Resolution, the
NLRC modified the decision of the labor arbiter by granting separation pay to the
private respondents. The concluding paragraphs of the NLRC Resolution read:
The contention of complainant is partly correct. One-half month
salary should be US$120.00 but this amount can not be paid to the
complainant in U.S. Dollar which is not the legal tender in the
Philippines. Paras, in commenting on Art. 1249 of the New Civil
Code, defines legal tender as "that which a debtor may compel a
creditor to accept in payment of the debt. The complainants who
are the creditors in this instance can be compelled to accept the
Philippine peso which is the legal tender, in which case, the table
of conversion (exchange rate) at the time of payment or
satisfaction of the judgment should be used. However, since the
choice is left to the debtor, (respondents) they may choose to pay
in US dollar." (Phoenix Assurance Co. vs. Macondray & Co. Inc., L-
25048, May 13, 1975)
In discharging the above obligations, Sergio F. Naguiat Enterprises,
which is headed by Sergio F. Naguiat and Antolin Naguiat, father
and son at the same time the President and Vice-President and
General Manager, respectively, should be joined as indispensable
party whose liability is joint and several. (Sec. 7, Rule 3, Rules of
Court)8
As mentioned earlier, the motion for reconsideration of herein petitioners was
denied by the NLRC. Hence, this petition with prayer for issuance of a temporary
restraining order. Upon posting by the petitioners of a surety bond, a temporary
restraining order9 was issued by this Court enjoining execution of the assailed
Resolutions.
Issues
The petitioners raise the following issues before this Court for resolution:
I. Whether or not public respondent NLRC (3rd Div.) committed
grave abuse of discretion amounting to lack of jurisdiction in issuing
the appealed resolution;
II. Whether or not Messrs. Teofilo Rafols and Romeo N. Lopez could
validly represent herein private respondents; and,
III. Whether or not the resolution issued by public respondent is
contrary to law. 10
Petitioners also submit two additional issues by way of a supplement 11 to their
petition, to wit: that Petitioners Sergio F. Naguiat and Antolin Naguiat were denied
due process; and that petitioners were not furnished copies of private respondents'
appeal to the NLRC. As to the procedural lapse of insufficient copies of the appeal,
the proper forum before which petitioners should have raised it is the NLRC. They,
however, failed to question this in their motion for reconsideration. As a
consequence, they are deemed to have waived the same and voluntarily submitted
themselves to the jurisdiction of the appellate body.
Anent the first issue raised in their original petition, petitioners contend that NLRC
committed grave abuse of discretion amounting to lack or excess of jurisdiction in
unilaterally increasing the amount of severance pay granted by the labor arbiter.
They claim that this was not supported by substantial evidence since it was based
simply on the self-serving allegation of respondents that their monthly take-home
pay was not lower than $240.00.
On the second issue, petitioners aver that NOWM cannot make legal representations
in behalf of individual respondents who should, instead, be bound by the decision of
the union (AAFES Taxi Drivers Association) of which they were members.
As to the third issue, petitioners incessantly insist that Sergio F. Naguiat Enterprises,
Inc. is a separate and distinct juridical entity which cannot be held jointly and
severally liable for the obligations of CFTI. And similarly, Sergio F. Naguiat and Antolin
Naguiat were merely officers and stockholders of CFTI and, thus, could not be held
personally accountable for corporate debts.
Lastly, Sergio and Antolin Naguiat assail the Resolution of NLRC holding them
solidarily liable despite not having been impleaded as parties to the complaint.
Individual respondents filed a comment separate from that of NOWM. In sum, both
aver that petitioners had the opportunity but failed to refute, the taxi drivers' claim
of having an average monthly earning of $240.00; that individual respondents
became members of NOWM after disaffiliating themselves from the AAFES Taxi
Drivers Association which, through the manipulations of its President Eduardo
Castillo, unconscionably compromised their separation pay; and that Naguiat
Enterprises, being their indirect employer, is solidarily liable under the law for
violation of the Labor Code, in this case, for nonpayment of their separation pay.
The Solicitor General unqualifiedly supports the allegations of private respondents.
In addition, he submits that the separate personalities of respondent corporations
and their officers should be disregarded and considered one and the same as these
were used to perpetrate injustice to their employees.
The Court's Ruling
As will be discussed below, the petition is partially meritorious.
First Issue: Amount of Separation Pay
Firmly, we reiterate the rule that in a petition for certiorari filed pursuant to Rule 65
of the Rules of Court, which is the only way a labor case may reach the Supreme
Court, the petitioner/s must clearly show that the NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion. 12
Long-standing and well-settled in Philippine jurisprudence is the judicial dictum that
findings of fact of administrative agencies and quasi-judicial bodies, which have
acquired expertise because their jurisdiction is confined to specific matters, are
generally accorded not only great respect but even finality; and are binding upon this
Court unless there is a showing of grave abuse of discretion, or where it is clearly
shown that they were arrived at arbitrarily or in disregard of the evidence on
record. 13
Nevertheless, this Court carefully perused the records of the instant case if only to
determine whether public respondent committed grave abuse of discretion,
amounting to lack of jurisdiction, in granting the clamor of private respondents that
their separation pay should be based on the amount of $240.00, allegedly their
minimum monthly earnings as taxi drivers of petitioners.
In their amended complaint before the Regional Arbitration Branch in San Fernando,
Pampanga, herein private respondents set forth in detail the work schedule and
financial arrangement they had with their employer. Therefrom they inferred that
their monthly take-home pay amounted to not less than $240.00. Herein petitioners
did not bother to refute nor offer any evidence to controvert said allegations.
Remaining undisputed, the labor arbiter adopted such facts in his decision.
Petitioners did not even appeal from the decision of the labor arbiter nor manifest
any error in his findings and conclusions. Thus, petitioners are in estoppel for not
having questioned such facts when they had all opportunity to do so. Private
respondents, like petitioners, are bound by the factual findings of Respondent
Commission.
Petitioners also claim that the closure of their taxi business was due to great financial
losses brought about by the eruption of Mt. Pinatubo which made the roads
practically impassable to their taxicabs. Likewise well-settled is the rule that business
losses or financial reverses, in order to sustain retrenchment of personnel or closure
of business and warrant exemption from payment of separation pay, must be proved
with clear and satisfactory evidence. 14 The records, however, are devoid of such
evidence.
The labor arbiter, as affirmed by NLRC, correctly found that petitioners stopped their
taxi business within Clark Air Base because of the phase-out of U.S. military presence
thereat. It was not due to any great financial loss because petitioners' taxi business
was earning profitably at the time of its closure.
With respect to the amount of separation pay that should be granted, Article 283 of
the Labor Code provides:
. . . In case of retrenchment to prevent losses and in cases of
closures or cessation of operations of establishment or undertaking
not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or at least
one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered one
(1) whole year.
Considering the above, we find that NLRC did not commit grave abuse of discretion
in ruling that individual respondents were entitled to separation pay 15 in the amount
$120.00 (one-half of $240.00 monthly pay) or its peso equivalent for every year of
service.
Second Issue: NOWM's Personality to
Represent Individual Respondents-Employees
On the question of NOWM's authority to represent private respondents, we hold
petitioners in estoppel for not having seasonably raised this issue before the labor
arbiter or the NLRC. NOWM was already a party-litigant as the organization
representing the taxi driver-complainants before the labor arbiter. But petitioners
who were party-respondents in said complaint did not assail the juridical personality
of NOWM and the validity of its representations in behalf of the complaining taxi
drivers before the quasi-judicial bodies. Therefore, they are now estopped from
raising such question before this Court. In any event, petitioners acknowledged
before this Court that the taxi drivers allegedly represented by NOWM, are
themselves parties in this case. 16
Third Issue: Liability of Petitioner-
Corporations and Their Respective Officers
The resolution of this issue involves another factual finding that Naguiat Enterprises
actually managed, supervised and controlled employment terms of the taxi drivers,
making it their indirect employer. As adverted to earlier, factual findings of quasi-
judicial bodies are binding upon the court in the absence of a showing of grave abuse
of discretion.
Unfortunately, the NLRC did not discuss or give any explanation for holding Naguiat
Enterprises and its officers jointly and severally liable in discharging CFTI's liability for
payment of separation pay. We again remind those concerned that decisions,
however concisely written, must distinctly and clearly set forth the facts and law
upon which they are based. 17 This rule applies as well to dispositions by quasi-judicial
and administrative bodies.
Naguiat Enterprise Not Liable
In impleading Naguiat Enterprises as solidarily liable for the obligations of CFTI,
respondents rely on Articles 106, 18107 19 and 109 20 of the Labor Code.
Based on factual submissions of the parties, the labor arbiter, however, found that
individual respondents were regular employees of CFTI who received wages on a
boundary or commission basis.
We find no reason to make a contrary finding. Labor-only contracting exists where:
(1) the person supplying workers to an employer does not have substantial capital or
investment in the form of tools, equipment, machinery, and work premises, among
others; and (2) the workers recruited and placed by such person are performing
activities which are directly related to the principal business of the
employer. 21 Independent contractors, meanwhile, are those who exercise
independent employment, contracting to do a piece of work according to their own
methods without being subject to control of their employer except as to the result of
their Work. 22
From the evidence proffered by both parties, there is no substantial basis to hold that
Naguiat Enterprises is an indirect employer of individual respondents much less a
labor only contractor. On the contrary, petitioners submitted documents such as the
drivers' applications for employment with CFTI, 23 and social security
remittances 24 and payroll 25 of Naguiat Enterprises showing that none of the
individual respondents were its employees. Moreover, in the contract 26 between
CFTI and AAFES, the former, as concessionaire, agreed to purchase from AAFES for a
certain amount within a specified period a fleet of vehicles to be "ke(pt) on the road"
by CFTI, pursuant to their concessionaire's contract. This indicates that CFTI became
the owner of the taxicabs which became the principal investment and asset of the
company.
Private respondents failed to substantiate their claim that Naguiat Enterprises
managed, supervised and controlled their employment. It appears that they were
confused on the personalities of Sergio F. Naguiat as an individual who was the
president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate corporate
entity with a separate business. They presumed that Sergio F. Naguiat, who was at
the same time a stockholder and director 27 of Sergio F. Naguiat Enterprises, Inc., was
managing and controlling the taxi business on behalf of the latter. A closer scrutiny
and analysis of the records, however, evince the truth of the matter: that Sergio F.
Naguiat, in supervising the taxi drivers and determining their employment terms, was
rather carrying out his responsibilities as president of CFTI. Hence, Naguiat
Enterprises as a separate corporation does not appear to be involved at all in the taxi
business.
To illustrate further, we refer to the testimony of a driver-claimant on cross
examination.
Atty. Suarez
Is it not true that you applied not with Sergio F.
Naguiat but with Clark Field Taxi?
Witness
I applied for (sic) Sergio F. Naguiat.
Atty. Suarez
Sergio F. Naguiat as an individual or the
corporation?
Witness
Sergio F. Naguiat na tao.
Atty. Suarez
Who is Sergio F. Naguiat?
Witness
He is the one managing the Sergio F. Naguiat
Enterprises and he is the one whom we believe
as our employer
Atty. Suarez
What is exactly the position of Sergio F. Naguiat
with the Sergio F. Naguiat Enterprises?
Witness
He is the owner, sir.
Atty. Suarez
How about with Clark Field Taxi Incorporated
what is the position of Mr. Naguiat?
Witness
What I know is that he is a concessionaire.
xxx xxx xxx
Atty. Suarez
But do you also know that Sergio F. Naguiat is the
President of Clark Field Taxi, Incorporated?
Witness
Yes, sir.
Atty. Suarez
How about Mr. Antolin Naguiat what is his role in
the taxi services, the operation of the Clark Field
Taxi, Incorporated?
Witness
He is the vice president. 28
And, although the witness insisted that Naguiat Enterprises was his employer, he
could not deny that he received his salary from the office of CFTI inside the base. 29
Another driver-claimant admitted, upon the prodding of counsel for the
corporations, that Naguiat Enterprises was in the trading business while CFTI was in
taxi services. 30
In addition, the Constitution 31 of CFTI-AAFES Taxi Drivers Association which,
admittedly, was the union of individual respondents while still working at Clark Air
Base, states that members thereof are the employees of CFTI and "(f)or collective
bargaining purposes, the definite employer is the Clark Field Taxi Inc."
From the foregoing, the ineludible conclusion is that CFTI was the actual and direct
employer of individual respondents, and that Naguiat Enterprises was neither their
indirect employer nor labor-only contractor. It was not involved at all in the taxi
business.
CFTI president
solidarily liable
Petitioner-corporations would likewise want to avoid the solidary liability of their
officers. To bolster their position, Sergio F. Naguiat and Antolin T. Naguiat specifically
aver that they were denied due process since they were not parties to the complaint
below. 32 In the broader interest of justice, we, however, hold that Sergio F. Naguiat,
in his capacity as president of CFTI, cannot be exonerated from joint and several
liability in the payment of separation pay to individual respondents.
A.C. Ransom Labor Union-CCLU vs. NLRC 33 is the case in point. A.C. Ransom
Corporation was a family corporation, the stockholders of which were members of
the Hernandez family. In 1973, it filed an application for clearance to close or cease
operations, which was duly granted by the Ministry of Labor and Employment,
without prejudice to the right of employees to seek redress of grievance, if any.
Backwages of 22 employees, who engaged in a strike prior to the closure, were
subsequently computed at P164,984.00. Up to September 1976, the union filed
about ten (10) motions for execution against the corporation, but none could be
implemented, presumably for failure to find leviable assets of said corporation. In its
last motion for execution, the union asked that officers and agents of the company
be held personally liable for payment of the backwages. This was granted by the labor
arbiter. In the corporation's appeal to the NLRC, one of the issues raised was: "Is the
judgment against a corporation to reinstate its dismissed employees with backwages,
enforceable against its officer and agents, in their individual, private and personal
capacities, who were not parties in the case where the judgment was rendered!" The
NLRC answered in the negative, on the ground that officers of a corporation are not
liable personally for official acts unless they exceeded the scope of their authority.
On certiorari, this Court reversed the NLRC and upheld the labor arbiter. In imposing
joint and several liability upon the company president, the Court, speaking through
Mme. Justice Ameurfina Melencio-Herrera, ratiocinated this wise:
(b) How can the foregoing (Articles 265 and 273 of the Labor Code)
provisions be implemented when the employer is a corporation?
The answer is found in Article 212(c) of the Labor Code which
provides:
(c) "Employer" includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any labor
organization or any of its officers or agents except when acting as
employer.
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have
an officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for nonpayment of
back wages. That is the policy of the law. . . .
(c) If the policy of the law were otherwise, the corporation
employer can have devious ways for evading payment of back
wages. . . .
(d) The record does not clearly identify "the officer or officers" of
RANSOM directly responsible for failure to pay the back wages of
the 22 strikers. In the absence of definite Proof in that regard, we
believe it should be presumed that the responsible officer is the
President of the corporation who can be deemed the chief
operation officer thereof. Thus, in RA 602, criminal responsibility is
with the "Manager or in his default, the person acting as such." In
RANSOM. the President appears to be the Manager. (Emphasis
supplied.)
Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the
business. Thus, applying the ruling in A.C. Ransom, he falls within the meaning of an
"employer" as contemplated by the Labor Code, who may be held jointly and
severally liable for the obligations of the corporation to its dismissed employees.
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were
"close family corporations" 34owned by the Naguiat family. Section 100, paragraph 5,
(under Title XII on Close Corporations) of the Corporation Code, states:
(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall
be personally liable for corporate tortsunless the corporation has
obtained reasonably adequate liability insurance. (emphasis
supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate
liability insurance;" thus, what remains is to determine whether there was
corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially,
"tort" consists in the violation of a right given or the omission of a duty imposed by
law. 35 Simply stated, tort is a breach of a legal duty. 36 Article 283 of the Labor Code
mandates the employer to grant separation pay to employees in case of closure or
cessation of operations of establishment or undertaking not due to serious business
losses or financial reverses, which is the condition obtaining at bar. CFTI failed to
comply with this law-imposed duty or obligation. Consequently, its stockholder who
was actively engaged in the management or operation of the business should be held
personally liable.
Furthermore, in MAM Realty Development vs. NLRC, 37 the Court recognized that a
director or officer may still be held solidarily liable with a corporation by specific
provision of law. Thus:
. . . A corporation, being a juridical entity, may act only through its
directors, officers and employees. Obligations incurred by them,
acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. True, solidary
liabilities may at times be incurred but only when exceptional
circumstances warrant such as, generally, in the following cases:
xxx xxx xxx
4. When a director, trustee or officer is made, by specific provision
of law, personally liable for his corporate action. (footnotes
omitted)
As pointed out earlier, the fifth paragraph of Section 100 of the Corporation Code
specifically imposes personal liability upon the stockholder actively managing or
operating the business and affairs of the close corporation.
In fact, in posting the surety bond required by this Court for the issuance of a
temporary restraining order enjoining the execution of the assailed NLRC
Resolutions, only Sergio F. Naguiat, in his individual and personal capacity, principally
bound himself to comply with the obligation thereunder, i.e., "to guarantee the
payment to private respondents of any damages which they may incur by reason of
the issuance of a temporary restraining order sought, if it should be finally adjudged
that said principals were not entitled thereto. 38
The Court here finds no application to the rule that a corporate officer cannot be held
solidarily liable with a corporation in the absence of evidence that he had acted in
bad faith or with malice. 39 In the present case, Sergio Naguiat is held solidarily liable
for corporate tort because he had actively engaged in the management and
operation of CFTI, a close corporation.
Antolin Naguiat not personally liable
Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title of
"general manager" as well, it had not been shown that he had acted in such capacity.
Furthermore, no evidence on the extent of his participation in the management or
operation of the business was preferred. In this light, he cannot be held solidarily
liable for the obligations of CFTI and Sergio Naguiat to the private respondents.
Fourth Issue: No Denial of Due Process
Lastly, in petitioners' Supplement to their original petition, they assail the NLRC
Resolution holding Sergio F. Naguiat and Antolin T. Naguiat jointly and severally liable
with petitioner-corporations in the payment of separation pay, averring denial of due
process since the individual Naguiats were not impleaded as parties to the complaint.
We advert to the case of A.C. Ransom once more. The officers of the corporation
were not parties to the case when the judgment in favor of the employees was
rendered. The corporate officers raised this issue when the labor arbiter granted the
motion of the employees to enforce the judgment against them. In spite of this, the
Court held the corporation president solidarily liable with the corporation.
Furthermore, Sergio and Antolin Naguiat voluntarily submitted themselves to the
jurisdiction of the labor arbiter when they, in their individual capacities, filed a
position paper 40 together with CFTI, before the arbiter. They cannot now claim to
have been denied due process since they availed of the opportunity to present their
positions.
WHEREFORE, the foregoing premises considered, the petition is PARTLY GRANTED.
The assailed February 28, 1994 Resolution of the NLRC is hereby MODIFIED as
follows:
(1) Petitioner Clark Field Taxi, Incorporated, and Sergio F. Naguiat, president and co-
owner thereof, are ORDERED to pay, jointly and severally, the individual respondents
their separation pay computed at US$120.00 for every year of service, or its peso
equivalent at the time of payment or satisfaction of the judgment;
(2) Petitioner Sergio F. Naguiat Enterprises, Incorporated, and Antolin T. Naguiat are
ABSOLVED from liability in the payment of separation pay to individual respondents.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.
G.R. No. 126297 February 11, 2008
PROFESSIONAL SERVICES, INC., petitioner,
vs.
THE COURT OF APPEALS and NATIVIDAD and ENRIQUE AGANA, respondents,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 126467 February 11, 2008
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA,
JR., EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE
AGANA, petitioners,
vs.
THE COURT OF APPEALS and JUAN FUENTES, respondents,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 127590 February 11, 2008
MIGUEL AMPIL, petitioner,
vs.
THE COURT OF APPEALS and NATIVIDAD AGANA and ENRIQUE
AGANA, respondents.
RESOLUTION
SANDOVAL-GUTIERREZ, J.:
As the hospital industry changes, so must the laws and jurisprudence governing
hospital liability. The immunity from medical malpractice traditionally accorded to
hospitals has to be eroded if we are to balance the interest of the patients and
hospitals under the present setting.
Before this Court is a motion for reconsideration filed by Professional Services, Inc.
(PSI), petitioner in G.R. No. 126297, assailing the Court’s First Division Decision dated
January 31, 2007, finding PSI and Dr. Miguel Ampil, petitioner in G.R. No. 127590,
jointly and severally liable for medical negligence.
A brief revisit of the antecedent facts is imperative.
On April 4, 1984, Natividad Agana was admitted at the Medical City General Hospital
(Medical City) because of difficulty of bowel movement and bloody anal discharge.
Dr. Ampil diagnosed her to be suffering from "cancer of the sigmoid." Thus, on April
11, 1984, Dr. Ampil, assisted by the medical staff1 of Medical City, performed an
anterior resection surgery upon her. During the surgery, he found that the
malignancy in her sigmoid area had spread to her left ovary, necessitating the
removal of certain portions of it. Thus, Dr. Ampil obtained the consent of Atty.
Enrique Agana, Natividad’s husband, to permit Dr. Juan Fuentes, respondent in G.R.
No. 126467, to perform hysterectomy upon Natividad.
Dr. Fuentes performed and completed the hysterectomy. Afterwards, Dr. Ampil took
over, completed the operation and closed the incision. However, the operation
appeared to be flawed. In the corresponding Record of Operation dated April 11,
1984, the attending nurses entered these remarks:
sponge count lacking 2
announced to surgeon searched done (sic) but to no avail continue for
closure.
After a couple of days, Natividad complained of excruciating pain in her anal region.
She consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain
was the natural consequence of the surgical operation performed upon her. Dr.
Ampil recommended that Natividad consult an oncologist to treat the cancerous
nodes which were not removed during the operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United States
to seek further treatment. After four (4) months of consultations and laboratory
examinations, Natividad was told that she was free of cancer. Hence, she was advised
to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains.
Two (2) weeks thereafter, her daughter found a piece of gauze protruding from her
vagina. Dr. Ampil was immediately informed. He proceeded to Natividad’s house
where he managed to extract by hand a piece of gauze measuring 1.5 inches in width.
Dr. Ampil then assured Natividad that the pains would soon vanish.
Despite Dr. Ampil’s assurance, the pains intensified, prompting Natividad to seek
treatment at the Polymedic General Hospital. While confined thereat, Dr. Ramon
Gutierrez detected the presence of a foreign object in her vagina -- a foul-smelling
gauze measuring 1.5 inches in width. The gauze had badly infected her vaginal vault.
A recto-vaginal fistula had formed in her reproductive organ which forced stool to
excrete through the vagina. Another surgical operation was needed to remedy the
situation. Thus, in October 1984, Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the Regional Trial
Court, Branch 96, Quezon City a complaint for damages against PSI (owner of Medical
City), Dr. Ampil and Dr. Fuentes.
On February 16, 1986, pending the outcome of the above case, Natividad died. She
was duly substituted by her above-named children (the Aganas).
On March 17, 1993, the trial court rendered judgment in favor of spouses Agana
finding PSI, Dr. Ampil and Dr. Fuentes jointly and severally liable. On appeal, the Court
of Appeals, in its Decision dated September 6, 1996, affirmed the assailed judgment
with modification in the sense that the complaint against Dr. Fuentes was dismissed.
PSI, Dr. Ampil and the Aganas filed with this Court separate petitions for review
on certiorari. On January 31, 2007, the Court, through its First Division, rendered a
Decision holding that PSI is jointly and severally liable with Dr. Ampil for the following
reasons: first, there is an employer-employee relationship between Medical City and
Dr. Ampil. The Court relied on Ramos v. Court of Appeals,2 holding that for the
purpose of apportioning responsibility in medical negligence cases, an employer-
employee relationship in effect exists between hospitals and their attending and
visiting physicians; second, PSI’s act of publicly displaying in the lobby of the Medical
City the names and specializations of its accredited physicians, including Dr. Ampil,
estopped it from denying the existence of an employer-employee relationship
between them under the doctrine of ostensible agency or agency by
estoppel;and third, PSI’s failure to supervise Dr. Ampil and its resident physicians and
nurses and to take an active step in order to remedy their negligence rendered it
directly liable under the doctrine of corporate negligence.
In its motion for reconsideration, PSI contends that the Court erred in finding it liable
under Article 2180 of the Civil Code, there being no employer-employee relationship
between it and its consultant, Dr. Ampil. PSI stressed that the Court’s Decision
in Ramos holding that "an employer-employee relationship in effect exists between
hospitals and their attending and visiting physicians for the purpose of apportioning
responsibility" had been reversed in a subsequent Resolution. 3 Further, PSI argues
that the doctrine of ostensible agency or agency by estoppelcannot apply because
spouses Agana failed to establish one requisite of the doctrine, i.e., that Natividad
relied on the representation of the hospital in engaging the services of Dr. Ampil. And
lastly, PSI maintains that the doctrine of corporate negligence is misplaced because
the proximate cause of Natividad’s injury was Dr. Ampil’s negligence.
The motion lacks merit.
As earlier mentioned, the First Division, in its assailed Decision, ruled that an
employer-employee relationship "in effect" exists between the Medical City and Dr.
Ampil. Consequently, both are jointly and severally liable to the Aganas. This ruling
proceeds from the following ratiocination in Ramos:
We now discuss the responsibility of the hospital in this particular incident.
The unique practice (among private hospitals) of filling up specialist staff
with attending and visiting "consultants," who are allegedly not hospital
employees, presents problems in apportioning responsibility for negligence
in medical malpractice cases. However, the difficulty is only more apparent
than real.
In the first place, hospitals exercise significant control in the hiring and
firing of consultants and in the conduct of their work within the hospital
premises. Doctors who apply for "consultant" slots, visiting or attending, are
required to submit proof of completion of residency, their educational
qualifications; generally, evidence of accreditation by the appropriate board
(diplomate), evidence of fellowship in most cases, and references. These
requirements are carefully scrutinized by members of the hospital
administration or by a review committee set up by the hospital who either
accept or reject the application. This is particularly true with respondent
hospital.
After a physician is accepted, either as a visiting or attending consultant,
he is normally required to attend clinico-pathological conferences,
conduct bedside rounds for clerks, interns and residents, moderate grand
rounds and patient audits and perform other tasks and responsibilities, for
the privilege of being able to maintain a clinic in the hospital, and/or for
the privilege of admitting patients into the hospital. In addition to
these, the physician’s performance as a specialist is generally evaluated by
a peer review committee on the basis of mortality and morbidity statistics,
and feedback from patients, nurses, interns and residents. A consultant
remiss in his duties, or a consultant who regularly falls short of the
minimum standards acceptable to the hospital or its peer review
committee, is normally politely terminated.
In other words, private hospitals hire, fire and exercise real control over
their attending and visiting "consultant" staff. While "consultants" are not,
technically employees, a point which respondent hospital asserts in
denying all responsibility for the patient’s condition, the control exercised,
the hiring, and the right to terminate consultants all fulfill the important
hallmarks of an employer-employee relationship, with the exception of
the payment of wages. In assessing whether such a relationship in fact
exists, the control test is determining. Accordingly, on the basis of the
foregoing, we rule that for the purpose of allocating responsibility in
medical negligence cases, an employer-employee relationship in effect
exists between hospitals and their attending and visiting physicians.This
being the case, the question now arises as to whether or not respondent
hospital is solidarily liable with respondent doctors for petitioner’s
condition.
The basis for holding an employer solidarily responsible for the negligence
of its employee is found in Article 2180 of the Civil Code which considers a
person accountable not only for his own acts but also for those of others
based on the former’s responsibility under a relationship of partia ptetas.
Clearly, in Ramos, the Court considered the peculiar relationship between a hospital
and its consultants on the bases of certain factors. One such factor is the "control
test" wherein the hospital exercises control in the hiring and firing of consultants, like
Dr. Ampil, and in the conduct of their work.
Actually, contrary to PSI’s contention, the Court did not reverse its ruling in Ramos.
What it clarified was that the De Los Santos Medical Clinic did not exercise control
over its consultant, hence, there is no employer-employee relationship between
them. Thus, despite the granting of the said hospital’s motion for reconsideration,
the doctrine in Ramos stays, i.e., for the purpose of allocating responsibility in
medical negligence cases, an employer-employee relationship exists between
hospitals and their consultants.
In the instant cases, PSI merely offered a general denial of responsibility, maintaining
that consultants, like Dr. Ampil, are "independent contractors," not employees of the
hospital. Even assuming that Dr. Ampil is not an employee of Medical City, but an
independent contractor, still the said hospital is liable to the Aganas.
In Nograles, et al. v. Capitol Medical Center, et al.,4 through Mr. Justice Antonio T.
Carpio, the Court held:
The question now is whether CMC is automatically exempt from liability
considering that Dr. Estrada is an independent contractor-physician.
In general, a hospital is not liable for the negligence of an independent
contractor-physician. There is, however, an exception to this principle. The
hospital may be liable if the physician is the "ostensible" agent of the
hospital. (Jones v. Philpott, 702 F. Supp. 1210 [1988]) This exception is also
known as the "doctrine of apparent authority." (Sometimes referred to as
the apparent or ostensible agency theory. [King v. Mitchell, 31 A.D.3rd 958,
819 N.Y. S.2d 169 (2006)].
 xxx
The doctrine of apparent authority essentially involves two factors to
determine the liability of an independent contractor-physician.
The first factor focuses on the hospital’s manifestations and is sometimes
described as an inquiry whether the hospital acted in a manner which would
lead a reasonable person to conclude that the individual who was alleged to
be negligent was an employee or agent of the hospital. (Diggs v. Novant
Health, Inc., 628 S.E.2d 851 (2006) citing Hylton v. Koontz, 138 N.C. App. 629
(2000). In this regard, the hospital need not make express representations
to the patient that the treating physician is an employee of the hospital;
rather a representation may be general and implied. (Id.)
The doctrine of apparent authority is a specie of the doctrine of estoppel.
Article 1431 of the Civil Code provides that "[t]hrough estoppel, an
admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against the person relying thereon."
Estoppel rests on this rule: "Whether a party has, by his own declaration,
act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act or omission, be permitted to falsify it. (De
Castro v. Ginete, 137 Phil. 453 [1969], citing Sec. 3, par. A, Rule 131 of the
Rules of Court. See also King v. Mitchell, 31 A.D.3rd 958, 819 N.Y.S.2d 169
[2006]).
xxx
The second factor focuses on the patient’s reliance. It is sometimes
characterized as an inquiry on whether the plaintiff acted in reliance upon
the conduct of the hospital or its agent, consistent with ordinary care and
prudence. (Diggs v. Novant Health, Inc.)
PSI argues that the doctrine of apparent authority cannot apply to these cases
because spouses Agana failed to establish proof of their reliance on the
representation of Medical City that Dr. Ampil is its employee.
The argument lacks merit.
Atty. Agana categorically testified that one of the reasons why he chose Dr. Ampil
was that he knew him to be a staff member of Medical City, a prominent and known
hospital.
Q Will you tell us what transpired in your visit to Dr. Ampil?
A Well, I saw Dr. Ampil at the Medical City, I know him to be a staff
member there, and I told him about the case of my wife and he asked me
to bring my wife over so she could be examined. Prior to that, I have known
Dr. Ampil, first, he was staying in front of our house, he was a neighbor,
second, my daughter was his student in the University of the East School of
Medicine at Ramon Magsaysay; and when my daughter opted to establish a
hospital or a clinic, Dr. Ampil was one of our consultants on how to establish
that hospital. And from there, I have known that he was a specialist when it
comes to that illness.
Atty. Agcaoili
On that particular occasion, April 2, 1984, what was your reason for
choosing to contact Dr. Ampil in connection with your wife’s illness?
A First, before that, I have known him to be a specialist on that part of the
body as a surgeon; second, I have known him to be a staff member of the
Medical City which is a prominent and known hospital. And third, because
he is a neighbor, I expect more than the usual medical service to be given to
us, than his ordinary patients.5
Clearly, PSI is estopped from passing the blame solely to Dr. Ampil. Its act of
displaying his name and those of the other physicians in the public directory at the
lobby of the hospital amounts to holding out to the public that it offers quality
medical service through the listed physicians. This justifies Atty. Agana’s belief that
Dr. Ampil was a member of the hospital’s staff. It must be stressed that under the
doctrine of apparent authority, the question in every case is whether the principal
has by his voluntary act placed the agent in such a situation that a person of
ordinary prudence, conversant with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to
perform the particular act in question.6 In these cases, the circumstances yield a
positive answer to the question.
The challenged Decision also anchors its ruling on the doctrine of corporate
responsibility.7 The duty of providing quality medical service is no longer the sole
prerogative and responsibility of the physician. This is because the modern hospital
now tends to organize a highly-professional medical staff whose competence and
performance need also to be monitored by the hospital commensurate with its
inherent responsibility to provide quality medical care.8 Such responsibility includes
the proper supervision of the members of its medical staff. Accordingly, the
hospital has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in its premises.
Unfortunately, PSI had been remiss in its duty. It did not conduct an immediate
investigation on the reported missing gauzes to the great prejudice and agony of its
patient. Dr. Jocson, a member of PSI’s medical staff, who testified on whether the
hospital conducted an investigation, was evasive, thus:
Q We go back to the operative technique, this was signed by Dr.
Puruganan, was this submitted to the hospital?
A Yes, sir, this was submitted to the hospital with the record of the
patient.
Q Was the hospital immediately informed about the missing sponges?
A That is the duty of the surgeon, sir.
Q As a witness to an untoward incident in the operating room, was it not
your obligation, Dr., to also report to the hospital because you are under
the control and direction of the hospital?
A The hospital already had the record of the two OS missing, sir.
Q If you place yourself in the position of the hospital, how will you
recover.
 A You do not answer my question with another question.
Q Did the hospital do anything about the missing gauzes?
A The hospital left it up to the surgeon who was doing the operation, sir.
Q Did the hospital investigate the surgeon who did the operation?
A I am not in the position to answer that, sir.
Q You never did hear the hospital investigating the doctors involved in
this case of those missing sponges, or did you hear something?
xxxxxx
A I think we already made a report by just saying that two sponges were
missing, it is up to the hospital to make the move.
Atty. Agana
Precisely, I am asking you if the hospital did a move, if the hospital did a
move.
A I cannot answer that.
Court
By that answer, would you mean to tell the Court that you were aware if
there was such a move done by the hospital?
A I cannot answer that, your honor, because I did not have any more
follow-up of the case that happened until now.9
The above testimony obviously shows Dr. Jocson’s lack of concern for the patients.
Such conduct is reflective of the hospital’s manner of supervision. Not only did PSI
breach its duty to oversee or supervise all persons who practice medicine within its
walls, it also failed to take an active step in fixing the negligence committed. This
renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article
2180 of the Civil Code, but also directly liable for its own negligence under Article
2176.
Moreover, there is merit in the trial court’s finding that the failure of PSI to conduct
an investigation "established PSI’s part in the dark conspiracy of silence and
concealment about the gauzes." The following testimony of Atty. Agana supports
such findings, thus:
Q You said you relied on the promise of Dr. Ampil and despite the promise
you were not able to obtain the said record. Did you go back to the record
custodian?
A I did not because I was talking to Dr. Ampil. He promised me.
Q After your talk to Dr. Ampil, you went to the record custodian?
A I went to the record custodian to get the clinical record of my wife,
and I was given a portion of the records consisting of the findings, among
them, the entries of the dates, but not the operating procedure and
operative report.10
In sum, we find no merit in the motion for reconsideration.
WHEREFORE, we DENY PSI’s motion for reconsideration with finality.
SO ORDERED.
G.R. No. L-35262 March 15, 1930 Apparently, the court below based the appealed ruling on the ground that the
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant, offense charged must be regarded as committed by the corporation and not by its
vs. officials or agents. This view is in direct conflict with the great weight of authority. a
TAN BOON KONG, defendant-appellee. corporation can act only through its officers and agent s, and where the business
Attorney-General Jaranilla for appellant. itself involves a violation of the law, the correct rule is that all who participate in it
Alejandro de Aboitiz Pinaga for appellee. are liable (Grall and Ostrand's Case, 103 Va., 855, and authorities there cited.)
OSTRAND, J.: In case of State vs. Burnam (17 Wash., 199), the court went so far as to hold that the
This is an appeal from an order of the Judge of the Twenty-third Judicial District manager of a diary corporation was criminally liable for the violation of a statute by
sustaining to demurrer to an information charging the defendant Tan Boon Kong with the corporation through he was not present when the offense was committed.
the violation of section 1458 of Act No. 2711 as amended. The information reads as In the present case the information or complaint alleges that he defendant was the
follows: manager of a corporation which was engaged in business as a merchant, and as such
That on and during the four quarters of the year 1924, in the municipality of manager, he made a false return, for purposes of taxation, of the total amount of sale
Iloilo, Province of Iloilo, Philippine Islands, the said accused, as corporation made by said false return constitutes a violation of law, the defendant, as the author
organized under the laws of the Philippine Islands and engaged in the of the illegal act, must necessarily answer for its consequences, provided that the
purchase and the sale of sugar, "bayon," coprax, and other native products allegation are proven.
and as such object to the payment of internal-revenue taxes upon its sales, The ruling of the court below sustaining the demurrer to the complaint is therefore
did then and there voluntarily, illegally, and criminally declare in 1924 for reversed, and the case will be returned to said court for further proceedings not
the purpose of taxation only the sum of P2,352,761.94, when in truth and in inconsistent with our view as hereinafter stated. Without costs. So ordered.
fact, and the accused well knew that the total gross sales of said corporation Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.
during that year amounted to P2543,303.44, thereby failing to declare for
the purpose of taxation the amount of P190,541.50, and voluntarily and
illegally not paying the Government as internal-revenue percentage taxes
the sum of P2,960.12, corresponding to 1½ per cent of said undeclared sales.
The question to be decided is whether the information sets forth facts rendering the
defendant, as manager of the corporation liable criminally under section 2723 of Act
No. 2711 for violation of section 1458 of the same act for the benefit of said
corporation. Section 1458 and 2723 read as follows:
SEC. 1458. Payment of percentage taxes — Quarterly reports of earnings. —
The percentage taxes on business shall be payable at the end of each
calendar quarter in the amount lawfully due on the business transacted
during each quarter; and it shall be on the duty of every person conducting
a business subject to such tax, within the same period as is allowed for the
payment of the quarterly installments of the fixed taxes without penalty, to
make a true and complete return of the amount of the receipts or earnings
of his business during the preceeding quarter and pay the tax due thereon.
. . . (Act No. 2711.)
SEC. 2723. Failure to make true return of receipts and sales. — Any person
who, being required by law to make a return of the amount of his receipts,
sales, or business, shall fail or neglect to make such return within the time
required, shall be punished by a fine not exceeding two thousand pesos or
by imprisonment for a term not exceeding one year, or both.
And any such person who shall make a false or fraudulent return shall be
punished by a fine not exceeding ten thousand pesos or by imprisonment
for a term not exceeding two years, or both. (Act No. 2711.)
G.R. No. L-30896 April 28, 1983
JOSE O. SIA, petitioner,
vs.
THE PEOPLE OF THE PHILIPPINES, respondent.
DE CASTRO, J.:
Petition for review of the decision of the Court of Appeals affirming the decision of
the Court of First Instance of Manila convicting the appellant of estafa, under an
information which reads:
That in, about or during the period comprised' between July 24,
1963 and December 31, 1963, both dates inclusive, in the City of
Manila, Philippines, the said accused did then and there willfully,
unlawfully and feloniously defraud the Continental Bank, a banking
institution duly organized and doing business in the City of Manila,
in the following manner, to wit: the said accused, in his capacity as
president and general manager of the Metal Manufacturing of the
Philippines, Inc. (MEMAP) and on behalf of said company, obtained
delivery of 150 M/T Cold Rolled Steel Sheets valued at P 71,023.60
under a trust receipt agreement under L/C No. 63/109, which cold
rolled steel sheets were consigned to the Continental Bank, under
the express obligation on the part of said accused of holding the
said steel sheets in trust and selling them and turning over the
proceeds of the sale to the Continental Bank; but the said accused,
once in possession of the said goods, far from complying with his
aforesaid obligation and despite demands made upon him to do so,
with intent to defraud, failed and refused to return the said cold
rolled sheets or account for the proceeds thereof, if sold, which the
said accused willfully, unlawfully and feloniously misappropriated,
misapplied and converted to his own personal use and benefit, to
the damage and prejudice of the said Continental Bank in the total
amount of P146,818.68, that is the balance including the interest
after deducting the sum of P28,736.47 deposited by the said
accused with the bank as marginal deposit and forfeited by the said
from the value of the said goods, in the said sum of P71,023.60.
(Original Records, p. 1).
In reviewing the evidence, the Court of Appeals came up with the following findings
of facts which the Solicitor General alleges should be conclusive upon this Court:
There is no debate on certain antecedents: Accused Jose 0. Sia
sometime prior to 24 May, 1963, was General Manager of the
Metal Manufacturing Company of the Philippines, Inc. engaged in
the manufacture of steel office equipment; on 31 May, 1963,
because his company was in need of raw materials to be imported
from abroad, he applied for a letter of credit to import steel sheets
from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the application
being directed to the Continental Bank, herein complainant, Exhibit
B and his application having been approved, the letter of credit was
opened on 5 June, 1963 in the amount of $18,300, Exhibit D; and
the goods arrived sometime in July, 1963 according to accused
himself, tsn. II:7; now from here on there is some debate on the
evidence; according to Complainant Bank, there was permitted
delivery of the steel sheets only upon execution of a trust receipt,
Exhibit A; while according to the accused, the goods were delivered
to him sometime before he executed that trust receipt in fact they
had already been converted into steel office equipment by the time
he signed said trust receipt, tsn. II:8; but there is no question - and
this is not debated - that the bill of exchange issued for the purpose
of collecting the unpaid account thereon having fallen due (see Exh.
B) neither accused nor his company having made payment thereon
notwithstanding demands, Exh. C and C-1, dated 17 and 27
December, 1963, and the accounts having reached the sum in
pesos of P46,818.68 after deducting his deposit valued at
P28,736.47; that was the reason why upon complaint by
Continental Bank, the Fiscal filed the information after preliminary
investigation as has been said on 22 October, 1964. (Rollo [CA], pp.
103- 104).
The first issue raised, which in effect combines the first three errors assigned, is
whether petitioner Jose O. Sia, having only acted for and in behalf of the Metal
Manufacturing Company of the Philippines (Metal Company, for short) as President
thereof in dealing with the complainant, the Continental Bank, (Bank for short) he
may be liable for the crime charged.
In discussing this question, petitioner proceeds, in the meantime, on the assumption
that the acts imputed to him would constitute the crime of estafa, which he also
disputes, but seeks to avoid liability on his theory that the Bank knew all along that
petitioner was dealing with him only as an officer of the Metal Company which was
the true and actual applicant for the letter of credit (Exhibit B) and which, accordingly,
assumed sole obligation under the trust receipt (Exhibit A). In disputing the theory of
petitioner, the Solicitor General relies on the general principle that when a
corporation commits an act which would constitute a punishable offense under the
law, it is the responsible officers thereof, acting for the corporation, who would be
punished for the crime, The Court of Appeals has subscribed to this view when it
quoted approvingly from the decision of the trial court the following:
A corporation is an artificial person, an abstract being. If the
defense theory is followed unscrupulously legions would form
corporations to commit swindle right and left where nobody could
be convicted, for it would be futile and ridiculous to convict an
abstract being that can not be pinched and confined in jail like a
natural, living person, hence the result of the defense theory would
 be hopeless chose in business and finance. It is completely
untenable. (Rollo [CA], p. 108.)
The above-quoted observation of the trial court would seem to be merely restating
a general principle that for crimes committed by a corporation, the responsible
officers thereof would personally bear the criminal liability. (People vs. Tan Boon
Kong, 54 Phil. 607. See also Tolentino, Commercial Laws of the Philippines, p. 625,
citing cases.)
The case cited by the Court of Appeals in support of its stand-Tan Boon Kong
case, supra-may however not be squarely applicable to the instant case in that the
corporation was directly required by law to do an act in a given manner, and the same
law makes the person who fails to perform the act in the prescribed manner expressly
liable criminally. The performance of the act is an obligation directly imposed by the
law on the corporation. Since it is a responsible officer or officers of the corporation
who actually perform the act for the corporation, they must of necessity be the ones
to assume the criminal liability; otherwise this liability as created by the law would
be illusory, and the deterrent effect of the law, negated.
In the present case, a distinction is to be found with the Tan Boon Kong case in that
the act alleged to be a crime is not in the performance of an act directly ordained by
law to be performed by the corporation. The act is imposed by agreement of parties,
as a practice observed in the usual pursuit of a business or a commercial transaction.
The offense may arise, if at all, from the peculiar terms and condition agreed upon
by the parties to the transaction, not by direct provision of the law. The intention of
the parties, therefore, is a factor determinant of whether a crime was committed or
whether a civil obligation alone intended by the parties. With this explanation, the
distinction adverted to between the Tan Boon Kong case and the case at bar should
come out clear and meaningful. In the absence of an express provision of law making
the petitioner liable for the criminal offense committed by the corporation of which
he is a president as in fact there is no such provisions in the Revised Penal Code under
which petitioner is being prosecuted, the existence of a criminal liability on his part
may not be said to be beyond any doubt. In all criminal prosecutions, the existence
of criminal liability for which the accused is made answerable must be clear and
certain. The maxim that all doubts must be resolved in favor of the accused is always
of compelling force in the prosecution of offenses. This Court has thus far not ruled
on the criminal liability of an officer of a corporation signing in behalf of said
corporation a trust receipt of the same nature as that involved herein. In the case
of Samo vs. People, L-17603-04, May 31, 1962, the accused was not clearly shown to
be acting other than in his own behalf, not in behalf of a corporation.
The next question is whether the violation of a trust receipt constitutes estafa under
Art. 315 (1-[2]) of the Revised Penal Code, as also raised by the petitioner. We now
entertain grave doubts, in the light of the promulgation of P.D. 115 providing for the
regulation of trust receipts transaction, which is a very comprehensive piece of
legislation, and includes an express provision that if the violation or offense is
committed by a corporation, partnership, association or other juridical entities the
penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to civil liabilities arising from the criminal offense. The question that
suggests itself is, therefore, whether the provisions of the Revised Penal Code, Article
315, par. 1 (b) are not adequate to justify the punishment of the act made punishable
by P.D. 115, that the necessity was felt for the promulgation of the decree. To answer
this question, it is imperative to make an indepth analysis of the conditions usually
embodied in a trust receipt to best their legal sufficiency to constitute the basis for
holding the violation of said conditions as estafa under Article 315 of the Revised
Penal Code which P.D. 115 now seeks to punish expressly.
As executed, the trust receipt in question reads:
I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE SAID
BANK as its property with liberty to sell the same for its account but
without authority to make any other disposition whatsoever of the
said goods or any part thereof (or the proceeds thereof) either way
of conditional sale, pledge or otherwise;
In case of sale I/we further agree to hand the proceeds as soon as
received to the BANK to apply against the relative acceptance (as
described above) and for the payment of any other indebtedness
of mine/ours to CONTINENTAL BANK. (Original Records, p. 108)
One view is to consider the transaction as merely that of a security of a loan, and that
the trust element is but and inherent feature of the security aspect of the
arrangement where the goods are placed in the possession of the "entrustee," to use
the term used in P.D. 115, violation of the element of trust not being intended to be
in the same concept as how it is understood in the criminal sense. The other view is
that the bank as the owner and "entrustor" delivers the goods to the "entrustee, "
with the authority to sell the goods, but with the obligation to give the proceeds to
the "entrustor" or return the goods themselves if not sold, a trust being thus created
in the full sense as contemplated by Art. 315, par. 1 (b).
We consider the view that the trust receipt arrangement gives rise only to civil
liability as the more feasible, before the promulgation of P.D. 115. The transaction
being contractual, the intent of the parties should govern. Since the trust receipt has,
by its nature, to be executed upon the arrival of the goods imported, and acquires
legal standing as such receipt only upon acceptance by the "entrustee," the trust
receipt transaction itself, the antecedent acts consisting of the application of the L/C,
the approval of the L/C and the making of the marginal deposit and the effective
importation of the goods, all through the efforts of the importer who has to find his
supplier, arrange for the payment and shipment of the imported goods-all these
circumstances would negate any intent of subjecting the importer to criminal
prosecution, which could possibly give rise to a case of imprisonment for non-
payment of a debt. The parties, therefore, are deemed to have consciously entered
into a purely commercial transaction that could give rise only to civil liability, never
to subject the "entrustee" to criminal prosecution. Unlike, for instance, when several
pieces of jewelry are received by a person from the owner for sale on commission,
and the former misappropriates for his personal use and benefit, either the jewelries
or the proceeds of the sale, instead of returning them to the owner as is his
obligation, the bank is not in the same concept as the jewelry owner with full power
of disposition of the goods, which the bank does not have, for the bank has previously
extended a loan which the L/C represents to the importer, and by that loan, the
importer should be the real owner of the goods. If under the trust receipt the bank is
made to appear as the owner, it was but an artificial expedient, more of a legal fiction
than fact, for if it were really so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with the purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider the bank
as the true owner from the inception of the transaction would be to disregard the
loan feature thereof, a feature totally absent in the case of the transaction between
the jewel-owner and his agent.
Consequently, if only from the fact that the trust receipt transaction is susceptible to
two reasonable interpretation, one as giving rise only to civil liability for the violation
of the condition thereof, and the other, as generating also criminal liability, the
former should be adopted as more favorable to the supposed offender. (Duran vs.
CA, L-39758, May 7, 1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24
SCRA 3; People vs. Abendan, L-1481, January 28,1949,82 Phil. 711; People vs.
Bautista, L-1502, May 24, 1948, 81 Phil. 78; People vs. Abana, L-39, February 1, 1946,
76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the significance of which
should be properly evaluated. As stated in petitioner's brief (page 2), not denied by
the People, "before the Continental Bank approved the application for a letter of
credit (Exhibit 'D'), subsequently covered by the trust receipt, the Continental Bank
examined the financial capabilities of the applicant, Metal Manufacturing Company
of the Philippines because that was the bank's standard procedure (Testimony of Mr.
Ernesto Garlit, Asst. Manager of the Foreign Department, Continental Bank, t.s.n.,
August 30, 1965). The Continental Bank did not examine the financial capabilities of
herein petitioner, Jose O. Sia, in connection with the same letter of credit. (Ibid). "
From this fact, it would appear as positively established that the intention of the
parties in entering into the "trust receipt" agreement is merely to afford a stronger
security for the loan evidenced by the letter of credit, may be not as an ordinary
pledge as observed in P.N.B. vs. Viuda e Hijos de Angel Jose, et al., 63 Phil. 814, citing
In re Dunlap C (206 Fed. 726) but neither as a transaction falling under Article 315-1
(b) of the Revised Penal Code giving rise to criminal liability, as previously explained
and demonstrated.
It is worthy of note that the civil liability imposed by the trust receipt is exclusively on
the Metal Company. Speaking of such liability alone, as one arising from the contract,
as distinguished from the civil liability arising out of a crime, the petitioner was never
intended to be equally liable as the corporation. Without being made so liable
personally as the corporation is, there would then be no basis for holding him
criminally liable, for any violation of the trust receipt. This is made clearly so upon
consideration of the fact that in the violation of the trust agreement and in the
absence of positive evidence to the contrary, only the corporation benefited, not the
petitioner personally, yet, the allegation of the information is to effect that the
misappropriation or conversion was for the personal use and benefit of the
petitioner, with respect to which there is variance between the allegation and the
evidence.
It is also worthy of note that while the trust receipt speaks of authority to sell, the
fact is undisputed that the imported goods were to be manufactured into finished
products first before they could be sold, as the Bank had full knowledge of. This fact
is, however, not embodied in the trust agreement, thus impressing on the trust
receipt vagueness and ambiguity which should not be the basis for criminal
prosecution, in the event of a violation of the terms of the trust receipt. Again, P.D.
115 has express provision relative to the "manufacture or process of the good with
the purpose of ultimate sale," as a distinct condition from that of "to sell the goods
or procure their sale" (Section 4, (1). Note that what is embodied in the receipt in
question is the sale of imported goods, the manufacture thereof not having been
mentioned. The requirement in criminal prosecution, that there must be strict
harmony, not variance, between the allegation and the evidence, may therefore, not
be said to have been satisfied in the instance case.
FOR ALL THE FOREGOING, We reverse the decision of the Court of Appeals and
hereby acquit the petitioner, with costs de oficio.
SO ORDERED.
Concepcion, Jr., Guerrero, Vasquez, Relova and Gutierrez, JJ., concur.
Fernando, CJ., Escolin, Plana, Abad Santos, JJ., concur in the result.
Separate Opinions
TEEHANKEE, J., concurring:
In concur. Petitioner personally cannot be charged and convicted for the crime of
estafa for failure of the corporation(MEMAP) represented by him as president and
general manager to pay "the balance of P46,818.68 .... including the interest after
deducting the sum of P28,736.47" which sum, according to the very information, it
was "deposited by the said accused with the [Continental] bank as marginal deposit
and forfeited by the said bank from the value of said goods, in the said sum of P
71,023.60" representing the value of the cold rolled steel sheets imported by
the corporation with the bank's financing under its letter of credit and released to
the importer corporation under trust receipt in favor of the bank.
All these acts were corporate acts with the accused duly representing the
corporation as its president and general manager: the application for bank financing,
the deposit (which was from corporate funds, and not a deposit made by the
petitioner, as wrongly alleged in the information), the receipt of the steel sheets,
then manufactured into finished products (which could not technically be done
under the terms of the trust receipt required by the bank, under which the very
sheets were supposed to be sold by the corporation) and the non-payment of the
credit extended by the bank. There is not the slightest evidence nor intimation that
these corporate acts were unauthorized or that petitioner personally had committed
any fraud or deceit in connection therewith or that he had personallybeen
responsible for or benefited from the corporation's failure to pay the bank the
balance due under the trust receipt.
In the recent case of People vs. Cuevo, G. R. No. L-27607, decided by the Court on
May 7, 1981, the Court, for lack of necessary votes, affirmed the dismissal of the same
charge of estafa, for non-payment of the debt evidenced by the trust receipt, by the
trial court presided by Judge Ruperto Kapunan, Jr. who ruled that "the holder of a
trust receipt who disposed of the goods covered thereby and in violation of its terms,
failed to deliver to the bank the proceeds of the sale as payment of the debt
secured by the trust receipt" incurs only civil and not criminal liability for non-
payment of the debt thus incurred. I reiterate my separate opinion therein
supporting the more liberal interpretation that the trust receipt transaction "gives
rise only to civil liability on the part of the offender" and holding that the very
definition of a trust receipt, to wit," ' (A) trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased' (53 Am. Jr. 961, cited in Samo vs.
People, 115 Phil. 346, 349), sustains the lower court's rationale in dismissing the
information that the contract covered by a trust receipt is merely a secured loan. The
goods imported by the small importer and retail dealer through the bank's financing
remain of their own property and risk and the old capitalist orientation of putting
them in jail for estafa for non-payment of the secured loan (granted after they had
been fully investigated by the bank as good credit risks) through the fiction of
the trust receipt device should no longer be permitted in this day and age." **
The charge in the case at bar against petitioner-accused must accordingly be
dismissed.
MELENCIO-HERRERA, J., concurring and dissenting:
I dissent in so far as the Decision states that violation of the terms of a trust receipt
does not constitute Estafa under Art. 315, par. 1 (b) of the Revised Penal Code, for
being contrary to the rulings in People vs. Yu Chai Ho, 53 Phil. 874 (1928); PNB vs.
Arrozal, 103 Phil. 213 (1958), and Samo vs. People, 5 SCRA 355 (1962).
I concur in so far as the Decision holds that petitioner should not be held liable for
the crime of Estafa considering that in the cases above enumerated, the persons who
executed the trust receipts acted in their own individual capacities unlike in this case
where petitioner acted for and on behalf of the Metal Manufacturing Company, as
its General Manager, and was presumably authorized to do so. This Court has not as
yet laid down a ruling on the criminal liability of a corporation officer signing a trust
receipt on behalf of the corporation, a trust receipt being essentially a financing
transaction. It was only upon the promulgation of PD 115 on January 29, 1973 that
responsible directors, officers, employees or other officials of a corporation,
partnership, associations or other juridical entities are made expressly responsible
for violation of the terms of a trust receipt agreement committed by said corporation,
partnership, association or other juridical entities.
Makasiar, J., dissent. The C.A. decision should be affirmed.
Aquino, J., dissent. I vote for the affirmance of the judgement of the C.A.
Separate Opinions
TEEHANKEE, J., concurring:
In concur. Petitioner personally cannot be charged and convicted for the crime of
estafa for failure of the corporation(MEMAP) represented by him as president and
general manager to pay "the balance of P 46,818.68 .... including the interest after
deducting the sum of P 28,736.47" which sum, according to the very information, it
was "deposited by the said accused with the [Continental] bank as marginal deposit
and forfeited by the said bank from the value of said goods, in the said sum of P
71,023.60" representing the value of the cold rolled steel sheets imported by
the corporation with the bank's financing under its letter of credit and released to
the importer corporation under trust receipt in favor of the bank.
All these acts were corporate acts with the accused duly representing the
corporation as its president and general manager: the application for bank financing,
the deposit (which was from corporate funds, and not a deposit made by the
petitioner, as wrongly alleged in the information), the receipt of the steel sheets,
then manufactured into finished products (which could not technically be done
under the terms of the trust receipt required by the bank, under which the very
sheets were supposed to be sold by the corporation) and the non-payment of the
credit extended by the bank. There is not the slightest evidence nor intimation that
these corporate acts were unauthorized or that petitioner personally had committed
any fraud or deceit in connection therewith or that he had personallybeen
responsible for or benefited from the corporation's failure to pay the bank the
balance due under the trust receipt.
In the recent case of People vs. Cuevo, G. R. No. L-27607, decided by the Court on
May 7, 1981, the Court, for lack of necessary votes, affirmed the dismissal of the same
charge of estafa, for non-payment of the debt evidenced by the trust receipt, by the
trial court presided by Judge Ruperto Kapunan, Jr. who ruled that "the holder of a
trust receipt who disposed of the goods covered thereby and in violation of its terms,
failed to deliver to the bank the proceeds of the sale as payment of the debt
secured by the trust receipt" incurs only civil and not criminal liability for non-
payment of the debt thus incurred. I reiterate my separate opinion therein
supporting the more liberal interpretation that the trust receipt transaction "gives
rise only to civil liability on the part of the offender" and holding that the very
definition of a trust receipt, to wit," ' (A) trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased' (53 Am. Jr. 961, cited in Samo vs. People,
115 Phil. 346, 349), sustains the lower court's rationale in dismissing the information
that the contract covered by a trust receipt is merely a secured loan. The goods
imported by the small importer and retail dealer through the bank's financing remain
of their own property and risk and the old capitalist orientation of putting them in jail
for estafa for non-payment of the secured loan (granted after they had been fully
investigated by the bank as good credit risks) through the fiction of the trust receipt
device should no longer be permitted in this day and age."*
The charge in the case at bar against petitioner-accused must accordingly be
dismissed.
MELENCIO-HERRERA, J., concurring and dissenting:
I dissent in so far as the Decision states that violation of the terms of a trust receipt
does not constitute Estafa under Art. 315, par. 1 (b) of the Revised Penal Code, for
being contrary to the rulings in People vs. Yu Chai Ho, 53 Phil. 874 (1928); PNB vs.
Arrozal, 103 Phil. 213 (1958), and Samo vs. People, 5 SCRA 355 (1962).
I concur in so far as the Decision holds that petitioner should not be held liable for
the crime of Estafa considering that in the cases above enumerated, the persons who
executed the trust receipts acted in their own individual capacities unlike in this case
where petitioner acted for and on behalf of the Metal Manufacturing Company, as
its General Manager, and was presumably authorized to do so. This Court has not as
yet laid down a ruling on the criminal liability of a corporation officer signing a trust
receipt on behalf of the corporation, a trust receipt being essentially a financing
transaction. It was only upon the promulgation of PD 115 on January 29, 1973 that
responsible directors, officers, employees or other officials of a corporation,
partnership, associations or other juridical entities are made expressly responsible
for violation of the terms of a trust receipt agreement committed by said corporation,
partnership, association or other juridical entities.
Makasiar, J., dissent.
Aquino, J., dissent.
Separate Opinions
TEEHANKEE, J., concurring:
In concur. Petitioner personally cannot be charged and convicted for the crime of
estafa for failure of the corporation(MEMAP) represented by him as president and
general manager to pay "the balance of P 46,818.68 .... including the interest after
deducting the sum of P 28,736.47" which sum, according to the very information, it
was "deposited by the said accused with the [Continental] bank as marginal deposit
and forfeited by the said bank from the value of said goods, in the said sum of P
71,023.60" representing the value of the cold rolled steel sheets imported by
the corporation with the bank's financing under its letter of credit and released to
the importer corporation under trust receipt in favor of the bank.
All these acts were corporate acts with the accused duly representing the
corporation as its president and general manager: the application for bank financing,
the deposit (which was from corporate funds, and not a deposit made by the
petitioner, as wrongly alleged in the information), the receipt of the steel sheets,
then manufactured into finished products (which could not technically be done
under the terms of the trust receipt required by the bank, under which the very
sheets were supposed to be sold by the corporation) and the non-payment of the
credit extended by the bank. There is not the slightest evidence nor intimation that
these corporate acts were unauthorized or that petitioner personally had committed
any fraud or deceit in connection therewith or that he had personallybeen
responsible for or benefited from the corporation's failure to pay the bank the
balance due under the trust receipt.
In the recent case of People vs. Cuevo, G. R. No. L-27607, decided by the Court on
May 7, 1981, the Court, for lack of necessary votes, affirmed the dismissal of the same
charge of estafa, for non-payment of the debt evidenced by the trust receipt, by the
trial court presided by Judge Ruperto Kapunan, Jr. who ruled that "the holder of a
trust receipt who disposed of the goods covered thereby and in violation of its terms,
failed to deliver to the bank the proceeds of the sale as payment of the debt
secured by the trust receipt" incurs only civil and not criminal liability for non-
payment of the debt thus incurred. I reiterate my separate opinion therein
supporting the more liberal interpretation that the trust receipt transaction "gives
rise only to civil liability on the part of the offender" and holding that the very
definition of a trust receipt, to wit," ' (A) trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased' (53 Am. Jr. 961, cited in Samo vs. People,
115 Phil. 346, 349), sustains the lower court's rationale in dismissing the information
that the contract covered by a trust receipt is merely a secured loan. The goods
imported by the small importer and retail dealer through the bank's financing remain
of their own property and risk and the old capitalist orientation of putting them in jail
for estafa for non-payment of the secured loan (granted after they had been fully
investigated by the bank as good credit risks) through the fiction of the trust receipt
device should no longer be permitted in this day and age."*
The charge in the case at bar against petitioner-accused must accordingly be
dismissed.
MELENCIO-HERRERA, J., concurring and dissenting:
I dissent in so far as the Decision states that violation of the terms of a trust receipt
does not constitute Estafa under Art. 315, par. 1 (b) of the Revised Penal Code, for
being contrary to the rulings in People vs. Yu Chai Ho, 53 Phil. 874 (1928); PNB vs.
Arrozal, 103 Phil. 213 (1958), and Samo vs. People, 5 SCRA 355 (1962).
I concur in so far as the Decision holds that petitioner should not be held liable for
the crime of Estafa considering that in the cases above enumerated, the persons who
executed the trust receipts acted in their own individual capacities unlike in this case
where petitioner acted for and on behalf of the Metal Manufacturing Company, as
its General Manager, and was presumably authorized to do so. This Court has not as
yet laid down a ruling on the criminal liability of a corporation officer signing a trust
receipt on behalf of the corporation, a trust receipt being essentially a financing
transaction. It was only upon the promulgation of PD 115 on January 29, 1973 that
responsible directors, officers, employees or other officials of a corporation,
partnership, associations or other juridical entities are made expressly responsible
for violation of the terms of a trust receipt agreement committed by said corporation,
partnership, association or other juridical entities.
G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco
Carreon for appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in the Court of First
Instance of Manila with the crime of falsification of a public and commercial
document in that, having been entrusted with the preparation and registration of the
article of incorporation of the Pacific Airways Corporation, a domestic corporation
organized for the purpose of engaging in business as a common carrier, he caused it
to appear in said article of incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent of the subscribed capital
stock of the corporation when in reality, as the accused well knew, such was not the
case, the truth being that the owner of the portion of the capital stock subscribed to
by Baylon and the money paid thereon were American citizen whose name did not
appear in the article of incorporation, and that the purpose for making this false
statement was to circumvent the constitutional mandate that no corporation shall
be authorize to operate as a public utility in the Philippines unless 60 per cent of its
capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine, the
accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the Pacific Airways
Corporation registered its articles of incorporation with the Securities and Exchanged
Commission. The article were prepared and the registration was effected by the
accused, who was in fact the organizer of the corporation. The article stated that the
primary purpose of the corporation was to carry on the business of a common carrier
by air, land or water; that its capital stock was P1,000,000, represented by 9,000
preferred and 100,000 common shares, each preferred share being of the par value
of p100 and entitled to 1/3 vote and each common share, of the par value of P1 and
entitled to one vote; that the amount capital stock actually subscribed was P200,000,
and the names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert
W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being
a Filipino and the other five all Americans; that Baylon's subscription was for 1,145
preferred shares, of the total value of P114,500, and for 6,500 common shares, of
the total par value of P6,500, while the aggregate subscriptions of the American
subscribers were for 200 preferred shares, of the total par value of P20,000, and
59,000 common shares, of the total par value of P59,000; and that Baylon and the
American subscribers had already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital
stock of the corporation, Baylon nevertheless did not have the controlling vote
because of the difference in voting power between the preferred shares and the
common shares. Still, with the capital structure as it was, the article of incorporation
were accepted for registration and a certificate of incorporation was issued by the
Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of the
subscribed capital stock of the corporation. But it is admitted that the money paid on
his subscription did not belong to him but to the Americans subscribers to the
corporate stock. In explanation, the accused testified, without contradiction, that in
the process of organization Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon subscribed to
1,135 preferred shares with a total value of P1,135. Do you know how that
came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are listed
on page 7 of this certified copy came to my house, Messrs. Shannahan, Onstott,
O'Bannon, Caven, Perry and Anastasakas one evening. There was considerable
difficulty to get them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would be. Onstott had
invested a certain amount of money in airplane surplus property and they had
obtained a considerable amount of money on those planes and as I recall they were
desirous of getting a corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated that they could get
together that they feel that they had no time to settle their respective share holdings.
We discussed the matter and finally it was decided that the best way to handle the
things was not to put the shares in the name of anyone of the interested parties and
to have someone act as trustee for their respective shares holdings. So we looked
around for a trustee. And he said "There are a lot of people whom I trust." He said,
"Is there someone around whom we could get right away?" I said, "There is Arsenio.
He was my boy during the liberation and he cared for me when i was sick and i said i
consider him my friend." I said. They all knew Arsenio. He is a very kind man and that
was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with article 171,
paragraph 4, of the Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or ecclesiastic
minister. — The penalty of prision mayor and a fine not to exceed 5,000
pesos shall be imposed upon any public officer, employee, or notary who,
taking advantage of his official position, shall falsify a document by
committing any of the following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of falsified documents.
— The penalty of prision correccional in its medium and maximum period
and a fine of not more than 5,000 pesos shall be imposed upon:
xxx xxx xxx
 1. Any private individual who shall commit any of the falsifications
enumerated in the next preceding article in any public or official document
or letter of exchange or any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his well-known work on the
Revised Penal Code ( new edition, pp. 407-408), observes, on the authority of U.S. vs.
Reyes, (1 Phil., 341), that the perversion of truth in the narration of facts must be
made with the wrongful intent of injuring a third person; and on the authority of U.S.
vs. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful
intent is proven, still the untruthful statement will not constitute the crime of
falsification if there is no legal obligation on the part of the narrator to disclose the
truth. Wrongful intent to injure a third person and obligation on the part of the
narrator to disclose the truth are thus essential to a conviction for a crime of
falsification under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present case consists
in not disclosing in the articles of incorporation that Baylon was a mere trustee ( or
dummy as the prosecution chooses to call him) of his American co-incorporators,
thus giving the impression that Baylon was the owner of the shares subscribed to by
him which, as above stated, amount to 60.005 per cent of the sub-scribed capital
stock. This, in the opinion of the trial court, is a malicious perversion of the truth
made with the wrongful intent circumventing section 8, Article XIV of the
Constitution, which provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporation or other entities organized under the law of the
Philippines, sixty per centum of the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first glance, this opinion loses
validity once it is noted that it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit the mere formation of a
public utility corporation without 60 per cent of its capital being owned by the
Filipinos, a mistaken belief which has induced the lower court to that the accused
was under obligation to disclose the whole truth about the nationality of the
subscribed capital stock of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and that in not making such
disclosure defendant's intention was to circumvent the Constitution to the detriment
of the public interests. Contrary to the lower court's assumption, the Constitution
does not prohibit the mere formation of a public utility corporation without the
required formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public utility to
a corporation already in existence but without the requisite proportion of Filipino
capital. This is obvious from the context, for the constitutional provision in question
qualifies the terms " franchise", "certificate", or "any other form of authorization"
with the phrase "for the operation of a public utility," thereby making it clear that the
franchise meant is not the "primary franchise" that invest a body of men with
corporate existence but the "secondary franchise" or the privilege to operate as a
public utility after the corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public utility corporation
with the alien capital, then how can the accused be charged with having wrongfully
intended to circumvent that fundamental law by not revealing in the articles of
incorporation that Baylon was a mere trustee of his American co-incorporation and
that for that reason the subscribed capital stock of the corporation was wholly
American? For the mere formation of the corporation such revelation was not
essential, and the Corporation Law does not require it. Defendant was, therefore,
under no obligation to make it. In the absence of such obligation and of the allege
wrongful intent, defendant cannot be legally convicted of the crime with which he is
charged.
It is urged, however, that the formation of the corporation with 60 per cent of its
subscribed capital stock appearing in the name of Baylon was an indispensable
preparatory step to the subversion of the constitutional prohibition and the laws
implementing the policy expressed therein. This view is not correct. For a corporation
to be entitled to operate a public utility it is not necessary that it be organized with
60 per cent of its capital owned by Filipinos from the start. A corporation formed with
capital that is entirely alien may subsequently change the nationality of its capital
through transfer of shares to Filipino citizens. conversely, a corporation originally
formed with Filipino capital may subsequently change the national status of said
capital through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its
formation, 60 per cent of its capital owned by Filipinos alone? That condition may
anytime be attained thru the necessary transfer of stocks. The moment for
determining whether a corporation is entitled to operate as a public utility is when it
applies for a franchise, certificate, or any other form of authorization for that
purpose. And that can be done after the corporation has already come into being and
not while it is still being formed. And at that moment, the corporation must show
that it has complied not only with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements of the Civil Aviation Law if it
is a common carrier by air, the Revised Administrative Code if it is a common carrier
by water, and the Public Service Law if it is a common carrier by land or other kind of
public service.
Equally untenable is the suggestion that defendant should at least be held guilty of
an "impossible crime" under article 59 of the Revised Penal Code. It not being
possible to suppose that defendant had intended to commit a crime for the simple
reason that the alleged constitutional prohibition which he is charged for having tried
to circumvent does not exist, conviction under that article is out of the question.
The foregoing consideration can not but lead to the conclusion that the defendant
can not be held guilty of the crime charged. The majority of the court, however, are
also of the opinion that, even supposing that the act imputed to the defendant
constituted falsification at the time it was perpetrated, still with the approval of the
Party Amendment to the Constitution in March, 1947, which placed Americans on
the same footing as Filipino citizens with respect to the right to operate public utilities
in the Philippines, thus doing away with the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are concerned, the said act has ceased to
be an offense within the meaning of the law, so that defendant can no longer be held
criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed and the defendant
William H. Quasha acquitted, with costs de oficio.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo, and Labrador,
JJ., concur.
G.R. No. 114222 April 6, 1995
FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of
Transportation and Communications, and EDSA LRT CORPORATION,
LTD., respondents.
QUIASON, J.:
This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents
from further implementing and enforcing the "Revised and Restated Agreement to
Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992,
and the "Supplemental Agreement to the 22 April 1992 Revised and Restated
Agreement To Build, Lease and Transfer a Light Rail Transit System for EDSA" dated
May 6, 1993.
Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members
of the Philippine Senate and are suing in their capacities as Senators and as taxpayers.
Respondent Jesus B. Garcia, Jr. is the incumbent Secretary of the Department of
Transportation and Communications (DOTC), while private respondent EDSA LRT
Corporation, Ltd. is a private corporation organized under the laws of Hongkong.
I After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9,
In 1989, DOTC planned to construct a light railway transit line along EDSA, a major
thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay,
Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit III
(EDSA LRT III), was intended to provide a mass transit system along EDSA and alleviate
the congestion and growing transportation problem in the metropolis.
On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc.,
represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct
the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.
On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss
the project with DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the Private
Sector, and For Other Purposes," was signed by President Corazon C. Aquino.
Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9,
1990.
Republic Act No. 6957 provides for two schemes for the financing, construction and
operation of government projects through private initiative and investment: Build-
Operate-Transfer (BOT) or Build-Transfer (BT).
In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project
underway, DOTC, on January 22, 1991 and March 14, 1991, issued Department
Orders Nos. 91-494 and 91-496, respectively creating the Prequalification Bids and
Awards Committee (PBAC) and the Technical Committee.
After its constitution, the PBAC issued guidelines for the prequalification of
contractors for the financing and implementation of the project The notice,
advertising the prequalification of bidders, was published in three newspapers of
general circulation once a week for three consecutive weeks starting February 21,
1991.
The deadline set for submission of prequalification documents was March 21, 1991,
later extended to April 1, 1991. Five groups responded to the invitation namely, ABB
Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel International of
Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed of
ten foreign and domestic corporations: namely, Kaiser Engineers International, Inc.,
ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the
Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing
Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co.
Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.
On the last day for submission of prequalification documents, the prequalification
criteria proposed by the Technical Committee were adopted by the PBAC. The criteria
totalling 100 percent, are as follows: (a) Legal aspects — 10 percent; (b)
Management/Organizational capability — 30 percent; and (c) Financial capability —
30 percent; and (d) Technical capability — 30 percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the BOT Law with the formulation
of the Implementation Rules and Regulations thereof, approved the same.
1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the
requirements of garnering at least 21 points per criteria [sic], except for Legal
Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146).
The Legal Aspects referred to provided that the BOT/BT contractor-applicant meet
the requirements specified in the Constitution and other pertinent laws (Rollo, p.
114).
Subsequently, Secretary Orbos was appointed Executive Secretary to the President
of the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter
sent to President Aquino two letters dated May 31, 1991 and June 14, 1991,
respectively recommending the award of the EDSA LRT III project to the sole
complying bidder, the EDSA LRT Consortium, and requesting for authority to
negotiate with the said firm for the contract pursuant to paragraph 14(b) of the
Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).
In July 1991, Executive Secretary Orbos, acting on instructions of the President,
issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991,
the EDSA LRT Consortium submitted its bid proposal to DOTC.
Finding this proposal to be in compliance with the bid requirements, DOTC and
respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT Consortium,
entered into an "Agreement to Build, Lease and Transfer a Light Rail Transit System
for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).
Secretary Prado, thereafter, requested presidential approval of the contract.
In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced
Executive Secretary Orbos, informed Secretary Prado that the President could not
grant the requested approval for the following reasons: (1) that DOTC failed to
conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that
the law authorized public bidding as the only mode to award BOT projects, and the
prequalification proceedings was not the public bidding contemplated under the law;
(3) that Item 14 of the Implementing Rules and Regulations of the BOT Law which
authorized negotiated award of contract in addition to public bidding was of doubtful
legality; and (4) that congressional approval of the list of priority projects under the
BOT or BT Scheme provided in the law had not yet been granted at the time the
contract was awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon, the DOTC and private
respondents re-negotiated the agreement. On April 22, 1992, the parties entered
into a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant
of the fact the DOTC has full authority to sign the Agreement without need of
approval by the President pursuant to the provisions of Executive Order No. 380 and
that certain events [had] supervened since November 7, 1991 which necessitate[d]
the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by
Secretary Jesus Garcia vice Secretary Prado, and private respondent entered into a
"Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to
Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify their
respective rights and responsibilities" and to submit [the] Supplemental Agreement
to the President, of the Philippines for his approval" (Rollo, pp. 79-80).
Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his
consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993,
approved the said Agreements, (Rollo, p. 194).
According to the agreements, the EDSA LRT III will use light rail vehicles from the
Czech and Slovak Federal Republics and will have a maximum carrying capacity of
450,000 passengers a day, or 150 million a year to be achieved-through 54 such
vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level,
on the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison, Pasay
City to North Avenue, Quezon City. The system will have its own power facility
(Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen
(13) passenger stations and one depot in 16-hectare government property at North
Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the entire project required for a
complete operational light rail transit system (Revised and Restated Agreement, Sec.
4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years
from the implementation date of the contract inclusive of mobilization, site works,
initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83).
Upon full or partial completion and viability thereof, private respondent shall deliver
the use and possession of the completed portion to DOTC which shall operate the
same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec.
5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a monthly
basis through an Irrevocable Letter of Credit. The rentals shall be determined by an
independent and internationally accredited inspection firm to be appointed by the
parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private
respondent's capital shall be recovered from the rentals to be paid by the DOTC
which, in turn, shall come from the earnings of the EDSA LRT III (Revised and Restated
Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed
payment of the rentals, ownership of the project shall be transferred to the latter for
a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Rollo,
p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act
No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation and
Maintenance of Infrastructure Projects by the Private Sector, and for Other
Purposes" was signed into law by the President. The law was published in two
newspapers of general circulation on May 12, 1994, and took effect 15 days
thereafter or on May 28, 1994. The law expressly recognizes BLT scheme and allows
direct negotiation of BLT contracts.
II
In their petition, petitioners argued that:
(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE
SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT
GRANTS EDSA LRT CORPORATION, LTD., A FOREIGN
CORPORATION, THE OWNERSHIP OF EDSA LRT III, A PUBLIC
UTILITY, VIOLATES THE CONSTITUTION AND, HENCE, IS
UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE
AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957
OR ITS IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS
ILLEGAL;
(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS
VIOLATES R; A. NO. 6957 AND, HENCE, IS UNLAWFUL;
(4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT
EDSA LRT CORPORATION, LTD. VIOLATES THE REQUIREMENTS
PROVIDED IN THE IMPLEMENTING RULES AND REGULATIONS OF
THE BOT LAW AND, HENCE, IS ILLEGAL;
(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR
THEIR FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE,
ARE ILLEGAL AND INEFFECTIVE; AND
(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE
GOVERNMENT (Rollo, pp. 15-16).
Secretary Garcia and private respondent filed their comments separately and claimed
that:
(1) Petitioners are not the real parties-in-interest and have no legal standing to
institute the present petition;
(2) The writ of prohibition is not the proper remedy and the petition requires
ascertainment of facts;
(3) The scheme adopted in the Agreements is actually a build-transfer scheme
allowed by the BOT Law;
(4) The nationality requirement for public utilities mandated by the Constitution does
not apply to private respondent;
(5) The Agreements executed by and between respondents have been approved by
President Ramos and are not disadvantageous to the government;
(6) The award of the contract to private respondent through negotiation and not
public bidding is allowed by the BOT Law; and
(7) Granting that the BOT Law requires public bidding, this has been amended by R.A
No. 7718 passed by the Legislature On May 12, 1994, which provides for direct
negotiation as a mode of award of infrastructure projects.
III
Respondents claimed that petitioners had no legal standing to initiate the instant
action. Petitioners, however, countered that the action was filed by them in their
capacity as Senators and as taxpayers.
The prevailing doctrines in taxpayer's suits are to allow taxpayers to question
contracts entered into by the national government or government-owned or
controlled corporations allegedly in contravention of the law (Kilosbayan, Inc. v.
Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal
contracts are involved (Bugnay Construction and Development Corporation v. Laron,
176 SCRA. 240 [1989]).
For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no
choice but to follow it and uphold the legal standing of petitioners as taxpayers to
institute the present action.
IV
In the main, petitioners asserted that the Revised and Restated Agreement of April
22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and
invalid for the following reasons:
(1) the EDSA LRT III is a public utility, and the ownership and
operation thereof is limited by the Constitution to Filipino citizens
and domestic corporations, not foreign corporations like private
respondent;
(2) the Build-Lease-Transfer (BLT) scheme provided in the
agreements is not the BOT or BT Scheme under the law;
(3) the contract to construct the EDSA LRT III was awarded to
private respondent not through public bidding which is the only
mode of awarding infrastructure projects under the BOT law; and
(4) the agreements are grossly disadvantageous to the
government.
1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct
the EDSA LRT III was awarded by public respondent, is admittedly a foreign
corporation "duly incorporated and existing under the laws of Hongkong" (Rollo, pp.
50, 79). There is also no dispute that once the EDSA LRT III is constructed, private
respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate
the system and pay rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation, Ltd., a foreign corporation
own EDSA LRT III; a public utility? (Rollo, p. 17).
The phrasing of the question is erroneous; it is loaded. What private respondent
owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and
the power plant, not a public utility. While a franchise is needed to operate these
facilities to serve the public, they do not by themselves constitute a public utility.
What constitutes a public utility is not their ownership but their use to serve the
public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558
[1923]).
The Constitution, in no uncertain terms, requires a franchise for the operation of a
public utility. However, it does not require a franchise before one can own the
facilities needed to operate a public utility so long as it does not operate them to
serve the public.
Section 11 of Article XII of the Constitution provides:
No franchise, certificate or any other form of authorization for
the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive character or for a longer
period than fifty years . . . (Emphasis supplied).
In law, there is a clear distinction between the "operation" of a public utility and the
ownership of the facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of which a thing pertaining to one
person is completely subjected to his will in everything not prohibited by law or the
concurrence with the rights of another (Tolentino, II Commentaries and
Jurisprudence on the Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is limited by law so that a
property cannot be operated and used to serve the public as a public utility unless
the operator has a franchise. The operation of a rail system as a public utility includes
the transportation of passengers from one point to another point, their loading and
unloading at designated places and the movement of the trains at pre-scheduled
times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R.
1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P.
2d 868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist independently and separately from the
ownership of the facilities thereof. One can own said facilities without operating
them as a public utility, or conversely, one may operate a public utility without
owning the facilities used to serve the public. The devotion of property to serve the
public may be done by the owner or by the person in control thereof who may not
necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the ownership of the
facilities used to serve the public can be very well appreciated when we consider the
transportation industry. Enfranchised airline and shipping companies may lease their
aircraft and vessels instead of owning them themselves.
While private respondent is the owner of the facilities necessary to operate the EDSA.
LRT III, it admits that it is not enfranchised to operate a public utility (Revised and
Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity, private
respondent and DOTC agreed that on completion date, private respondent will
immediately deliver possession of the LRT system by way of lease for 25 years, during
which period DOTC shall operate the same as a common carrier and private
respondent shall provide technical maintenance and repair services to DOTC (Revised
and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical
maintenance consists of providing (1) repair and maintenance facilities for the depot
and rail lines, services for routine clearing and security; and (2) producing and
distributing maintenance manuals and drawings for the entire system (Revised and
Restated Agreement, Annex F).
Private respondent shall also train DOTC personnel for familiarization with the
operation, use, maintenance and repair of the rolling stock, power plant, substations,
electrical, signaling, communications and all other equipment as supplied in the
agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training
consists of theoretical and live training of DOTC operational personnel which includes
actual driving of light rail vehicles under simulated operating conditions, control of
operations, dealing with emergencies, collection, counting and securing cash from
the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3).
Personnel of DOTC will work under the direction and control of private respondent
only during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The
training objectives, however, shall be such that upon completion of the EDSA LRT III
and upon opening of normal revenue operation, DOTC shall have in their employ
personnel capable of undertaking training of all new and replacement personnel
(Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of
the three-year construction period and upon commencement of normal revenue
operation, DOTC shall be able to operate the EDSA LRT III on its own and train all new
personnel by itself.
Fees for private respondent' s services shall be included in the rent, which likewise
includes the project cost, cost of replacement of plant equipment and spare parts,
investment and financing cost, plus a reasonable rate of return thereon (Revised and
Restated Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and
liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold
harmless private respondent from any losses, damages, injuries or death which may
be claimed in the operation or implementation of the system, except losses,
damages, injury or death due to defects in the EDSA LRT III on account of the
defective condition of equipment or facilities or the defective maintenance of such
equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p.
68).
In sum, private respondent will not run the light rail vehicles and collect fees from
the riding public. It will have no dealings with the public and the public will have no
right to demand any services from it.
It is well to point out that the role of private respondent as lessor during the lease
period must be distinguished from the role of the Philippine Gaming Management
Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994).
Therein, the Contract of Lease between PGMC and the Philippine Charity
Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement
prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the lessor
obligated itself to build, at its own expense, all the facilities necessary to operate and
maintain a nationwide on-line lottery system from whom PCSO was to lease the
facilities and operate the same. Upon due examination of the contract, the Court
found that PGMC's participation was not confined to the construction and setting up
of the on-line lottery system. It spilled over to the actual operation thereof, becoming
indispensable to the pursuit, conduct, administration and control of the highly
technical and sophisticated lottery system. In effect, the PCSO leased out its franchise
to PGMC which actually operated and managed the same.
Indeed, a mere owner and lessor of the facilities used by a public utility is not a public
utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa
Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246
[1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434,
59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and
beer cars who supply cars under contract to railroad companies considered as public
utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).
Even the mere formation of a public utility corporation does not ipso
facto characterize the corporation as one operating a public utility. The moment for
determining the requisite Filipino nationality is when the entity applies for a
franchise, certificate or any other form of authorization for that purpose (People v.
Quasha, 93 Phil. 333 [1953]).
2. Petitioners further assert that the BLT scheme under the Agreements in question
is not recognized in the BOT Law and its Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT schemes as follows:
(a) Build-operate-and-transfer scheme — A contractual
arrangement whereby the contractor undertakes the construction
including financing, of a given infrastructure facility, and the
operation and maintenance thereof. The contractor operates the
facility over a fixed term during which it is allowed to charge facility
users appropriate tolls, fees, rentals and charges sufficient to
enable the contractor to recover its operating and maintenance
expenses and its investment in the project plus a reasonable rate
of return thereon. The contractor transfers the facility to the
government agency or local government unit concerned at the end
 of the fixed term which shall not exceed fifty (50) years. For the
construction stage, the contractor may obtain financing from
foreign and/or domestic sources and/or engage the services of a
foreign and/or Filipino constructor [sic]: Provided, That the
ownership structure of the contractor of an infrastructure facility
whose operation requires a public utility franchise must be in
accordance with the Constitution: Provided, however, That in the
case of corporate investors in the build-operate-and-transfer
corporation, the citizenship of each stockholder in the corporate
investors shall be the basis for the computation of Filipino equity in
the said corporation: Provided, further, That, in the case of foreign
constructors [sic], Filipino labor shall be employed or hired in the
different phases of the construction where Filipino skills are
available: Provided, furthermore, that the financing of a foreign or
foreign-controlled contractor from Philippine government
financing institutions shall not exceed twenty percent (20%) of the
total cost of the infrastructure facility or project: Provided, finally,
That financing from foreign sources shall not require a guarantee
by the Government or by government-owned or controlled
corporations. The build-operate-and-transfer scheme shall include
a supply-and-operate situation which is a contractual agreement
whereby the supplier of equipment and machinery for a given
infrastructure facility, if the interest of the Government so requires,
operates the facility providing in the process technology transfer
and training to Filipino nationals.
(b) Build-and-transfer scheme — "A contractual arrangement
whereby the contractor undertakes the construction including
financing, of a given infrastructure facility, and its turnover after
completion to the government agency or local government unit
concerned which shall pay the contractor its total investment
expended on the project, plus a reasonable rate of return thereon.
This arrangement may be employed in the construction of any
infrastructure project including critical facilities which for security
or strategic reasons, must be operated directly by the government
(Emphasis supplied).
The BOT scheme is expressly defined as one where the contractor undertakes the
construction and financing in infrastructure facility, and operates and maintains the
same. The contractor operates the facility for a fixed period during which it may
recover its expenses and investment in the project plus a reasonable rate of return
thereon. After the expiration of the agreed term, the contractor transfers the
ownership and operation of the project to the government.
In the BT scheme, the contractor undertakes the construction and financing of the
facility, but after completion, the ownership and operation thereof are turned over
to the government. The government, in turn, shall pay the contractor its total
investment on the project in addition to a reasonable rate of return. If payment is to
be effected through amortization payments by the government infrastructure agency
or local government unit concerned, this shall be made in accordance with a scheme
proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of the infrastructure
facility must comply with the citizenship requirement of the Constitution on the
operation of a public utility. No such a requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes bar any other
arrangement for the payment by the government of the project cost. The law must
not be read in such a way as to rule out or unduly restrict any variation within the
context of the two schemes. Indeed, no statute can be enacted to anticipate and
provide all the fine points and details for the multifarious and complex situations that
may be encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA
1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi
Molina, 29 Phil. 119 [1914]).
The BLT scheme in the challenged agreements is but a variation of the BT scheme
under the law.
As a matter of fact, the burden on the government in raising funds to pay for the
project is made lighter by allowing it to amortize payments out of the income from
the operation of the LRT System.
In form and substance, the challenged agreements provide that rentals are to be paid
on a monthly basis according to a schedule of rates through and under the terms of
a confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec.
6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made
to and received by private respondent, it shall transfer to DOTC, free from any lien or
encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00
(Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo,
pp. 67, .87).
A lease is a contract where one of the parties binds himself to give to another the
enjoyment or use of a thing for a certain price and for a period which may be definite
or indefinite but not longer than 99 years (Civil Code of the Philippines, Art. 1643).
There is no transfer of ownership at the end of the lease period. But if the parties
stipulate that title to the leased premises shall be transferred to the lessee at the end
of the lease period upon the payment of an agreed sum, the lease becomes a lease-
purchase agreement.
Furthermore, it is of no significance that the rents shall be paid in United States
currency, not Philippine pesos. The EDSA LRT III Project is a high priority project
certified by Congress and the National Economic and Development Authority as
falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is,
therefore, outside the application of the Uniform Currency Act (R.A. No. 529), which
reads as follows:
Sec. 1. — Every provision contained in, or made with respect to,
any domestic obligation to wit, any obligation contracted in the
Philippines which provisions purports to give the obligee the right
 to require payment in gold or in a particular kind of coin or currency
other than Philippine currency or in an amount of money of the
Philippines measured thereby, be as it is hereby declared against
public policy, and null, void, and of no effect, and no such provision
shall be contained in, or made with respect to, any obligation
hereafter incurred. The above prohibition shall not apply to (a) . . .;
(b) transactions affecting high-priority economic projects for
agricultural, industrial and power development as may be
determined by
the National Economic Council which are financed by or through
foreign funds; . . . .
3. The fact that the contract for the construction of the EDSA LRT III was awarded
through negotiation and before congressional approval on January 22 and 23, 1992
of the List of National Projects to be undertaken by the private sector pursuant to the
BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award.
Subsequent congressional approval of the list including "rail-based projects packaged
with commercial development opportunities" (Rollo, p. 310) under which the EDSA
LRT III projects falls, amounts to a ratification of the prior award of the EDSA LRT III
contract under the BOT Law.
Petitioners insist that the prequalifications process which led to the negotiated
award of the contract appears to have been rigged from the very beginning to do
away with the usual open international public bidding where qualified internationally
known applicants could fairly participate.
The records show that only one applicant passed the prequalification process. Since
only one was left, to conduct a public bidding in accordance with Section 5 of the BOT
Law for that lone participant will be an absurb and pointless exercise (cf. Deloso v.
Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT
Law in relation to Presidential Decree No. 1594 allows the negotiated award of
government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations
for Government Infrastructure Contracts," allows the negotiated award of
government projects in exceptional cases. Sections 4 of the said law reads as follows:
Bidding. — Construction projects shall generally be undertaken by
contract after competitive public bidding. Projects may be
undertaken by administration or force account or by negotiated
contract only in exceptional cases where time is of the essence, or
where there is lack of qualified bidders or contractors, or where
there is conclusive evidence that greater economy and efficiency
would be achieved through this arrangement, and in accordance
with provision of laws and acts on the matter, subject to the
approval of the Minister of Public Works and Transportation and
Communications, the Minister of Public Highways, or the Minister
of Energy, as the case may be, if the project cost is less than P1
Million, and the President of the Philippines, upon
recommendation of the Minister, if the project cost is P1 Million or
more (Emphasis supplied).
xxx xxx xxx
Indeed, where there is a lack of qualified bidders or contractors, the award of
government infrastructure contracts may he made by negotiation. Presidential
Decree No. 1594 is the general law on government infrastructure contracts while the
BOT Law governs particular arrangements or schemes aimed at encouraging private
sector participation in government infrastructure projects. The two laws are not
inconsistent with each other but are in pari materia and should be read together
accordingly.
In the instant case, if the prequalification process was actually tainted by foul play,
one wonders why none of the competing firms ever brought the matter before the
PBAC, or intervened in this case before us (cf. Malayan Integrated Industries Corp. v.
Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205
SCRA 705 [1992]).
The challenged agreements have been approved by President Ramos himself.
Although then Executive Secretary Drilon may have disapproved the "Agreement to
Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing in our
laws that prohibits parties to a contract from renegotiating and modifying in good
faith the terms and conditions thereof so as to meet legal, statutory and
constitutional requirements. Under the circumstances, to require the parties to go
back to step one of the prequalification process would just be an idle ceremony.
Useless bureaucratic "red tape" should be eschewed because it discourages private
sector participation, the "main engine" for national growth and development (R.A.
No. 6957, Sec. 1), and renders the BOT Law nugatory.
Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:
(e) Build-lease-and-transfer — A contractual arrangement whereby
a project proponent is authorized to finance and construct an
infrastructure or development facility and upon its completion
turns it over to the government agency or local government unit
concerned on a lease arrangement for a fixed period after which
ownership of the facility is automatically transferred to the
government unit concerned.
Section 5-A of the law, which expressly allows direct negotiation of contracts,
provides:
Direct Negotiation of Contracts. — Direct negotiation shall be
resorted to when there is only one complying bidder left as defined
hereunder.
(a) If, after advertisement, only one contractor applies for
prequalification and it meets the prequalification requirements,
after which it is required to submit a bid proposal which is
subsequently found by the agency/local government unit (LGU) to
be complying.
 (b) If, after advertisement, more than one contractor applied for
prequalification but only one meets the prequalification
requirements, after which it submits bid/proposal which is found
by the agency/local government unit (LGU) to be complying.
(c) If, after prequalification of more than one contractor only one
submits a bid which is found by the agency/LGU to be complying.
(d) If, after prequalification, more than one contractor submit bids
but only one is found by the agency/LGU to be complying.
Provided, That, any of the disqualified prospective bidder [sic] may
appeal the decision of the implementing agency, agency/LGUs
prequalification bids and awards committee within fifteen (15)
working days to the head of the agency, in case of national projects
or to the Department of the Interior and Local Government, in case
of local projects from the date the disqualification was made
known to the disqualified bidder: Provided, furthermore, That the
implementing agency/LGUs concerned should act on the appeal
within forty-five (45) working days from receipt thereof.
Petitioners' claim that the BLT scheme and direct negotiation of contracts are not
contemplated by the BOT Law has now been rendered moot and academic by R.A.
No. 7718. Section 3 of this law authorizes all government infrastructure agencies,
government-owned and controlled corporations and local government units to enter
into contract with any duly prequalified proponent for the financing, construction,
operation and maintenance of any financially viable infrastructure or development
facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-
operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-
transfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).
From the law itself, once and applicant has prequalified, it can enter into any of the
schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated
and defined therein (Sec. 3).
Republic Act No. 7718 is a curative statute. It is intended to provide financial
incentives and "a climate of minimum government regulations and procedures and
specific government undertakings in support of the private sector" (Sec. 1). A curative
statute makes valid that which before enactment of the statute was invalid. Thus,
whatever doubts and alleged procedural lapses private respondent and DOTC may
have engendered and committed in entering into the questioned contracts, these
have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v.
Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong
V. Cheong Seng Gee, 43 Phil. 43 [1922].
4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the
government because the rental rates are excessive and private respondent's
development rights over the 13 stations and the depot will rob DOTC of the best
terms during the most productive years of the project.
It must be noted that as part of the EDSA LRT III project, private respondent has been
granted, for a period of 25 years, exclusive rights over the depot and the air space
above the stations for development into commercial premises for lease, sublease,
transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and
in consideration of these development rights, private respondent shall pay DOTC in
Philippine currency guaranteed revenues generated therefrom in the amounts set
forth in the Supplemental Agreement (Sec. 11; Rollo, p. 93). In the event that DOTC
shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct
any shortfalls from the monthly rent due private respondent for the construction of
the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights, titles,
interests and income over all contracts on the commercial spaces shall revert to
DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec.
11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a painstaking study by DOTC. The
determination by the proper administrative agencies and officials who have acquired
expertise, specialized skills and knowledge in the performance of their functions
should be accorded respect absent any showing of grave abuse of discretion (Felipe
Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of
Medical Education v. Alfonso, 176 SCRA 304 [1989]).
Government officials are presumed to perform their functions with regularity and
strong evidence is necessary to rebut this presumption. Petitioners have not
presented evidence on the reasonable rentals to be paid by the parties to each other.
The matter of valuation is an esoteric field which is better left to the experts and
which this Court is not eager to undertake.
That the grantee of a government contract will profit therefrom and to that extent
the government is deprived of the profits if it engages in the business itself, is not
worthy of being raised as an issue. In all cases where a party enters into a contract
with the government, he does so, not out of charity and not to lose money, but to
gain pecuniarily.
5. Definitely, the agreements in question have been entered into by DOTC in the
exercise of its governmental function. DOTC is the primary policy, planning,
programming, regulating and administrative entity of the Executive branch of
government in the promotion, development and regulation of dependable and
coordinated networks of transportation and communications systems as well as in
the fast, safe, efficient and reliable postal, transportation and communications
services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive
department, DOTC in particular that has the power, authority and technical expertise
determine whether or not a specific transportation or communication project is
necessary, viable and beneficial to the people. The discretion to award a contract is
vested in the government agencies entrusted with that function (Bureau Veritas v.
Office of the President, 205 SCRA 705 [1992]).
WHEREFORE, the petition is DISMISSED.
SO ORDERED
Bellosillo and Kapunan, JJ., concur.
Padilla and Regalado, JJ., concurs in the result.
Romero, J., is on leave.

Separate Opinions
MENDOZA, J., concurring:
I concur in all but Part III of the majority opinion. Because I hold that petitioners do
not have standing to sue, I join to dismiss the petition in this case. I write only to set
forth what I understand the grounds for our decisions on the doctrine of standing are
and, why in accordance with these decisions, petitioners do not have the rights to
sue, whether as legislators, taxpayers or citizens. As members of Congress, because
they allege no infringement of prerogative as legislators.1 As taxpayers because
petitioners allege neither an unconstitutional exercise of the taxing or spending
powers of Congress (Art VI, §§24-25 and 29)2 nor an illegal disbursement of public
money.3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron,4 a party
suing as taxpayer "must specifically prove that he has sufficient interest in preventing
the illegal expenditure of money raised by taxation and that he will sustain a direct
injury as a result of the enforcement of the questioned statute or contract. It is not
sufficient that he has merely a general interest common to all members of the
public." In that case, it was held that a contract, whereby a local government leased
property to a private party with the understanding that the latter would build a
market building and at the end of the lease would transfer the building of the lessor,
did not involve a disbursement of public funds so as to give taxpayer standing to
question the legality of the contract. I see no substantial difference, as far as the
standing is of taxpayers to question public contracts is concerned, between the
contract there and the build-lease-transfer (BLT) contract being questioned by
petitioners in this case.
Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which
citizens were authorized to sue, this Court found standing because it thought the
constitutional claims pressed for decision to be of "transcendental importance," as
in fact it subsequently granted relief to petitioners by invalidating the challenged
statutes or governmental actions. Thus in the Lotto case 6 relied upon by the majority
for upholding petitioners standing, this Court took into account the "paramount
public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive
effects of the envisioned on-line lottery system:"7 Accordingly, the Court invalidated
the contract for the operation of lottery.
But in the case at bar, the Court precisely finds the opposite by finding petitioners'
substantive contentions to be without merit To the extent therefore that a party's
standing is affected by a determination of the substantive merit of the case or a
preliminary estimate thereof, petitioners in the case at bar must be held to be
without standing. This is in line with our ruling in Lawyers League for a Better
Philippines v. Aquino8 and In re Bermudez 9 where we dismissed citizens' actions on
the ground that petitioners had no personality to sue and their petitions did not state
a cause of action. The holding that petitioners did not have standing followed from
the finding that they did not have a cause of action.
In order that citizens' actions may be allowed a party must show that he personally
has suffered some actual or threatened injury as a result of the allegedly illegal
conduct of the government; the injury is fairly traceable to the challenged action; and
the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme Court
has held:
Typically, . . . the standing inquiry requires careful judicial
examination of a complaint's allegation to ascertain whether the
particular plaintiff is entitled to an adjudication of the particular
claims asserted. Is the injury too abstract, or otherwise not
appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated?
Is the prospect of obtaining relief from the injury as a result of a
favorable ruling too speculative? These questions and any others
relevant to the standing inquiry must be answered by reference to
the Art III notion that federal courts may exercise power only "in
the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v.
Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only
when adjudication is "consistent with a system of separated
powers and [the dispute is one] traditionally thought to be capable
of resolution through the judicial process," Flast v Cohen, 392 US
83, 97, 20 L Ed 2d 947, 88 S Ct 1942 (1968). See Valley Forge, 454
US, at 472-473, 70 L Ed 2d 700, 102 S Ct 752.11
Today's holding that a citizen, qua citizen, has standing to question a government
contract unduly expands the scope of public actions and sweeps away the case and
controversy requirement so carefully embodied in Art. VIII, §5 in defining the
jurisdiction of this Court. The result is to convert the Court into an office of
ombudsman for the ventilation of generalized grievances. Consistent with the view
that this case has no merit I submit with respect that petitioners, as representatives
of the public interest, have no standing.
Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.
DAVIDE, JR., J., dissenting:
After wading through the record of the vicissitudes of the challenged contract and
evaluating the issues raised and the arguments adduced by the parties, I find myself
unable to joint majority in the well-written ponencia of Mr. Justice Camilo P. Quiason.
I most respectfully submit that the challenged contract is void for at least two
reasons: (a) it is an-ultra-vires act of the Department of Transportation and
Communications (DOTC) since under R.A. 6957 the DOTC has no authority to enter
into a Build-Lease-and-Transfer (BLT) contract; and (b) even assuming arguendo that
it has, the contract was entered into without complying with the mandatory
requirement of public bidding.
I
 Respondents admit that the assailed contract was entered into under R.A. 6957. This (6) Rehabilitate-operate-and-transfer (ROT)
law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation and (7) Rehabilitate-own-and-operate (ROO).
Maintenance of Infrastructure Projects by the Private Sector, and For Other
b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase
Purposes," recognizes only two (2) kinds of contractual arrangements between the
"through the build-operate-and-transfer or build-and-transfer
private sector and government infrastructure agencies: (a) the Build-Operate-and-
scheme."
Transfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This conclusion
II
finds support in Section 2 thereof which defines only the BOT and BT schemes, in
Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:
Section 3 which explicitly provides for said schemes thus:
Sec. 5 Public Bidding of Projects. — Upon approval of the projects
Sec. 3 Private Initiative in Infrastructure. — All government
mentioned in Section 4 of this Act, the concerned head of the
infrastructure agencies, including government-owned and
infrastructure agency or local government unit shall forthwith
controlled corporations and local government units, are hereby
cause to be published, once every week for three (3) consecutive
authorized to enter into contract with any duly prequalified private
weeks, in at least two (2) newspapers of general circulation and in
contractor for the financing, construction, operation and
at least one (1) local newspaper which is circulated in the region,
maintenance of any financially viable infrastructure
province, city or municipality in which the project is to be
facilities through the build-operate-and transfer or build-and-
constructed a notice inviting all duly prequalified infrastructure
transfer scheme, subject to the terms and conditions hereinafter
contractors to participate in the public bidding for the projects so
set forth; (Emphasis supplied).
approved. In the case of a build-operate-and-transfer
and in Section 5 which requires public bidding of projects under both schemes.
arrangement, the contract shall be awarded to the lowest
All prior acts and negotiations leading to the perfection of the challenged contract
complying bidder based on the present value of its proposed tolls,
were clearly intended and pursued for such schemes.
fees, rentals, and charges over a fixed term for the facility to be
A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and
constructed, operated, and maintained according to the prescribed
none of the aforesaid prior acts and negotiations were designed for such
minimum design and performance standards plans, and
unauthorized scheme. Hence, the DOTC is without any power or authority to enter
specifications. For this purpose, the winning contractor shall be
into the BLT contract in question.
automatically granted by the infrastructure agency or local
The majority opinion maintains, however, that since "[t]here is no mention in the
government unit the franchise to operate and maintain the facility,
BOT Law that the BOT and the BT schemes bar any other arrangement for the
including the collection of tolls, fees, rentals; and charges in
payment by the government of the project cost," then "[t]he law must not be read in
accordance with Section 6 hereof.
such a way as to rule outer unduly restrict any variation within the context of the two
In the case of a build-and-transfer arrangement, the contract shall
schemes." This interpretation would be correct if the law itself provides a room for
be awarded to the lowest complying bidder based on the present
flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a BLT
value of its proposed, schedule of amortization payments for the
scheme, then it should have so stated, for contracts of lease are not unknown in our
facility to be constructed according to the prescribed minimum
jurisdiction, and Congress has enacted several laws relating to leases. That the BLT
design and performance standards, plans and
scheme was never intended as a permissible variation "within the context" of the
specifications: Provided, however, That a Filipino constructor who
BOT and BT schemes is conclusively established by the passage of R.A. No. 7718
submits an equally advantageous bid shall be given preference.
which amends:
A copy of each build-operate-and-transfer or build-and-transfer
a. Section 2 by adding to the original BOT and BT schemes the
contract shall forthwith be submitted to Congress for its
following schemes:
information.
(1) Build-own-and-operate (BOO) The requirement of public bidding is not an idle ceremony. It has been aptly said that
(2) Build-Lease-and-transfer (BLT) in our jurisdiction "public bidding is the policy and medium adhered to in
(3) Build-transfer-and-operate (BTO) Government procurement and construction contracts under existing laws and
(4) Contract-add-and-operate (CAO) regulations. It is the accepted method for arriving at a fair and reasonable price and
ensures that overpricing, favoritism, and other anomalous practices are eliminated
(5) Develop-operate-and-transfer (DOT) or minimized. And any Government contract entered into without the required
bidding is null and void and cannot adversely affect the rights of third parties."
(Bartolome C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER
PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368
[1954]).
The Office of the President, through then Executive Secretary Franklin Drilon
Correctly disapproved the contract because no public bidding is strict compliance
with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon Further bluntly
stated that the provision of the Implementing Rules of said law authorizing
negotiated contracts was of doubtful legality. Indeed, it is null and void because the
law itself does not recognize or allow negotiated contracts.
However the majority opinion posits the view that since only private respondent
EDSA LRT was prequalified, then a public bidding would be "an absurd and pointless
exercise." I submit that the mandatory requirement of public bidding cannot be
legally dispensed with simply because only one was qualified to bid during the
prequalification proceedings. Section 5 mandates that the BOT or BT contract should
be awarded "to the lowest complying bidder," which logically means that there must
at least be two (2) bidders. If this minimum requirement is not met, then the
proposed bidding should be deferred and a new prequalification proceeding be
scheduled. Even those who were earlier disqualified may by then have qualified
because they may have, in the meantime, exerted efforts to meet all the
qualifications.
This view of the majority would open the floodgates to the rigging of prequalification
proceedings or to unholy conspiracies among prospective bidders, which would even
include dishonest government officials. They could just agree, for a certain
consideration, that only one of them qualify in order that the latter would
automatically corner the contract and obtain the award.
That section 5 admits of no exception and that no bidding could be validly had with
only one bidder is likewise conclusively shown by the amendments introduced by
R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was
introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section
reads:
Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation,
shall be resorted to when there is only one complying bidder left as
defined hereunder.
(a) If, after advertisement, only one contractor
applies for prequalification requirements, after
which it is required to submit a bid/proposal
which subsequently found by the agency/local
government unit (LGU) to be complying.
(b) If, after advertisement, more than one
contractor applied for prequalification but only
one meets the prequalification requirements,
after which it submits bid/proposal which is
found by the agency/local government unit (LGU)
to be complying,
(c) If after prequalification of more than one
contractor only one submits a bid which is found
by the agency/LGU to be complying.
(d) If, after prequalification, more than one
contractor, only one submit bids but only one is
found by the agency/LGU to be
complying: Provided, That, any of the disqualified
prospective bidder may appeal the decision
contractor of the implementing agency/LGUs
prequalification bids an award committee within
fifteen (15) working days to the head of the
agency, in case of national projects or to the
Department of the Interior and Local
Government, in case of local projects from the
date the disqualification was made known to the
disqualified bidder Provided, That the
implementing agency/LGUs concerned should
act on the appeal within forty-five (45) working
days from receipt thereof.
Can this amendment be given retroactive effect to the challenged contract so that it
may now be considered a permissible negotiated contract? I submit that it cannot be
R.A. No. 7718 does not provide that it should be given retroactive effect to pre-
existing contracts. Section 18 thereof says that it "shall take effect fifteen (15) days
after its publication in at least two (2) newspapers of general circulation." If it were
the intention of Congress to give said act retroactive effect then it would have so
expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."
The presumption is that all laws operate prospectively, unless the contrary clearly
appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In
every case of doubt, the doubt will be resolved against the retroactive application of
laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to
amendatory acts, or acts which change an existing statute, Sutherland states:
In accordance with the rule applicable to original acts, it is
presumed that provisions added by the amendment affecting
substantive rights are intended to operate prospectively.
Provisions added by the amendment that affect substantive rights
will not be construed to apply to transactions and events
completed prior to its enactment unless the legislature has
expressed its intent to that effect or such intent is clearly implied
by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S
STATUTES AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).
I vote then to grant the instant petition and to declare void the challenged contract
and its supplement.
FELICIANO, J., dissenting:
After considerable study and effort, and with much reluctance, I find I must dissent
in the instant case. I agree with many of the things set out in the majority opinion
written by my distinguished brother in the Court Quiason, J. At the end of the day,
however, I find myself unable to join in the result reached by the majority.
I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is
appropriately drawn on fairly narrow grounds. At the same time; I wish to address
briefly one of the points made by Justice Quiason in the majority opinion in his effort
to meet the difficulties posed by Davide Jr., J.
I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11
June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for
Government Infrastructure Contracts·" More specifically, the majority opinion
invokes paragraph 1 of Section 4 of this Degree which reads as follows:
Sec. 4. Bidding. — Construction projects shall, generally be
undertaken by contract after competitive public bidding. Projects
may be undertaken by administration or force account or by
negotiated contract only in exceptional cases where time is of the
essence, or where there is lack of qualified bidders or contractors,
or where there is a conclusive evidence that greater economy and
efficiency would be achieved through this arrangement, and in
accordance with provisions of laws and acts on the matter, subject
to the approval of the Ministry of public Works, Transportation and
Communications, the Minister of Public Highways, or the Minister
of Energy, as the case may be, if the project cost is less than P1
Million, and of the President of the Philippines, upon the
recommendation of the Minister, if the project cost is P1 Million or
more.
xxx xxx xxx
I understand the unspoken theory in the majority opinion to be that above Section 4
and presumably the rest of Presidential Decree No. 1594 continue to exist and to run
parallel to the provisions of Republic Act No. 6957, whether in its original form or as
amended by Republic Act No. 7718.
A principal difficulty with this approach is that Presidential Decree No. 1594 purports
to apply to all "government contracts for infrastructure and other construction
projects." But Republic Act No. 6957 as amended by Republic Act No. 7718,
relates only to "infrastructure projects" which are financed, constructed, operated
and maintained "by the private sector" "through the build/operate-and-
transfer or build-and-transfer scheme" under Republic Act No. 6597 and under
a series of other comparable schemes under Republic Act No. 7718. In other words,
Republic Act No. 6957 and Republic Act. No. 7718 must be held, in my view, to
be special statutes applicable to a more limited field of "infrastructure projects" than
the wide-ranging scope of application of the general statute i.e., Presidential Decree
No. 1594. Thus, the high relevance of the point made by Mr. Justice Davide that
Republic Act No. 6957 in specific connection with BCT- and BLT type and BLT type of
contracts imposed an unqualified requirement of public bidding set out in Section 5
thereof.
It should also be pointed out that under Presidential Decree No. 1594, projects may
be undertaken "by administration or force account or by negotiated contract only"
(1) in exceptional cases where time is of the essence; or
(2) where there is lack of bidders or contractors; or
(3) where there is a conclusive evidence that greater economy and
efficiency would be achieved through these arrangements, and in
accordance with provision[s] of laws and acts on the matter.
It must, upon the one hand, be noted that the special law Republic Act No. 6957 made
absolutely no mention of negotiated contracts being permitted to displace the
requirement of public bidding. Upon the other hand, Section 5-a, inserted in Republic
Act No. 6957 by the amending statute Republic Act No. 7718, does not purport to
authorize direct negotiation of contracts situations where there is a lack of pre-
qualified contractors or, complying bidders. Thus, even under the amended special
statute, entering into contracts by negotiation is not permissible in the other (2)
categories of cases referred to in Section 4 of Presidential Decree No. 1594, i.e., "in
exceptional cases where time is of the essence" and "when there is conclusive
evidence that greater economy and efficiency would be achieved through these
arrangements, etc."
The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the
applicable public bidding requirement is that set out in Republic Act No. 6957
and, with respect to such type of contracts opened for pre-qualification and bidding
after the date of effectivity of Republic Act No. 7718, The provision of Republic Act
No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was
enacted.
The difficulties. of applying the provisions of Presidential Degree No. 1594 to the Edsa
LRT-type of contracts are aggravated when one considers the detailed "Implementing
Rules and Regulations as amended April 1988" issued under that Presidential
Decree.1 For instance:
IB [2.5.2] 2.4.2 By Negotiated Contract
xxx xxx xxx
a. In times of emergencies arising from natural
calamities where immediate action is necessary
to prevent imminent loss of life and/or property.
b. Failure to award the contract after competitive
public bidding for valid cause or causes [such as
where the prices obtained through public bidding
are all above the AAE and the bidders refuse to
reduce their prices to the AAE].
In these cases, bidding may be undertaken through sealed canvass
of at least three (3) qualified contractors. Authority to negotiate
 contracts for projects under these exceptional cases shall be
subject to prior approval by heads of agencies within their limits of
approving authority.
c. Where the subject project is adjacent or
contiguous to an on-going project and it could be
economically prosecuted by the same contractor
provided that he has no negative slippage and
has demonstrated a satisfactory performance.
(Emphasis supplied).
Note that there is no reference at all in these Presidential Decree No. 1594
Implementing Rules and Regulations to absence of pre-qualified applicants and
bidders as justifying negotiation of contracts as distinguished from requiring public
bidding or a second public bidding.
Note also the following provision of the same Implementing Rules and Regulations:
IB 1 Prequalification
The following may be become contractors for government projects:
1 Filipino
a. Citizens (single proprietorship)
b. Partnership of corporation duly organized under the laws of the
Philippines, and at least seventy five percent (75%) of the capital
stock of which belongs to Filipino citizens.
2. Contractors forming themselves into a joint venture, i.e., a group
of two or more contractors that intend to be jointly and severally
responsible for a particular contract, shall for purposes of
bidding/tendering comply with LOI 630, and, aside from being
currently and properly accredited by the Philippine Contractors
Accreditation Board, shall comply with the provisions of R.A. 4566,
provided thatjoint ventures in which Filipino ownership is less than
seventy five percent ( 75%) may be prequalified where the
structures to be built require the application of techniques and/or
technologies which are not adequately possessed by a Filipino
entity as defined above.
[The foregoing shall not negate any existing and future
commitments with respect to the bidding and aware of contracts
financed partly or wholly with funds from international lending
institutions like the Asian Development Bank and the Worlds Bank
as well as from bilateral and other similar sources.(Emphases
supplied)
The record of this case is entirely silent on the extent of Philippine equity in the Edsa
LRT Corporation; there is no suggestion that this corporation is organized under
Philippine law and is at least seventy-five (75%) percent owned by Philippine citizens.
Public bidding is the normal method by which a government keeps contractors
honest and is able to assure itself that it would be getting the best possible value for
its money in any construction or similar project. It is not for nothing that multilateral
financial organizations like the World Bank and the Asian Development Bank
uniformly require projects financed by them to be implemented and carried out by
public bidding. Public bidding is much too important a requirement casually to loosen
by a latitudinarian exercise in statutory construction.
The instant petition should be granted and the challenged contract and its
supplement should be nullified and set aside. A true public bidding, complete with a
new prequalification proceeding, should be required for the Edsa LRT Project.
Separate Opinions
MENDOZA, J., concurring:
I concur in all but Part III of the majority opinion. Because I hold that petitioners do
not have standing to sue, I join to dismiss the petition in this case. I write only to set
forth what I understand the grounds for our decisions petitioners do not have the
rights to sue, whether as legislators, taxpayers or citizens. As members of Congress,
because they allege no infringement of prerogative as legislators. 1 As taxpayers
because petitioners allege neither an unconstitutional exercise of the taxing or
spending powers of Congress (Art VI, §§24-25 and 29)2 nor an illegal disbursement of
public money.3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron,4 a
party suing as taxpayer "must specifically prove that he has sufficient interest in
preventing the illegal expenditure of money raised by taxation and that he will
sustain a direct injury as a result of the enforcement of the questioned statute or
contract, It is not sufficient that has merely a general interest common to all
members of the public." In that case, it was held that a contract, whereby a local
government leased property to a private party with the understanding that the latter
would build a market building and at the end of the lease would transfer the building
of the lessor, did not involve a disbursement of public funds so as to give taxpayer
standing to question the legality of the contract contracts I see no substantial
difference, as far as the standing is of taxpayers is concerned, between the contract
there and the build-lease-transfer (BLT) contract being questioned by petitioners in
this case.
Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which
citizens were authorized to sue, this Court found standing because it thought the
constitutional claims pressed for decision to be of "transcendental importance," as
in fact it subsequently granted relief to petitioners by invalidating the challenged
statutes or governmental actions. Thus in the Lotto case6 relied upon by the majority
for upholding petitioners standing, this Court took into account the "paramount
public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive
effects of the envisioned on-line lottery system:"7 Accordingly, the Court invalidated
the contract for the operation of lottery.
But in the case at bar, the Court precisely finds the opposite by finding petitioners'
substantive contentions to be without merit To the extent therefore that a party's
standing is affected by a determination of the substantive merit of the case or a
preliminary estimate thereof, petitioners in the case at bar must be held to be
without standing. This is in line with our ruling in Lawyers League for a Better
Philippines v. Aquino8 and In re Bermudez9 where we dismissed citizens' actions on
the ground that petitioners had no personality to sue and their petitions did not state
a cause of action. The holding that petitioners did not have standing followed from
the finding that they did not have a cause of action.
In order that citizens' actions may be allowed a party must show that he personally
has suffered some actual or threatened injury as a result of the allegedly illegal
conduct of the government; the injury is fairly traceable to the challenged action; and
the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme Court
has held:
Typically, . . . the standing inquiry requires careful judicial
examination of a complaint's allegation to ascertain whether the
particular plaintiff is entitled to an adjudication of the particular
claims asserted. Is the injury too abstract, or otherwise not
appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated?
Is the prospect of obtaining relief from the injury as a result of a
favorable ruling too speculative? These questions and any others
relevant to the standing inquiry must be answered by reference to
the Art III notion that federal courts may exercise power only "in
the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v.
Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only
when adjudication is "consistent with a system of separated
powers and [the dispute is one] traditionally thought to be capable
of resolution through the judicial process," Flast v Cohen, 392 US
83, 97, 20 L Ed 2d 947, .88 S Ct 1942 (1968). See Valley Forge, 454
US, at 472-473, 70 L Ed 2d 700, 102 S Ct 752.11
Today's holding that a citizen, qua citizen, has standing to question a government
contract unduly expands the scope of public actions and sweeps away the case and
controversy requirement so carefully embodied in Art. VIII, §5 in defining the
jurisdiction of this Court. The result is to convert the Court into an office of
ombudsman for the ventilation of generalized grievances. Consistent with the view
that this case has no merit I submit with respect that petitioners, as representatives
of the public interest, have no standing.
Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.
DAVIDE, JR., J., dissenting:
After wading through the record of the vicissitudes of the challenged contract and
evaluating the issues raised and the arguments adduced by the parties, I find myself
unable to joint majority in the well-written ponencia of Mr. Justice Camilo P. Quiason.
I most respectfully submit that the challenged contract is void for at least two
reasons: (a) it is an-ultra-vires act of the Department of Transportation and
Communications (DOTC) since under R.A. 6957 the DOTC has no authority to enter
into a Build-Lease-and-Transfer (BLT) contract; and (b) even assuming arguendo that
it has, the contract was entered into without complying with the mandatory
requirement of public bidding.
I
Respondents admit that the assailed contract was entered into under R.A. 6957. This
law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation and
Maintenance of Infrastructure Projects by the Private Sector, and For Other
Purposes," recognizes only two (2) kinds of contractual arrangements between the
private sector and government infrastructure agencies: (a) the Build-Operate-and-
Transfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This conclusion
finds support in Section 2 thereof which defines only the BOT and BT schemes, in
Section 3 which explicitly provides for said schemes thus:
Sec. 3 Private Initiative in Infrastructure. — All government
infrastructure agencies, including government-owned and
controlled corporations and local government units, are hereby
authorized to enter into contract with any duly prequalified private
contractor for the financing, construction, operation and
maintenance of any financially viable infrastructure
facilities through the build-operate-and transfer or build-and-
transfer scheme, subject to the terms and conditions hereinafter
set forth; (Emphasis supplied).
and in Section 5 which requires public bidding of projects under both schemes.
All prior acts and negotiations leading to the perfection of the challenged contract
were clearly intended and pursued for such schemes.
A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and
none of the aforesaid prior acts and negotiations were designed for such
unauthorized scheme. Hence, the DOTC is without any power or authority to enter
into the BLT contract in question.
The majority opinion maintains, however, that since "[t]here is no mention in the
BOT Law that the BOT and the BT schemes bar any other arrangement for the
payment by the government of the project cost," then "[t]he law must not be read in
such a way as to rule outer unduly restrict any variation within the context of the two
schemes." This interpretation would be correct if the law itself provides a room for
flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a BLT
scheme, then it should have so stated, for contracts of lease are not unknown in our
jurisdiction, and Congress has enacted several laws relating to leases. That the BLT
scheme was never intended as a permissible variation "within the context" of the
BOT and BT schemes is conclusively established by the passage of R.A. No. 7718
which amends:
a. Section. 2 by adding to the original BOT and BT schemes the
following schemes:
1) Build-own-and-operate (BOO)
2) Build-Lease-and-transfer (BLT)
3) Build-transfer-and-operate (BTO)
 4) Contract-add-and-operate (CAO)
5) Develop-operate-and-transfer (DOT)
6) Rehabilitate-operate-and-transfer (ROT)
7) Rehabilitate-own-and-operate (ROO).
b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase
"through the build-operate-and-transfer or build-and-transfer
scheme.
II
Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:
Sec. 5 Public Bidding of Projects. — Upon approval of the projects
mentioned in Section 4 of this Act, the concerned head of the
infrastructure agency or local government unit shall forthwith
cause to be published, once every week for three (3) consecutive
weeks, in at least two (2) newspapers of general circulation and in
at least one (1) local newspaper which is circulated in the region,
province, city or municipality in which the project is to be
constructed a notice inviting all duly prequalified infrastructure
contractors to participate in the public bidding for the projects so
approved. In the case of a build-operate-and-transfer
arrangement, the contract shall be awarded to the lowest
complying bidder based on the present value of its proposed tolls,
fees, rentals, and charges over a fixed term for the facility to be
constructed, operated, and maintained according to the prescribed
minimum design and performance standards plans, and
specifications. For this purpose, the winning contractor shall be
automatically granted by the infrastructure agency or local
government unit the franchise to operate and maintain the facility,
including the collection of tolls, fees, rentals; and charges in
accordance with Section 6 hereof.
In the case of a build-and-transfer arrangement, the contract shall
be awarded to the lowest complying bidder based on the present
value of its proposed, schedule of amortization payments for the
facility to be constructed according to the prescribed minimum
design and performance standards, plans and
specifications: Provided, however, That a Filipino constructor who
submits an equally advantageous bid shall be given preference.
A copy of each build-operate-and-transfer or build-and-transfer
contract shall forthwith be submitted to Congress for its
information.
The requirement of public bidding is not an idle ceremony. It has been aptly said that
in our jurisdiction "public bidding is the policy and medium adhered to in
Government procurement and construction contracts under existing laws and
regulations. It is the accepted method for arriving at a fair and reasonable price and
ensures that overpricing, favoritism, and other anomalous practices are eliminated
or minimized. And any Government contract entered into without the required
bidding is null and void and cannot adversely affect the rights of third parties."
(Bartolome C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER
PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368
[1954]).
The Office of the president secretary through then Executive Secretary Franklin
Drilon Correctly disapproved the contract because no public bidding is strict
compliance with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon Further
bluntly stated that the provision of the Implementing Rules of said law authorizing
negotiated contracts was of doubtful legality. Indeed, it is null and void because the
law itself does not recognize or allow negotiated contracts.
However the majority opinion posits the view that since only private respondent
EDSA LRT was prequalified, then a public bidding would be "an absurd and pointless
exercise." I submit that the mandatory requirement of public bidding cannot be
legally dispensed with simply because only one was qualified to bid during the
prequalification proceedings. Section 5 mandates that the BOT or BT contract should
be awarded "to the lowest complying bidder," which logically means that there must
at least be two (2) bidders. If this minimum requirement is not met, then the
proposed bidding should be deferred and a new prequalification proceeding be
scheduled. Even those who were earlier disqualified may by then have qualified
because they may have, in the meantime, exerted efforts to meet all the
qualifications.
This view of the majority would open the floodgates to the rigging of prequalification
proceedings or to unholy conspiracies among prospective bidders, which would even
include dishonest government officials. They could just agree, for a certain
consideration, that only one of them qualify in order that the latter would
automatically corner the contract and obtain the award.
That section 5 admits of no exception and that no bidding could be validly had with
only one bidder is likewise conclusively shown by the amendments introduced by
R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was
introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section
reads:
Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation,
shall be resorted to when there is only one complying bidder left as
defined hereunder.
(a) If, after advertisement, only one contractor
applies for prequalification requirements submit
a bid/proposal which subsequently found by the
agency/local government unit (LGU) to be
complying.
(b) If, after advertisement, more than one
contractor applied for prequalification but only
one meets the prequalification .requirements,
 after which it submits bid/proposal which is
found by the agency/local government unit (LGU)
to be complying,
(c) If after prequalification of more than one
contractor only one submits a bid which is found
by the agency/LGU to be complying.
(d) If, after prequalification, more than one
contractor, only one submit bids but only one is
found by the agency/LGU to be
complying: Provided, That, any of the disqualified
prospective bidder may appeal the decision
contractor of the implementing agency/LGUs
prequalification bids an award committee within
fifteen (15) working days to the head of the
agency of national projects or to the Department
of the Interior and Local Government, in case of
local projects from the date the disqualification
was made known to the disqualified
bidder Provided, That the implementing
agency/LGUs concerned should act on the appeal
within forty-five (45) working days from receipt
thereof.
Can this amendment be given retroactive effect to the challenged contract so that it
may now be considered a permissible negotiated contract? I submit that it cannot be
R.A. No. 7718 does not provide that it should be given retroactive effect to pre-
existing contracts. Section 18 thereof says that it "shall take effect fifteen (15) after
its publication in at least two (2) newspapers of general circulation." If it were the
intention of Congress to give said act retroactive effect then it would have so
expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."
The presumption is that all laws operate prospectively, unless the contrary clearly
appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In
every case of doubt, the doubt will be resolved against the retroactive application of
laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to
amendatory acts, or acts which change an existing statute, Sutherland states:
In accordance with the rule applicable to original acts, it is
presumed that provisions added by the amendment affecting
substantive rights are intended to operate prospectively.
Provisions added by the amendment that affect substantive rights
will not be construed to apply to transactions and events
completed prior to its enactment unless the legislature has
expressed its intent to that effect or such intent is clearly implied
by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S
STATUTES AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).
I vote then to grant the instant petition and to declare void the challenged contract
and its supplement.
FELICIANO, J., dissenting:
After considerable study and effort, and with much reluctance, I find I must dissent
in the instant case. I agree with many of the things set out in the majority opinion
written by my distinguished brother in the Court Quiason, J. At the end of the day,
however, I find myself unable to join in the result reached by the majority.
I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is
appropriately drawn on fairly narrow grounds. At the same time; I wish to address
briefly one of Justice Quiason in the majority opinion in his effort to meet the
difficulties posed by Davide Jr., J.
I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11
June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for
Government Infrastructure Contracts·" More specifically, the majority opinion
invokes paragraph 1 of Section 4 of this Degree which reads as follows:
Sec. 4. Bidding. — Construction projects shall, generally be
undertaken by contract after competitive public bidding. Projects
may be undertaken by administration or force account or by
negotiated contract only in exceptional cases where time is of the
essence, or where there is lack of qualified bidders or contractors,
or where there is a conclusive evidence that greater economy and
efficiency would be achieved through this arrangement, and in
accordance with provisions of laws and acts on the matter, subject
to the approval of the Ministry of public Works, Transportation and
Communications, the Minister of Public Highways, or the Minister
of Energy, as the case may be, if the project cost is less than P1
Million, and of the president of the Philippines, upon the
recommendation of the Minister, if the project cost is P1 Million or
more.
xxx xxx xxx
I understand the unspoken theory in the majority opinion utility and the ownership
of the facilities used to serve the public can be very w1594 continue to exist and to
run parallel to the provisions of Republic Act No. 6957, whether in its original form
or as amended by Republic Act No. 7718.
A principal difficulty with this approach is that Presidential Decree No. 1594 purports
to apply to all "government contracts for infrastructure and other construction
projects" But Republic Act No. 6957 as amended by Republic Act No. 7718, relates on
to "infrastructure projects" which are financed, constructed, operated and
maintained "by the private sector" "through the build/operate-and-transfer or build-
and-transfer scheme" under Republic Act No. 6597 and under a series of
other comparable schemes under Republic Act No. 7718. In other words, Republic
Act No. 6957 and Republic Act. No: 7718 must be held, in my view, to be special
statutes applicable to a more limited field of "infrastructure projects" than the wide-
ranging scope of application of the general statute i.e., Presidential Decree No. 1594.
Thus, the high relevance of the point made by Mr. Justice Davide that Republic Act
No. 6957 in specific connection with BCT- and BLT type and BLT type of
contracts imposed an unqualified requirement of public bidding set out in Section 5
thereof.
It should also be pointed out that under Presidential Decree No. 1594, projects may
be undertaken "by administration or force account or by negotiated contract only "
(1) in exceptional cases where time is of the essence; or
(2) where there is lack of bidders or contractors; or
(3) where there is a conclusive evidence that greater economy and
efficiency would be achieved through these arrangements, and in
accordance with provision[s] of laws and acts on the matter.
It must, upon the one hand, be noted that the special law Republic Act- No. 6957
made absolutely no mention of negotiated contracts being permitted to displace the
requirement of public bidding. Upon the other hand, Section 5-a, inserted in Republic
Act No. 6957 by the amending statute Republic Act No. 7718, does not purport to
authorize direct negotiation of contracts situations where there is a lack of pre-
qualified contractors or, complying bidders. Thus, even under the amended special
statute, entering into contracts by negotiation is not permissible in the other (2)
categories of cases referred to in Section 4 of Presidential Decree No. 1594, i.e., "in
exceptional cases where time is of the essence" and "when there is conclusive
evidence that greater economy and efficiency would be achieved through these
arrangements, etc."
The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the
applicable public bidding requirement is that set out in Republic Act No. 6957
and, with respect to such type of contracts opened for pre-qualification and bidding
after the date of effectivity of Republic Act No. 7718. The provision of Republic Act
No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was
enacted.
The difficulties. of applying the provisions of presidential Degree No. 1594 to the Edsa
LRT-type of contracts are aggravated when one considers the detailed" Implementing
Rules and Regulations as amended April 1988" issued under that Presidential
Decree.1 For instance:
IB [2.5.2] 2.4.2 By Negotiated Contract
xxx xxx xxx
a. In times of emergencies arising from natural
calamities where immediate action is necessary
to prevent imminent loss of life and/or property.
b. Failure to award the contract after competitive
public bidding for valid cause or causes [such as
where the prices obtained through public bidding
are all above the AAE and the bidders refuse to
reduce their prices to the AAE].
In these cases, bidding may be undertaken through sealed canvass
of at least three (3) qualified contractors. Authority to negotiate
contracts for projects under these exceptional cases shall be
subject to prior approval by heads of agencies within their limits of
approving authority.
c. Where the subject project is adjacent or
contiguous to an on-going project and it could be
economically prosecuted by the same contractor
provided that he has no negative slippage and
has demonstrated a satisfactory performance.
(Emphasis supplied).
Note that there is no reference at all in these presidential Decree No. 1594
Implementing Rules and Regulations to absence of pre-qualified applicants and
bidders as justifying negotiation of contracts as distinguished from requiring public
bidding or a second public bidding.
Note also the following provision of the same Implementing Rules and Regulations:
IB 1 Prequalification
The following may be become contractors for government projects:
1 Filipino
a. Citizens (single proprietorship)
b. Partnership of corporation duly organized under the laws of the
Philippines, and at least seventy five percent (75%) of the capital
stock of which belongs to Filipino citizens.
2. Contractors forming themselves into a joint venture, i.e., a group
of two or more contractors that intend to be jointly and severally
responsible for a particular contract, shall for purposes of
bidding/tendering comply with LOI 630, and, aside from being
currently and properly accredited by the Philippine Contractors
Accreditation Board, shall comply with the provisions of R.A. 4566,
provided thatjoint ventures in which Filipino ownership is less than
seventy five percent ( 75%) may be prequalified where the
structures to be built require the application of techniques and/or
technologies which are not adequately possessed by a Filipino
entity as defined above.
[The foregoing shall not negate any existing and future
commitments with respect to the bidding and aware of contracts
financed partly or wholly with funds from international lending
institutions like the Asian Development Bank and the Worlds Bank
as well as from bilateral and other similar sources.(Emphases
supplied)
The record of this case is entirely silent on the extent of Philippine equity in the Edsa
LRT Corporation; there is no suggestion that this corporation is organized under
Philippine law and is at least seventy-five (75%) percent owned by Philippine citizens.
Public bidding is the normal method by which a government keeps contractors
honest and is able to assure itself that it would be getting the best possible value for
its money in any construction or similar project. It is not for nothing that multilateral
financial organizations like the World Bank and the Asian Development Bank
uniformly require projects financed by them to be implemented and carried out by
public bidding. Public bidding is much too important a requirement casually to loosen
by a latitudinarian exercise in statutory construction.
The instant petition should be granted and the challenged contract and its
supplement should be nullified and set aside. A true public bidding, complete with a
new prequalification proceeding, should be required for the Edsa LRT Project.
G.R. No. L-18216 October 30, 1962
STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,
vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
Ramon C. Fernando for petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc.
executed a certificate of liquidation of the assets of the corporation reciting, among
other things, that by virtue of a resolution of the stockholders adopted on September
17, 1960, dissolving the corporation, they have distributed among themselves in
proportion to their shareholdings, as liquidating dividends, the assets of said
corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila, was
denied registration on seven grounds, of which the following were disputed by the
stockholders:
3. The number of parcels not certified to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the document;
7. The judgment of the Court approving the dissolution and directing the
disposition of the assets of the corporation need be presented (Rules of
Court, Rule 104, Sec. 3).
Deciding the consulta elevated by the stockholders, the Commissioner of Land
Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety or
impropriety of the three grounds on which the denial of the registration of the
certificate of liquidation was predicated hinges on whether or not that certificate
merely involves a distribution of the corporation's assets or should be considered a
transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or transfer
but merely a distribution of the assets of the corporation which has ceased to exist
for having been dissolved. This is apparent in the minutes for dissolution attached to
the document. Not being a conveyance the certificate need not contain a statement
of the number of parcel of land involved in the distribution in the acknowledgment
appearing therein. Hence the amount of documentary stamps to be affixed thereon
should only be P0.30 and not P940.45, as required by the register of deeds. Neither
is it correct to require appellants to pay the amount of P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different opinion. He
concurred in the view expressed by the register of deed to the effect that the
certificate of liquidation in question, though it involves a distribution of the
corporation's assets, in the last analysis represents a transfer of said assets from the
corporation to the stockholders. Hence, in substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person
distinct from the members composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property they do not represent property of
the corporation. The corporation has property of its own which consists chiefly of
real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1,
123 N.W. 743). A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed
according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So.,
235), but its holder is not the owner of any part of the capital of the corporation
(Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite
portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35
Ohio St., 474). The stockholder is not a co-owner or tenant in common of the
corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the act of liquidation made
by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and
cannot be considered a partition of community property, but rather a transfer or
conveyance of the title of its assets to the individual stockholders. Indeed, since the
purpose of the liquidation, as well as the distribution of the assets of the corporation,
is to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, — and this is in effect the purpose which they seek to obtain from the
Register of Deeds of Manila, — that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders. It is,
therefore, fair and logical to consider the certificate of liquidation as one in the
nature of a transfer or conveyance.
WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal,
JJ., concur.
Barrera, J., took no part.
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA
MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P.
MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special
Administratrix of the Estate of the late Genaro F. Magsaysay respondents.
FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to reverse and set aside [1]
the decision of the Court of Appeals dated July l3, 1981, 1 affirming that of the Court
of First Instance of Zambales and Olongapo City which denied petitioners' motion to
intervene in an annulment suit filed by herein private respondent, and [2] its
resolution dated September 7, 1981, denying their motion for reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of
Appeals correctly denied their motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special
administratix of the estate of the late Senator Genaro Magsaysay, brought before the
then Court of First Instance of Olongapo an action against Artemio Panganiban, Subic
Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the
Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and
her husband acquired, thru conjugal funds, a parcel of land with improvements,
known as "Pequena Island", covered by TCT No. 3258; that after the death of her
husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land
was acquired by her husband from his separate capital;" [b] the registration of a Deed
of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor
of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued
in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28,
1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK;
that the foregoing acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital consent to the
annotation on TCT No. 3258 was not obtained, the change made by the Register of
Deeds of the titleholders was effected without the approval of the Commissioner of
Land Registration and that the late Senator did not execute the purported Deed of
Assignment or his consent thereto, if obtained, was secured by mistake, violence and
intimidation. She further alleged that the assignment in favor of SUBIC was without
consideration and consequently null and void. She prayed that the Deed of
Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be
ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for
intervention on the ground that on June 20, 1978, their brother conveyed to them
one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6 shares and as
assignees of around 41 % of the total outstanding shares of such stocks of SUBIC, they
have a substantial and legal interest in the subject matter of litigation and that they
have a legal interest in the success of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that
petitioners have no legal interest whatsoever in the matter in litigation and their
being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle
them to intervene because SUBIC has a personality separate and distinct from its
stockholders.
On appeal, respondent Court of Appeals found no factual or legal justification to
disturb the findings of the lower court. The appellate court further stated that
whatever claims the petitioners have against the late Senator or against SUBIC for
that matter can be ventilated in a separate proceeding, such that with the denial of
the motion for intervention, they are not left without any remedy or judicial relief
under existing law.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by the
late Senator of a certain portion of his shareholdings to them as evidenced by a Deed
of Sale dated June 20, 1978. 2 Such transfer, petitioners posit, clothes them with an
interest, protected by law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil.
857,862 & 853 (1927), 3petitioners strongly argue that their ownership of 41.66% of
the entire outstanding capital stock of SUBIC entitles them to a significant vote in the
corporate affairs; that they are affected by the action of the widow of their late
brother for it concerns the only tangible asset of the corporation and that it appears
that they are more vitally interested in the outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court
affirms the respondent court's holding that petitioners herein have no legal interest
in the subject matter in litigation so as to entitle them to intervene in the proceedings
below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v.
Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be
permitted to intervene in a pending action, the party must have a legal interest in the
matter in litigation, or in the success of either of the parties or an interest against
both, or he must be so situated as to be adversely affected by a distribution or other
disposition of the property in the custody of the court or an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in the
matter in litigation, or otherwise qualified; and [b] consideration must be given as to
whether the adjudication of the rights of the original parties may be delayed or
prejudiced, or whether the intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the first is not more important
than the second. 5
The interest which entitles a person to intervene in a suit between other parties must
be in the matter in litigation and of such direct and immediate character that the
intervenor will either gain or lose by the direct legal operation and effect of the
judgment. Otherwise, if persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily complicated, expensive and Such claim all the more bolsters the contingent nature of petitioners' interest in the
interminable. And this is not the policy of the law. 6 subject of litigation.
The words "an interest in the subject" mean a direct interest in the cause of action The factual findings of the trial court are clear on this point. The petitioners cannot
as pleaded, and which would put the intervenor in a legal position to litigate a fact claim the right to intervene on the strength of the transfer of shares allegedly
alleged in the complaint, without the establishment of which plaintiff could not executed by the late Senator. The corporation did not keep books and
recover. 7 records. 11 Perforce, no transfer was ever recorded, much less effected as to
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, prejudice third parties. The transfer must be registered in the books of the
remote, conjectural, consequential and collateral. At the very least, their interest is corporation to affect third persons. The law on corporations is explicit. Section 63 of
purely inchoate, or in sheer expectancy of a right in the management of the the Corporation Code provides, thus: "No transfer, however, shall be valid, except as
corporation and to share in the profits thereof and in the properties and assets between the parties, until the transfer is recorded in the books of the corporation
thereof on dissolution, after payment of the corporate debts and obligations. showing the names of the parties to the transaction, the date of the transfer, the
While a share of stock represents a proportionate or aliquot interest in the property number of the certificate or certificates and the number of shares transferred."
of the corporation, it does not vest the owner thereof with any legal right or title to And even assuming arguendo that there was a valid transfer, petitioners are
any of the property, his interest in the corporate property being equitable or nonetheless barred from intervening inasmuch as their rights can be ventilated and
beneficial in nature. Shareholders are in no legal sense the owners of corporate amply protected in another proceeding.
property, which is owned by the corporation as a distinct legal person. 8 WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.
Petitioners further contend that the availability of other remedies, as declared by the SO ORDERED.
Court of appeals, is totally immaterial to the availability of the remedy of Gutierrez, Jr., Bidin and Corte's, JJ., concur.
intervention. Feliciano, J., is on leave.
We cannot give credit to such averment. As earlier stated, that the movant's interest
may be protected in a separate proceeding is a factor to be considered in allowing or
disallowing a motion for intervention. It is significant to note at this juncture that as
per records, there are four pending cases involving the parties herein, enumerated
as follows: [1] Special Proceedings No. 122122 before the CFI of Manila, Branch XXII,
entitled "Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp., et al.", involving
the validity of the transfer by the late Genaro Magsaysay of one-half of his
shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of
Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.;
Concepcion Labrador, et al. Intervenors", seeking to annul the purported Deed of
Assignment in favor of SUBIC and its annotation at the back of TCT No. 3258 in the
name of respondent's deceased husband; [3] SEC Case No. 001770, filed by
respondent praying, among other things that she be declared in her capacity as the
surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole
subscriber and stockholder of SUBIC. There, petitioners, by motion, sought to
intervene. Their motion to reconsider the denial of their motion to intervene was
granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein filing
a contingent claim pursuant to Section 5, Rule 86, Revised Rules of
Court. 9 Petitioners' interests are no doubt amply protected in these cases.
Neither do we lend credence to petitioners' argument that they are more interested
in the outcome of the case than the corporation-assignee, owing to the fact that the
latter is willing to compromise with widow-respondent and since a compromise
involves the giving of reciprocal concessions, the only conceivable concession the
corporation may give is a total or partial relinquishment of the corporate assets. 10
G.R. No. 89561 September 13, 1990 Exhibit A) which intestate proceedings was
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, instituted by Mauricia Meer Vda. de Castillo, the
BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. previous administratrix of the said proceedings
RIVERA, petitioners, prior to 1970 (per exhibits A-1 and A-2) which
vs. case was filed in Court way back in 1964;
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS b) The four (4) parcels of land described in
MANUFACTURING CO., INC., respondents. paragraph 3 of the Complaint were originally
Edmundo T. Zepeda for petitioners. covered by TCT No. T-42104 and Tax Dec. No.
Martin M. De Guzman for respondent BORMAHECO, Inc. 14134 with assessed value of P3,100.00; TCT No.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc. T 32227 and Tax Dec. No. 14132, with assessed
value of P5,130,00; TCT No. T-31762 and Tax Dec.
REGALADO, J.: No. 14135, with assessed value of P6,150.00; and
This is a petition to review the decision of respondent Court of Appeals, dated August TCT No. T-42103 with Tax Dec. No. 14133, with
3, 1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. assessed value of P3,580.00 (per Exhibits A-2 and
Philippine Machinery Parts Manufacturing Co., Inc., et al.," 1 the dispositive portion B, B-1 to B-3 C, C-1 -to C3
whereof provides: c) That the above-enumerated four (4) parcels of
WHEREFORE, viewed in the light of the entire record, the judgment land were the subject of the Deed of Extra-
appealed from must be, as it is hereby REVERSED. In lieu thereof, a Judicial Partition executed by the heirs of Felipe
judgment is hereby rendered- Castillo (per Exhibit D) and by virtue thereof the
1) Dismissing the complaint, with cost against plaintiffs; titles thereto has (sic) been cancelled and in lieu
2) Ordering plaintiffs-appellees to vacate the subject properties; thereof, new titles in the name of Mauricia Meer
and Vda. de Castillo and of her children, namely:
3) Ordering plaintiffs-appellees to pay upon defendants' Buenaflor, Bertilla, Victoria, Marietta and
counterclaims: Leovina, all surnamed Castillo has (sic) been
a) To defendant-appellant PM Parts: (i) damages issued, namely: TCT No. T-12113 (Exhibit E ); TCT
consisting of the value of the fruits in the subject No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit
parcels of land of which they were deprived in G ) and TCT No. T13117 (Exhibit H )
the sum of P26,000.00 and (ii) attorney's fees of d) That mentioned parcels of land were
P15,000.00 submitted as guaranty in the Agreement of
b) To defendant-appellant Bormaheco: (i) Counter-Guaranty with Chattel-Real Estate
expenses of litigation in the amount of P5,000.00 Mortgage executed on 24 October 1970 between
and (ii) attorney's fees of P15,000.00. Insurance Corporation of the Philippines and
SO ORDERED. Slobec Realty Corporation represented by
The original complaint for annulment of title filed in the court a quo by herein Santiago Rivera (Exhibit 1);
petitioners included as party defendants the Philippine Machinery Parts e) That based on the Certificate of Sale issued by
Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines (ICP), the Sheriff of the Province of Quezon in favor of
Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended Insurance Corporation of the Philippines it was
Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff. able to transfer to itself the titles over the lots in
During the pre-trial conference, the parties entered into the following stipulation of question, namely: TCT No. T-23705 (Exhibit M),
facts: TCT No. T 23706 (Exhibit N ), TCT No. T-23707
As between all parties: Plaintiff Buenaflor M. (Exhibit 0) and TCT No. T 23708 (Exhibit P);
Castillo is the judicial administratrix of the estate f) That on 10 April 1975, the Insurance
of Felipe Castillo in Special Proceeding No. 4053, Corporation of the Philippines sold to PM Parts
pending before Branch IX, CFI of Quezon (per the immovables in question (per Exhibit 6 for PM
Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in
dispute, namely: per TCT No. T-24846 (Exhibit Q
), per TCT No. T-24847 (Exhibit R ), TCT No. T-
24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de
Castillo' genther letter to Modesto N. Cervantes
stating that she and her children refused to
comply with his demands (Exhibit V-2);
h) That from at least the months of October,
November and December 1970 and January
1971, Modesto N. Cervantes was the Vice-
President of Bormaheco, Inc. later President
thereof, and also he is one of the Board of
Directors of PM Parts; on the other hand, Atty.
Martin M. De Guzman was the legal counsel of
Bormaheco, Inc., later Executive Vice-President
thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM
Parts; that Modesto N. Cervantes served later on
as President of PM Parts, and that Atty. de
Guzman was retained by Insurance Corporation
of the Philippines specifically for foreclosure
purposes only;
i) Defendant Bormaheco, Inc. on November 25,
1970 sold to Slobec Realty and Development,
Inc., represented by Santiago Rivera, President,
one (1) unit Caterpillar Tractor D-7 with Serial No.
281114 evidenced by a contract marked Exhibit J
and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-
defendant ICP was likewise secured by an
Agreement with Counter-Guaranty with Real
Estate Mortgage executed by Slobec Realty &
Development, Inc., Mauricia Castillo Meer,
Buenaflor Castillo, Bertilla Castillo, Victoria
Castillo, Marietta Castillo and Leovina Castillo, as
mortgagors in favor of ICP which document was
executed and ratified before notary public
Alberto R. Navoa of the City of Manila on October
24,1970;
k) That the property mortgaged consisted of four
(4) parcels of land situated in Lucena City and
covered by TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of
Lucena City;
l) That the tractor sold by defendant Bormaheco,
Inc. to Slobec Realty & Development, Inc. was
delivered to Bormaheco, Inc. on or about
October 2,1973, by Mr. Menandro Umali for
purposes of repair;
m) That in August 1976, PM Parts notified Mrs.
Mauricia Meer about its ownership and the
assignment of Mr. Petronilo Roque as caretaker
of the subject property;
n) That plaintiff and other heirs are harvest fruits
of the property (daranghita) which is worth no
less than Pl,000.00 per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal,
Same Rivera, in representation of the Slobec
Realty & Development Corporation executed in
favor of Bormaheco, Inc., represented by its Vice-
President Modesto N. Cervantes a Chattel
Mortgage concerning one unit model CAT D7
Caterpillar Crawler Tractor as described therein
as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per
Exhibit K) that Id document was superseded by
another chattel mortgage dated January 23, 1971
(Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the
Bormaheco, Inc., represented by its Vice-
President Modesto Cervantes and Slobec Realty
Corporation represented by Santiago Rivera
executed the sales agreement concerning the
sale of one (1) unit Model CAT D7 Caterpillar
Crawler Tractor as described therein for the
amount of P230,000.00 (per Exhibit J) which
document was superseded by the Sales
Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled
Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the
document entitled Sales Agreement (per Exhibit
J) that it was executed on 18 December 1970, it
appears in the notarial register of the notary
 public who notarized them that those two
documents were executed on 11 December
1970. The certified xerox copy of the notarial
register of Notary Public Guillermo Aragones
issued by the Bureau of Records Management is
hereto submitted as Exhibit BB That said chattel
mortgage was superseded by another document
dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty
Development Corporation, represented by
Santiago Rivera, received from Bormaheco, Inc.
one (1) tractor Caterpillar Model D-7 pursuant to
Invoice No. 33234 (Exhibits 9 and 9-A,
Bormaheco, Inc.) and delivery receipt No. 10368
(per Exhibits 10 and 10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de
Guzman, as counsel of Insurance Corporation of
the Philippines purchased at public auction for
said corporation the four (4) parcels of land
subject of tills case (per Exhibit L), and which
document was presented to the Register of
Deeds on 1 October 1973;
t) Although it appears that the realties in issue
has (sic) been sold by Insurance Corporation of
the Philippines in favor of PM Parts on 1 0 April
1975, Modesto N. Cervantes, formerly Vice-
President and now President of Bormaheco, Inc.,
sent his letter dated 9 August 1976 to Mauricia
Meer Vda. de Castillo (Exhibit V), demanding that
she and her children should vacate the premises;
u) That the Caterpillar Crawler Tractor Model CAT
D-7 which was received by Slobec Realty
Development Corporation was actually
reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer
Vda. de Castillo. The Castillo family are the owners of a parcel of
land located in Lucena City which was given as security for a loan
from the Development Bank of the Philippines. For their failure to
pay the amortization, foreclosure of the said property was about to
be initiated. This problem was made known to Santiago Rivera,
who proposed to them the conversion into subdivision of the four
(4) parcels of land adjacent to the mortgaged property to raise the
necessary fund. The Idea was accepted by the Castillo family and to
carry out the project, a Memorandum of Agreement (Exh. U p. 127,
Record) was executed by and between Slobec Realty and
Development, Inc., represented by its President Santiago Rivera
and the Castillo family. In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00
immediately after the execution of the agreement and to pay the
additional amount of P400,000.00 after the property has been
converted into a subdivision. Rivera, armed with the agreement,
Exhibit U , approached Mr. Modesto Cervantes, President of
defendant Bormaheco, and proposed to purchase from Bormaheco
two (2) tractors Model D-7 and D-8 Subsequently, a Sales
Agreement was executed on December 28,1970 (Exh. J, p. 22,
Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and
Development, Inc., represented by its President, Santiago Rivera,
executed a Sales Agreement over one unit of Caterpillar Tractor D-
7 with Serial No. 281114, as evidenced by the contract marked
Exhibit '16'. As shown by the contract, the price was P230,000.00
of which P50,000.00 was to constitute a down payment, and the
balance of P180,000.00 payable in eighteen monthly installments.
On the same date, Slobec, through Rivera, executed in favor of
Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said
equipment as security for the payment of the aforesaid balance of
P180,000.00. As further security of the aforementioned unpaid
balance, Slobec obtained from Insurance Corporation of the Phil. a
Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety
and Slobec as principal, in favor of Bormaheco, as borne out by
Exhibit '8' (p. 111, Record). The aforesaid surety bond was in turn
secured by an Agreement of Counter-Guaranty with Real Estate
Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president
of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo
Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and
Leovina Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In this
agreement, ICP guaranteed the obligation of Slobec with
Bormaheco in the amount of P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them the properties in
question, namely, four parcels of land covered by TCTs in the name
of the aforementioned mortgagors, namely TCT Nos. 13114, 13115,
13116 and 13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales
Agreement Exhibit '16', Slobec, represented by Rivera received
from Bormaheco the subject matter of the said Sales Agreement,
namely, the aforementioned tractor Caterpillar Model D-7 as
evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record)
and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p. 113). This
tractor was known by Rivera to be a reconditioned and repainted
one [Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the
Counter-Guaranty Agreement (Exh. 1), the properties of the
Castillos were foreclosed by ICP As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the Provincial
Sheriff of Lucena City and Transfer Certificates of Title over the
subject parcels of land were issued by the Register of Deeds of
Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-
23707 and T-23708 (Exhs. M to P, pp. 38-45). The mortgagors had
one (1) year from the date of the registration of the certificate of
sale, that is, until October 1, 1974, to redeem the property, but
they failed to do so. Consequently, ICP consolidated its ownership
over the subject parcels of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974, as shown in
Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real
Estate covering the subject properties was issued in favor of ICP
(Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to
Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4)
parcels of land and by virtue of said conveyance, PM Parts
transferred unto itself the titles over the lots in dispute so that said
parcels of land are now covered by TCT Nos. T-24846, T-24847, T-
24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto
Cervantes, sent a letter dated August 9,1976 addressed to plaintiff
Mrs. Mauricia Meer Castillo requesting her and her children to
vacate the subject property, who (Mrs. Castillo) in turn sent her
reply expressing her refusal to comply with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo,
particularly plaintiff Buenaflor M. Castillo Umali as the appointed
administratrix of the properties in question filed an action for
annulment of title before the then Court of First Instance of Quezon
and docketed thereat as Civil Case No. 8085. Thereafter, they filed
an Amended Complaint on January 10, 1980 (p. 444, Record). On
July 20, 1983, plaintiffs filed their Second Amended Complaint,
impleading Santiago M. Rivera as a party plaintiff (p. 706, Record).
They contended that all the aforementioned transactions starting
with the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of
Authority to Sell, Sale and the Affidavit of Consolidation of
Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes
J, K, L and M) are void for being entered into in fraud and without
the consent and approval of the Court of First Instance of Quezon,
(Branch IX) before whom the administration proceedings has been
pending. Plaintiffs pray that the four (4) parcels of land subject
hereof be declared as owned by the estate of the late Felipe Castillo
and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846,
24847, 24848 and 24849 as well as those appearing as
encumbrances at the back of the certificates of title mentioned be
declared as a nullity and defendants to pay damages and attorney's
fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the
complaint and alleged, by way of affirmative and special defenses
that the complaint did not state facts sufficient to state a cause of
action against defendants; that plaintiffs are not entitled to the
reliefs demanded; that plaintiffs are estopped or precluded from
asserting the matters set forth in the Complaint; that plaintiffs are
guilty of laches in not asserting their alleged right in due time; that
defendant PM Parts is an innocent purchaser for value and relied
on the face of the title before it bought the subject property (p.
744, Record). 3
After trial, the court a quo rendered judgment, with the following
decretal portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs
and against the defendants, declaring the following documents:
Agreement of Counter-Guaranty with Chattel-
Real Estate Mortgage dated October 24,1970
(Exhibit 1);
Sales Agreement dated December 28, 1970
(Exhibit J)
Chattel Mortgage dated November 25, 1970
(Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit
16);
Chattel Mortgage dated January 23, 1971 (Exhibit
17);
Certificate of Sale dated September 28, 1973
executed by the Provincial Sheriff of Quezon in
favor of Insurance Corporation of the Philippines
(Exhibit L);
null and void for being fictitious, spurious and without
consideration. Consequently, Transfer Certificates of Title Nos. T
23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P)
 issued in the name of Insurance Corporation of the Philippines, are
likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of
defendant Philippine Machinery Parts Manufacturing Co., Inc., over
Id four (4) parcels of land and Transfer Certificates of Title Nos. T
24846, T-24847, T-24848 and T-24849 subsequently issued by
virtue of said sale in the name of Philippine Machinery Parts
Manufacturing Co., Inc., are similarly declared null and void, and
the Register of Deeds of Lucena City is hereby directed to issue, in
lieu thereof, transfer certificates of title in the names of the
plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs
moral damages in the sum of P10,000.00, exemplary damages in
the amount of P5,000.00, and actual litigation expenses in the sum
of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and
severally, the sum of P10,000.00 for and as attomey's fees. With
costs against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted decision of the trial
court and rendered the judgment subject of this petition-
Petitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between
petitioner Rivera with Cervantes are all fair and regular and
therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based on
erroneous conclusions of facts, erroneous presumptions not
supported by the evidence on record but also, holding valid and
binding the supposed payment by ICP of its obligation to
Bormaheco, despite the fact that the surety bond issued it had
already expired when it opted to foreclose extrajudically the
mortgage executed by the petitioners;
3. In aside the finding of the lower court that there was necessity
to pierce the veil of corporate existence; and
4. In reversing the decision of the lower court of affirming the
same 5
I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as
President of Slobec Realty and Development Company (Slobec) and Mode Cervantes,
as Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel
Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun
and void. Such allegation is premised primarily on the fact that contrary to the
stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made any
advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the
tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated in
the Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage was executed on October 24, 1970, to secure the
obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage
had not as yet been executed, aside from the fact that it was Bormaheco, and not
Rivera, which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned
error hinges purely on questions of fact. Respondent Court of Appeals made several
findings to the effect that the questioned documents are valid and binding upon the
parties, that there was no fraud employed by private respondents in the execution
thereof, and that, contrary to petitioners' allegation, the evidence on record reveals
that petitioners had every intention to be bound by their undertakings in the various
transactions had with private respondents. It is a general rule in this jurisdiction that
findings of fact of said appellate court are final and conclusive and, thus, binding on
this Court in the absence of sufficient and convincing proof, inter alia, that the former
acted with grave abuse of discretion. Under the circumstances, we find no compelling
reason to deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the
Sales Agreement, which clearly constitutes a breach of the contract, cannot be
availed of by the guilty party to justify and support an action for the declaration of
nullity of the contract. Equity and fair play dictates that one who commits a breach
of his contract may not seek refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity
of petitioners' contention that the contracts entered into by the parties are either
absolutely simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the
parties do not intend to be bound at all by the same. 9 The basic characteristic of this
type of simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the juridical
situation of the parties. The subsequent act of Rivera in receiving and making use of
the tractor subject matter of the Sales Agreement and Chattel Mortgage, and the
simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the
execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be bound by these
contracts. The occurrence of these series of transactions between petitioners and
private respondents is a strong indication that the parties actually intended, or at
least expected, to exact fulfillment of their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to
show that they were induced to enter into a contract through the insidious words
and machinations of private respondents without which the former would not have
executed such contract. To set aside a document solemnly executed and voluntarily
delivered, the proof of fraud must be clear and convincing. 10 We are not persuaded
that such quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued
by ICP does not per se affect the validity of the bond. Petitioners themselves admit
in their present petition that Rivera executed a Deed of Sale with Right of Repurchase
of his car in favor of Bormaheco and agreed that a part of the proceeds thereof shall
be used to pay the premium for the bond. 11 In effect, Bormaheco accepted the
payment of the premium as an agent of ICP The execution of the deed of sale with a
right of repurchase in favor of Bormaheco under such circumstances sufficiently
establishes the fact that Rivera recognized Bormaheco as an agent of ICP Such
payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from
questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders of the corporation will be considered as
the corporation, that is, liability will attach directly to the officers and
stockholders. 12 The doctrine applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is
made as a shield to confuse the legitimate issues 14 or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of
Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in
causing the foreclosure and subsequent sale of the real properties belonging to
petitioners While we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked by
petitioners in granting the relief sought. It is our considered opinion that piercing the
veil of corporate entity is not the proper remedy in order that the foreclosure
proceeding may be declared a nullity under the circumstances obtaining in the legal
case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold
the officers and stockholders directly liable for a corporate debt or obligation. In the
instant case, petitioners do not seek to impose a claim against the individual
members of the three corporations involved; on the contrary, it is these corporations
which desire to enforce an alleged right against petitioners. Assuming that
petitioners were indeed defrauded by private respondents in the foreclosure of the
mortgaged properties, this fact alone is not, under the circumstances, sufficient to
justify the piercing of the corporate fiction, since petitioners do not intend to hold
the officers and/or members of respondent corporations personally liable therefor.
Petitioners are merely seeking the declaration of the nullity of the foreclosure sale,
which relief may be obtained without having to disregard the aforesaid corporate
fiction attaching to respondent corporations. Secondly, petitioners failed to establish
by clear and convincing evidence that private respondents were purposely formed
and operated, and thereafter transacted with petitioners, with the sole intention of
defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate
personalities, 16 absent sufficient showing that the corporate entity was purposely
used as a shield to defraud creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the
mortgaged properties by ICP Petitioners argue that the foreclosure proceedings
should be declared null and void for two reasons, viz.: (1) no written notice was
furnished by Bormaheco to ICP anent the failure of Slobec in paying its obligation
with the former, plus the fact that no receipt was presented to show the amount
allegedly paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the
mortgage, the liability of ICP under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP
of the real estate mortgage was in the exercise of a legal right, We
agree with the appellants that the foreclosure proceedings
instituted by the ICP was in the exercise of a legal right. First, ICP
has in its favor the legal presumption that it had indemnified
Bormaheco by reason of Slobec's default in the payment of its
obligation under the Sales Agreement, especially because
Bormaheco consented to ICPs foreclosure of the mortgage. This
presumption is in consonance with pars. R and Q Section 5, Rule 5,
* New Rules of Court which provides that it is disputably presumed
that private transactions have been fair and regular. likewise, it is
disputably presumed that the ordinary course of business has been
followed: Second, ICP had the right to proceed at once to the
foreclosure of the mortgage as mandated by the provisions of Art.
2071 Civil Code for these further reasons: Slobec, the principal
debtor, was admittedly insolvent; Slobec's obligation becomes
demandable by reason of the expiration of the period of payment;
and its authorization to foreclose the mortgage upon Slobec's
default, which resulted in the accrual of ICPS liability to Bormaheco.
Third, the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the
real estate mortgage in the event of 'non-payment or non-
liquidation of the entire indebtedness or fraction thereof upon
maturity as stipulated in the contract'. This is a valid and binding
stipulation in the absence of showing that it is contrary to law,
morals, good customs, public order or public policy. (Art. 1306,
New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to
ICP which would have entitled Bormaheco to demand payment from ICP under the
suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein
ICP and Slobec undertook to guarantee the payment of the balance of P180,000.00
payable in eighteen (18) monthly installments on one unit of Model CAT D-7
Caterpillar Crawler Tractor, pertinently provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES,
under this BOND will expire Twelve (I 2) months from date hereof.
Furthermore, it is hereby agreed and understood that the
INSURANCE CORPORATION OF THE PHILIPPINES will not be liable
for any claim not presented in writing to the Corporation within
THIRTY (30) DAYS from the expiration of this BOND, and that the
obligee hereby waives his right to bring claim or file any action
against Surety and after the termination of one (1) year from the
time his cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on
the upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND
SHALL BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the
balance of P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The
Promissory Note executed by Slobec on even date in favor of Bormaheco further
provides that the obligation shall be payable on or before February 23, 1971 up to
July 23, 1972, and that non-payment of any of the installments when due shall make
the entire obligation immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted
to the obligation expressly assumed therein. We have repeatedly held that the extent
of a surety's liability is determined only by the clause of the contract of suretyship as
well as the conditions stated in the bond. It cannot be extended by implication
beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the
contract, a demand or notice of default is not required to fix the surety's
liability. 23 Hence, where the contract of suretyship stipulates that notice of the
principal's default be given to the surety, generally the failure to comply with the
condition will prevent recovery from the surety. There are certain instances,
however, when failure to comply with the condition will not extinguish the surety's
liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there
is excuse or provision in the suretyship contract exempting the surety for liability
therefor, or where the surety already has knowledge or is chargeable with knowledge
of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be
liable for any claim not filed in writing within thirty (30) days from the expiration of
the bond. In its decision dated May 25 1987, the court a quocategorically stated that
'(n)o evidence was presented to show that Bormaheco demanded payment from ICP
nor was there any action taken by Bormaheco on the bond posted by ICP to
guarantee the payment of plaintiffs obligation. There is nothing in the records of the
proceedings to show that ICP indemnified Bormaheco for the failure of the plaintiffs
to pay their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in
writing about Slobec's supposed default released ICP from liability under its surety
bond. Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under the
surety bond. It cannot claim exemption from the required written notice since its
case does not fall under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by
any documentary evidence. Section 1, Rule 131 of the Rules of Court provides that
the burden of evidence lies with the party who asserts an affirmative allegation. Since
ICP failed to duly prove the fact of payment, the disputable presumption that private
transactions have been fair and regular, as erroneously relied upon by respondent
Court of Appeals, finds no application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is
liable to the full extent thereof, such liability is strictly limited to that assumed by its
terms. 26 While ordinarily the termination of a surety's liability is governed by the
provisions of the contract of suretyship, where the obligation of a surety is, under the
terms of the bond, to terminate at a specified time, his obligation cannot be enlarged
by an unauthorized extension thereof. 27This is an exception to the general rule that
the obligation of the surety continues for the same period as that of the principal
debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal
obligation, as where the principal debtor is required to make payment by
installments. 29 In the case at bar, the surety bond issued by ICP was to expire on
January 22, 1972, twelve (1 2) months from its effectivity date, whereas Slobec's
installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed
the payment by Slobec of the balance of P180,000.00, such guaranty was valid only
for and within twelve (1 2) months from the date of effectivity of the surety bond, or
until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the
liability of Slobec became an unsecured obligation. The default of Slobec during this
period cannot be a valid basis for the exercise of the right to foreclose by ICP since
its surety contract had already been terminated. Besides, the liability of ICP was
extinguished when Bormaheco failed to file a written claim against it within thirty
(30) days from the expiration of the surety bond. Consequently, the foreclosure of
the mortgage, after the expiration of the surety bond under which ICP as surety has
not incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal
as collateral surety for his personal indemnity, to which he may resort only after
payment by himself, until he has paid something as such guarantor neither he nor
the creditor can resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that
it is being issued for and in consideration of the obligations assumed by the
Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010
in behalf of Slobec Realty Development Corporation and in favor of Bormaheco,
Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is issued for the
personal indemnity of ICP Considering that the fact of payment by ICP has never been
established, it follows, pursuant to the doctrine above adverted to, that ICP cannot
foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore,
it acquired a valid title over the subject properties. The submission is without merit
and the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not
applicable in this case. However, its inapplicability has no bearing on the good faith
or bad faith of private respondent PM Parts. It must be noted that Modesto N.
Cervantes served as Vice-President of Bormaheco and, later, as President of PM
Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the
aforesaid several transactions executed between Bormaheco and petitioners. In
addition, Atty. Martin de Guzman, who is the Executive Vice-President of Bormaheco,
was also the legal counsel of ICP and PM Parts. These facts were admitted without
qualification in the stipulation of facts submitted by the parties before the trial court.
Hence, the defense of good faith may not be resorted to by private respondent PM
Parts which is charged with knowledge of the true relations existing between
Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title
issued in its name, as well as the certificate of sale, must be declared null and void
since they cannot be considered altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and
SET ASIDE, and judgment is hereby rendered declaring the following as null and void:
(1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff
of Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer
Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name
of the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation
of the Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of
the four (4) parcels of land covered by the aforesaid certificates of title; and (4)
Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849
subsequently issued by virtue of said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates
of Title Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine
Machinery Parts Manufacturing Co., Inc. and to issue in lieu thereof the
corresponding transfer certificates of title in the name of herein petitioners, except
Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal
remedies as may be available to respondent Bormaheco, Inc. against herein
petitioners.
SO ORDERED.
Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.
Sarmiento, J., is on leave.
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto
Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve,
Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos, respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where
badges of fraud exist; where public convenience is defeated; where a wrong is sought
to be justified 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 mere
association of persons and, in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporation's
subsidiary liability for damages, the corporation may not be heard to say that it has
a personality separate and distinct from the other corporation. The piercing of the
corporate veil comes into play.
This special civil action ostensibly raises the question of whether the 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 sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355
Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business.
Private respondents were employed by said company as laborers, carpenters and
riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was
stated in the individual notices that their contracts of employment had expired and
the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the
termination of private respondent's employment, the project in which they were
hired had not yet been finished and completed. Petitioner had to engage the services
of sub-contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-
month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or
three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed
the motion for reconsideration filed by petitioner on the ground that the said
decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the
finding that private respondents' back wages amounted to P199,800.00.3
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 to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate private
respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ
of execution on petitioner through the security guard on duty but the service was
refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc.
(HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon.4
The said special sheriff recommended that a "break-open order" be issued to enable
him to enter petitioner's premises so that he could proceed with the public auction
sale of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party 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.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-
Open Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended
its business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages
which petitioner and HPPI may suffer because of the issuance of the break-open
order.
In support of their claim against HPPI, private respondents presented 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, submitted by HPPI to the Securities and Exchange Virgilio O. Casino Corporate Secretary
Commission. 4. Principal Office
The General Information Sheet submitted by the petitioner revealed the following: 355 Maysan Road, Valenzuela, Metro Manila.6
1. Breakdown of Subscribed Capital On February 1, 1990, HPPI filed an Opposition to private respondents' motion for
Name of Stockholder Amount Subscribed issuance of a break-open order, contending that HPPI is a corporation which is
HPPI P 6,999,500.00 separate and distinct from petitioner. HPPI also alleged that the two corporations are
Antonio W. Lim 2,900,000.00 engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while
Dennis S. Cuyegkeng 300.00 petitioner was then engaged in construction.
Elisa C. Lim 100,000.00 On March 2, 1990, the Labor Arbiter issued an Order which denied private
Teodulo R. Dino 100.00 respondents' motion for break-open order.
Virgilio O. Casino 100.00 Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside
2. Board of Directors the order of the Labor Arbiter, issued a break-open order and directed private
Antonio W. Lim Chairman respondents to file a bond. Thereafter, it directed the sheriff to proceed with the
Dennis S. Cuyegkeng Member auction sale of the properties already levied upon. It dismissed the third-party claim
Elisa C. Lim Member for lack of merit.
Teodulo R. Dino Member Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Virgilio O. Casino Member Resolution, dated December 3, 1992.
3. Corporate Officers Hence, the resort to the present petition.
Antonio W. Lim President Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered
Dennis S. Cuyegkeng Assistant to the President the execution of its decision despite a third-party claim on the levied property.
Elisa O. Lim Treasurer Petitioner further contends, that the doctrine of piercing the corporate veil should
Virgilio O. Casino Corporate Secretary not have been applied, in this case, in the absence of any showing that it created HPPI
4. Principal Office in order to evade its liability to private respondents. It also contends that HPPI is
355 Maysan Road engaged in the manufacture and sale of steel, concrete and iron pipes, a business
Valenzuela, Metro Manila.5 which is distinct and separate from petitioner's construction business. Hence, it is of
On the other hand, the General Information Sheet of HPPI revealed the following: no consequence that petitioner and HPPI shared the same premises, the same
1. Breakdown of Subscribed Capital President and the same set of officers and subscribers. 7
Name of Stockholder Amount Subscribed We find petitioner's contention to be unmeritorious.
Antonio W. Lim P 400,000.00 It is a fundamental principle of corporation law that a corporation is an entity
Elisa C. Lim 57,700.00 separate and distinct from its stockholders and from other corporations to which it
AWL Trading 455,000.00 may be connected.8 But, this separate and distinct personality of a corporation is
Dennis S. Cuyegkeng 40,100.00 merely a fiction created by law for convenience and to promote justice. 9 So, when
Teodulo R. Dino 100.00 the notion of separate juridical personality is used to defeat public convenience,
Virgilio O. Casino 100.00 justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
2. Board of Directors laws,10 this separate personality of the corporation may be disregarded or the veil of
Antonio W. Lim Chairman corporate fiction pierced.11 This is true likewise when the corporation is merely an
Elisa C. Lim Member adjunct, a business conduit or an alter ego of another corporation. 12
Dennis S. Cuyegkeng Member The conditions under which the juridical entity may be disregarded vary according to
Virgilio O. Casino Member the peculiar facts and circumstances of each case. No hard and fast rule can be
Teodulo R. Dino Member accurately laid down, but certainly, there are some probative factors of identity that
3. Corporate Officers will justify the application of the doctrine of piercing the corporate veil, to wit:
Antonio W. Lim President 1. Stock ownership by one or common ownership of both
Dennis S. Cuyegkeng Assistant to the President corporations.
Elisa C. Lim Treasurer 2. Identity of directors and officers.
 3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the "instrumentality rule" which the courts have applied
in disregarding the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its
affairs are 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 disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury
or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act in contravention of
plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to that operation.14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casiño
as the corporate secretary of both corporations. It would also not
be amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and
substantially the same subscribers.
From the foregoing, it appears that, among other things, the
respondent (herein petitioner) and the third-party claimant shared
the same address and/or premises. Under this circumstances, (sic)
it cannot be said that the property levied upon by the sheriff were
not of respondents.16
Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations, 17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and
Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the next
day, July 1, 1957, up 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 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 the same business. This
"avoiding-the-liability" scheme is very patent, considering that 90%
of the subscribed shares of stock of the Claparols Steel Corporation
(the second corporation) was owned by respondent . . . Claparols
himself, and all the assets of the dissolved Claparols Steel and Nail
plant were turned over to the emerging Claparols Steel
Corporation.
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 evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but to
apply for a break-open order after the third-party claim of HPPI was dismissed for
lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC
Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or
prohibit the Sheriff or his representative entry to the place where
the property subject of execution is located or kept, the judgment
 creditor may apply to the Commission or Labor Arbiter concerned
for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due
notice and hearing were complied with. Petitioner and the third-party claimant were
given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-
judicial agencies supported by substantial evidence are binding on this Court and are
entitled to great respect, in the absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC,
dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.
G.R. No. L-20451 December 28, 1964
R. F. SUGAY and CO., INC., petitioner,
vs.
PABLO C. REYES, CESAR CURATA, PACIFIC PRODUCTS, INC., and WORKMEN'S
COMPENSATION COMMISSION, respondents.
G. S. Mangay for petitioner.
Ross, Selph & Carrascoso and Reyes & Flores for respondent Pacific Products, Inc.
R. P. Decena for respondent Cesar Curata
Villavieja & Martinez for respondent Workmen's Compensation Commission.
PAREDES, J.:
This is a Workmen's Compensation Case, the compensability of the injuries suffered
by the claimants, Pablo C. Reyes, and Cesar Curata, being admitted by all the parties.
The only issue requiring determination is, who among the three (3) persons (Romulo
Sugay, R. F. Sugay & Co., Inc., and Pacific Products, Inc.) is the statutory employer of
said claimants and who should be liable for their disability compensation.
In the evening of January 13, 1961, respondents Pablo Reyes and Cesar Curata
suffered burns of various degrees, while painting the building of the Pacific Products,
Inc., caused by a fire of accidental origin, resulting in their temporary disability from
work. For said injuries they filed claims for disability and medical expenses against
the R. F. Sugay & Co., Inc., Romulo F. Sugay and the Pacific Products, Inc. The R. F.
Sugay & Co., Inc., answered the claim, alleging that the corporation was not the
employer of the claimants but it was the Pacific Products, Inc., which had an
administration and supervision job contract with Romulo F. Sugay, who, aside from
being the President of the corporation, bearing his name, had also a business of his
own, distinct and separate from said corporation; and that the Regional Office of the
Department of Labor had no jurisdiction over the subject matter. Romulo F. Sugay
did not file an Answer, but voluntarily appeared during the hearing and disclaimed
liability. The Answer of Pacific Products, Inc., contained the customary admissions
and denials, and averred that its business was mainly in the manufacture and sale of
lacquer and other painting materials. As defenses, it stated that the claimants were
the employees of respondents R. F. Sugay Construction Co., Inc., and/or Romulo F.
Sugay that as a result of the, fire, it incurred a loss of P2,000,000.00, occasioned by
the employment of incompetent men in the painting of its factory by the Sugays.
The Hearing Officer dismissed the case with respect, to R. F. Sugay & Co., Inc., and
Romulo F. Sugay "for want of employer-employee relationship with the claimants,
either directly or through an independent contractor" declaring:
WHEREFORE, the Pacific Products, Inc., is hereby adjudged to pay through
this office, the following benefits to the claimants as follows:
1. To PABLO C. REYES, the sum of P490.05 as temporary total disability
benefits plus P44.53 for permanent partial disability of index finger plus
P40.20 for the middle finger plus P49.48 for the ring finger; plus hospital and
medical expenses of P659.70 or a total of ONE THOUSAND TWO HUNDRED
EIGHTY-THREE and 96/100 PESOS (P1,283.96) as total benefits under the
Act.
2. To CESAR CURATA, the sum of P415.80 as temporary total disability
compensation plus P477.75 and P273.00 for impairment of his right and left
feet plus P4,459.96 as medical and hospital expenses or a total of FIVE
THOUSAND SIX HUNDRED TWENTY-FIVE and 80/100 PESOS (P5,625.80) as
total benefits under the Act.
3. To pay to this office the sum of EIGHTEEN PESOS (P18.00) as fees for the
two claims pursuant to Section 55 of the Act.
The respondents, ROMULO F. SUGAY and R. F. SUGAY & CO., INC., should be
as they are hereby exempted from any liability for lack of employer-
employee relationship with the claimants.
Pacific Products, Inc., appealed the above decision to the Commission. On August 24,
1962, Commissioner Jose Sanchez rendered judgment affirming the compensability
of the injuries and the amounts due them, but modified the decision of the Hearing
Officer, by finding that R. F. Sugay & Co., Inc., was the statutory employer of the
claimants and should be liable to them. Pacific Products, Inc., was absolved from all
responsibility. In the decision, the Associate Commissioner, made the following
findings and conclusions, to wit:
xxx xxx xxx
A careful study of the evidence leads us to the conclusion that, although the
accident happened within the premises of the respondent Pacific Products,
Inc., the responsibility for the payment of the compensation due in this case
should be lodged somewhere else. In the first place, even the evidence
presented by the claimants and the other two respondents clearly
established the fact that the accident occurred while the claimant, were
painting the Office of Pacific Products Inc., an undertaking which had
nothing to do with the business of the latter. It was fairly shown that Pacific
Products, Inc., was engaged in the manufacture and sale of paints, varnish
and other allied products, and, therefore, the work which was then being
undertaken in its office at the time of the accident has nothing to do with
the nature of its business. The records disclose that the injured painter were
hired, through an intermediary, by R. F. Sugay & Co., which was purposely
established "to engage itself in the constructions, repairs, remodelling of all
kinds of houses, residences, edifices and all such other buildings and all kinds
of construction works allied thereto." (Exh. "11", Articles of Incorporation of
R. F. Sugay & Co., Inc., page 241 Records of the case.)
xxx xxx xxx
The evidence adduced by the parties indicates rather clearly that, except for
the fact that the Pacific Products, Inc. supplied the paint, it did not exercise
any of the above-enumerated powers. The claimants were hired by one
Rodolfo Babatid pursuant to the instruction received by the latter from
Romulo Sugay. They were paid by Eduardo Sugay, brother of Romulo and
Secretary of R. F. Sugay & Co., and were under the control of these persons
during the time they were painting the office of Pacific Products, Inc.
Following the rulings enunciated in the abovecited decisions of the Supreme
 Court.1 we are constrained to disagree with the Hearing Officer's decision in concurred in by the Commission en banc are fully supported by the evidence on
so far as it held that respondent Pacific Products, Inc. should be solely record which clearly points out that R. F. Sugay & Co., is the statutory employer of
responsible for the payment of the compensation he awarded in favor of the claimants. The decisive elements showing that it is the employer, are present,
the claimants. Neither can we see the reason of the Hearing Officer in such as selection and engagement; payment of wages; power of dismissal, and
ordering said respondent to pay the compensation in this case after ruling control (Viaña vs. Alejo-Alagadan, et al., May 31, 1956). These powers were lodged
categorically that "the herein claimants were casual employees of Pacific in R. F. Sugay & Co. On this very score alone, the petition for review should be
Products, Inc." A casual employee,' by the way, is one "whose employment dismissed.
is purely casual and is not for the purposes of the occupation or business of There was a faint attempt by the petitioning corporation, to evade liability, by
the employer." (Section 39[b] Workmen's. Compensation Act, as amended.) advancing the theory that Romulo P. Sugay, its President, was the one who entered
xxx xxx xxx into a contract of administration and supervision for the painting of the factory of the
... In a situation like this, much weight should be given to the testimony of a Pacific Products, Inc., and making it appear that said Romulo F. Sugay acted as an
person who does not stand to lose or gain from the outcome of the agent of the Pacific Products, Inc., and as such, the latter should be made answerable
case. Rodolfo Babatid, who was presented by both the respondent Romulo to the compensation due to the claimants. We, however, agree with the Commission
Sugay and the claimants, swore on the witness stand that he has been for a that "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts
long time, an employee of the firm R. F. Sugay & Co. and that he hired the relating to employer-employee relationship." It is a legal truism that when the veil of
other painters pursuant to Sugay as president of said firm. This witness, and corporate fiction is made as a shield to perpetrate a fraud and/or confuse legitimate
the two claimants were in unison in declaring that they were paid by the issues (here, the relation of employer-employee), the same should be pierced. Verily
firm, thru its secretary Eduardo Sugay, who directly supervised them in their the R. F. Sugay & Co., Inc. is a business conduit of R. F. Sugay.
work. That the claimants were of the belief that they were hired by R. F. IN VIEW HEREOF, the writ is denied, and the judgment appealed from, is hereby
Sugay & Co., thru Mr. Babatid, is also shown by their declarations under oath affirmed, in all respects. Costs taxed against petitioner R. F. Sugay & Co., Inc., in both
that they were paid thru the company payroll; which they signed. ... . These instances.
two persons, as already adverted to above, expressed their honest belief Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala,
that they were connected with R. F. Sugay & Co., having been hired by one Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
who was known to be a trusted employee of said business establishment.
Under this set of facts it may be said that R. F. Sugay & Co., is now estopped
from denying any relationship with the claimants because, thru its
responsible officials, it made others believe that the painters hired by Mr.
Babatid were being employed by it. Without insinuating that the dual role
played by Romulo F. Sugay was intended to be used as a subterfuge of the
corporation to cloak the responsibilities of the corporation under his
presidency, we must state that such dual roles cannot be allowed to confuse
the facts relating to employer-employee relationships.
The Commission en banc, on September 19, 1962, denied the motion for
reconsideration stating that there was "nothing to warrant a modification much less
a reversal, of the decision sought to be reviewed." In the appeal of R. F. Sugay & Co.,
to this Court, it is insisted that Pacific Products, Inc. was the employer of the
claimants.
At the outset, We would wish to point out that this case is an appeal from the decision
of the Workmen's Compensation Commission. Needless to state, in this class of
proceedings, only questions of law should be raised, the findings of facts made by the
Commission, being conclusive and binding upon this Court. (Bernardo vs. Pascual, L-
13260, October 31, 1960.) Indeed, We are authorized to inquire into the facts, but
only when the conclusions thereupon are not supported by the evidence. In the case
at bar, however, We find that the findings of facts made by the Commissioner and
G.R. No. L-5677 May 25, 1953
LA CAMPANA FACTORY, INC., and TAN TONG doing business under the trial name
"LA CAMPANA GAUGAU PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE COURT OF
INDUSTRIAL RELATIONS, respondents.
Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V. Roxas for
petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged in the business
of buying and selling gaugau under the trade name La Campana Gaugau Packing with
an establishment in Binondo, Manila, which was later transferred to España
Extension, Quezon City. But on July 6, 1950, Tan Tong, with himself and members of
his family corporation known as La Campana Factory Co., Inc., with its principal office
located in the same place as that of La Campana Gaugau Packing.
About a year before the formation of the corporation, or on July 11, 1949, Tan Tong
had entered into a collective bargaining agreement with the Philippine Legion of
Organized Workers, known as PLOW for short, to which the union of Tan Tong's
employees headed by Manuel E. Sadde was then affiliated. Seceding, however, from
the PLOW, Tan Tong's employees later formed their own organization known
as Kaisahan Ng Mga Manggagawa Sa La Campana, one of the herein respondents,
and applied for registration in the Department of Labor as an independent entity.
Pending consideration of this application, the Department gave the new organization
legal standing by issuing it a permit as an affiliate to the Kalipunan Ng Mga
Manggagawa.
On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana, hereinafter to
be referred to as the respondent Kaisahan, which, as of that date, counted with 66
members — workers all of them of both La Campana Gaugau Packing and La
Campana Coffee Factory Co., Inc. — presented a demand for higher wages and more
privileges, the demand being addressed to La Campana Starch and Coffee Factory, by
which name they sought to designate, so it appears, the La Campana Gaugau Packing
and the La Campana Coffee Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the Conciliation Service of the
Department of Labor had given no result, the said Department certified the dispute
to the Court of Industrial Relations on July 17, 1951, the case being there docketed
as Case No. 584-V.
With the case already pending in the industrial court, the Secretary of Labor, on
September 5, 1951, revoked the Kalipunan Ng Mga Kaisahang
Manggagawa's permit as a labor union on the strength of information received that
it was dominated by subversive elements, and, in consequence, on the 20th of the
same month, also suspended the permit of its affiliate, the respondent Kaisahan.
We have it from the court's order of January 15, 1952, which forms one of the
annexes to the present petition, that following the revocation of the Kaisahan's
permit, "La Campana Gaugau and Coffee Factory" (obviously the combined name of
La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc,) and the PLOW,
which had been allowed to intervene as a party having an interest in the dispute, filed
separate motions for the dismissal of the case on the following grounds:
1. That the action is directed against two different entities with distinct
personalities, with "La Campana Starch Factory" and the "La Campana
Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory, Inc." are less than
thirty-one;
3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the Department of
Labor on September 5, 1951; and
4. That there is an existing valid contract between the respondent "La
Campana Gaugau Packing" and the intervenor PLOW, where-in the
petitioner's members are contracting parties bound by said contract.
Several hearings were held on the above motions, in the course of which ocular
inspections were also made, and on the basis of the evidence received and the facts
observed in the ocular inspections, the Court of Industrial Relations denied the said
motions in its order of January 14, 1952, because if found as a fact that:
A. While the coffee corporation is a family corporation with Mr. Tan Tong,
his wife, and children as the incorporations and stockhelders (Exhibit 1), the
La Campana Gaugau Packing is merely a business name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan Tong., propriety
and manager of the Ka Campana Gaugau Factory, leased a space of 200
square meters in the bodega housing the gaugau factory to his son Tan Keng
Lim, manager of the La Campana Coffee Factory. But the lease was executed
only on September 1, 1951, while the dispute between the parties was
pending before the Court.
C. There is only one entity La Campana Starch and Coffee Factory, as shown
by the signboard (Exhibit 1), the advertisement in the delivery trucks (Exhibit
I-1), the packages of gaugau(Exhibit K), and delivery forms (Exhibits J, J-1,
and J-2).
D. All the laborers working in the gaugau or in the coffee factory receive
their pay from the same person, the cashier, Miss Natividad Garcia,
secretary of Mr. Tan Tong; and they are transferred from the gaugau to the
coffee and vice-versa as the management so requires.
E. There has been only one payroll for the entire La Campana personnel and
only one person preparing the same — Miss Natividad Garcia, secretary of
Mr. Tan Tong. But after the case at bar was certified to this Court on July 17,
1951, the company began making separate payrolls for the coffee factory
(Exhibits M-2 and M-3, and for the gaugau factory (Exhibits O-2, O-3 and O-
4). It is to be noted that before July 21, 1951, the coffee payrolls all began
with number "41-Maria Villanueva" with 24 or more laborers (Exhibits M
and M-1), whereas beginning July 21, 1951, the payrolls for the coffee
 factory began with No. 1-Loreta Bernabe with only 14 laborers (Exhibits M-
2 and M-3).
F. During the ocular inspection made in the factory on August 26, 1951 the
Court has found the following:
In the ground floor and second floor of the gaugau factory there were
hundreds of bags of raw coffee behind the pile of gaugau sacks. There were
also women employees working paper wrappers for gaugau, and, in the
same place there were about 3,000 cans to be used as containers for coffee.
The Court found out also that there were 16 trucks used both for the
delivery of coffee and gaugau. To show that those trucks carried both coffee
and gaugau, the union president invited the Court to examine the contents
of delivery truck No. T-582 parked in a garage between the gaugau building
and the coffee factory, and upon examination, there were found inside the
said truck boxes of gaugau and cans of coffee,
and held that:
. . . there is only one management for the business of gaugau and coffee
with whom the laborers are dealing regarding their work. Hence, the filing
of action against the Ka Campana Starch and Coffee Factory is proper and
justified.
With regards to the alleged lack of personality, it is to be noted that before
the certification of the case to this Court on July 17, 1951, the
petitioner Kaisahan Ng Mga Manggagawa Sa La Campana, had a separate
permit from the Department of Labor. This permit was suspended on
September 30, 1951. (Exhibit M-Intervenor, page 55, of the record). It is not
true that, on July 17, 1951, when this case forwarded to this Court, the
petitioner's permit, as an independent union, had not yet been issued, for
the very Exhibit MM-Intervenor regarding the permit, conclusively shows
the preexistence of said permit. (Annex G.)
Their motion for reconsideration of the above order having been denied, Tan Tong
and La Campana Coffee Factory, Inc. (same as La Campana Coffee Factory Co., Inc.),
later joined by the PLOW, filed the present petition for certiorari on the grounds that
the Court of Industrial Relations had no jurisdiction to take cognizance of the case,
for the reason, according to them, "(1) that the petitioner La Campana Coffee
Factory, Inc. has only 14 employees, only 5 of whom are members of the respondent
union and therefore the absence of the jurisdictional number (30) as provided by
sections 1 and 4 of Commonwealth Act No. 103; and, (2) that the suspension of
respondent union's permit by the Secretary of Labor has the effect of taking away
the union's right to collective bargaining under section 2 of Commonwealth Act No.
213 and consequently, its personality to sue for ad in behalf of its members."
As to the first ground, petitioners obviously do not question the fact that the number
of employees of the La Campana Gaugau Packing involved in the case is more than
the jurisdictional number (31) required bylaw, but they do contend that the industrial
court has no jurisdiction to try the case as against La Campana Coffee Factory, Inc.
because the latter has allegedly only 14 laborers and only of these are members of
the respondent Kaisahan. This contention loses force when it is noted that, as found
by the industrial court — and this finding is conclusive upon us — La Campana Gaugau
Packing and La Campana Coffee Factory Co. Inc., are operating under one single
management, that is, as one business though with two trade names. True, the coffee
factory is a corporation and, by legal fiction, an entity existing separate and apart fro
the persons composing it, that is, Tan Tong and his family. But it is settled that this
fiction of law, which has been introduced as a matter of convenience and to subserve
the ends of justice cannot be invoked to further an end subversive of that purpose.
Disregarding Corporate Entity. — The doctrine that a corporation is a legal
entity existing separate and apart from the person composing it is a legal
theory introduced for purposes of convenience and to subserve the ends of
justice. The concept cannot, therefore, be extended to a point beyond its
reason and policy, and when invoked in support of an end subversive of this
policy, will be disregarded by the courts. Thus, in an appropriate case and in
furtherance of the ends of justice, a corporation and the individual or
individuals owning all its stocks and assets will be treated as identical, the
corporate entity being disregarded where used as a cloak or cover for fraud
or illegality. (13 Am. Jur., 160-161.)
. . . A subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be regarded
as identical with the parent corporation, especially if the stockholders or
officers of the two corporations are substantially the same or their system
of operation unified. (Ibid. 162; see Annotation 1 A. L. R. 612, s. 34 A. L. R.
599.)
In the present case Tan Tong appears to be the owner of the gaugau factory. And the
coffee factory, though an incorporated business, is in reality owned exclusively by
Tan Tong and his family. As found by the Court of industrial Relations, the two
factories have but one office, one management and one payroll, except after July 17,
the day the case was certified to the Court of Industrial Relations, when the person
who was discharging the office of cashier for both branches of the business began
preparing separate payrolls for the two. And above all, it should not be overlooked
that, as also found by the industrial court, the laborers of the gaugau factory and the
coffee factory were interchangeable, that is, the laborers from the gaugau factory
were sometimes transferred to the coffee factory and vice-versa. In view of all these,
the attempt to make the two factories appears as two separate businesses, when in
reality they are but one, is but a device to defeat the ends of the law (the Act
governing capital and labor relations) and should not be permitted to prevail.
The second point raised by petitioners is likewise with-out merit. In the first place,
there being more than 30 laborers involved and the Secretary of Labor having
certified the dispute to the Court of Industrial Relations, that court duly acquired
jurisdiction over the case (International Oil Factory vs. NLU, Inc. 73 Phil., 401; section
4, C. A. 103). This jurisdiction was not when the Department of Labor suspended the
permit of the respondent Kaisahan as a labor organization. For once jurisdiction is
acquired by the Court of Industrial Relations it is retained until the case is completely
decided. (Manila Hotel Employees Association vs. Manila Hotel Co. et al., 73 Phil.,
374.)
In view of the foregoing, the petition is denied, with costs against the petitioner.
G.R. No. L-13203 January 28, 1961
YUTIVO SONS HARDWARE COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax Appeals ordering
petitioner to pay to respondent Collector of Internal Revenue the sum of
P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth
quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54,
or a sum total of P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears
that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a
domestic corporation, organized under the laws of the Philippines, with principal
office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to
the last world war, in the importation and sale of hardware supplies and equipment.
After the liberation, it resumed its business and until June of 1946 bought a number
of cars and trucks from General Motors Overseas Corporation (hereafter referred to
as GM for short), an American corporation licensed to do business in the Philippines.
As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax
Code on the basis of its selling price to Yutivo. Said tax being collected only once on
original sales, Yutivo paid no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was
organized to engage in the business of selling cars, trucks and spare parts. Its original
authorized capital stock was P1,000,000 divided into 10,000 shares with a par value
of P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear to have been
subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng
Poh, and Washington Sycip. The first three named subscribers are brothers, being
sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons
of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in
the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by
Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous arrangement of selling exclusively to
SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the
latter, as importer, paid sales tax prescribed on the basis of its selling price to SM,
and since such sales tax, as already stated, is collected only once on original sales, SM
paid no sales tax on its sales to the public.
On November 7, 1950, after several months of investigation by revenue officers
started in July, 1948, the Collector of Internal Revenue made an assessment upon
Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus
surcharge covering the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were
the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to
the latter inasmuch as SM and Yutivo were one and the same corporation, the former
being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a reinvestigation of the case
having been made by the agents of the Bureau of Internal Revenue, the respondent
Collector in his letter dated November 15, 1952 countermanded his demand for sales
tax deficiency on the ground that "after several investigations conducted into the
matter no sufficient evidence could be gathered to sustain the assessment of this
Office based on the theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo." The withdrawal was subject, however, to the general power of
review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom
the papers relative to the case were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to the respondent Collector for
reinvestigation.
After another investigation, the respondent Collector, in a letter to petitioner dated
December 16, 1954, redetermined that the aforementioned tax assessment was
lawfully due the government and in addition assessed deficiency sales tax due from
petitioner for the four quarters of 1950; the respondents' last demand was in the
total sum of P2,215,809.27 detailed as follows:
Deficiency 75% Tota
Sales Tax Surcharge Due
Assessment (First) of November 7, 1950 for
deficiency sales Tax for the period from 3rd Qrtr
1947 to 4th Qrtr 1949 inclusive P1,031,296.60 P773,473.45 P1,8
Additional Assessment for period from 1st to 4th
Qrtr 1950, inclusive 234,880.13 176,160.09 411,
Total amount demanded per letter of December
16, 1954 P1,266,176.73 P949,632.54 P2,2
This second assessment was contested by the petitioner Yutivo before the Court of
Tax Appeals, alleging that there is no valid ground to disregard the corporate
personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that
assuming the separate personality of SM may be disregarded, the sales tax already
paid by Yutivo should first be deducted from the selling price of SM in computing the
sales tax due on each vehicle; and (3) that the surcharge has been erroneously
imposed by respondent. Finding against Yutivo and sustaining the respondent
Collector's theory that there was no legitimate or bona fide purpose in the
organization of SM — the apparent objective of its organization being to evade the
payment of taxes — and that it was owned (or the majority of the stocks thereof are
owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit,
instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge
Roman Umali not taking part — disregarded its separate corporate existence and on
April 27, 1957, rendered the decision now complained of. Of the two Judges who
signed the decision, one voted for the modification of the computation of the sales
tax as determined by the respondent Collector in his decision so as to give allowance
for the reduction of the tax already paid (resulting in the reduction of the assessment
to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The
dispositive part of the decision, however, affirmed the assessment made by the
Collector. Reconsideration of this decision having been denied, Yutivo brought the
case to this Court thru the present petition for review.
It is an elementary and fundamental principle of corporation law that a corporation
is an entity separate and distinct from its stockholders and from other corporation
petitions to which it may be connected. However, "when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime,"
the law will regard the corporation as an association of persons, or in the case of two
corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I
Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule
is that, when the corporation is the "mere alter ego or business conduit of a person,
it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule
that the Court of Tax Appeals was not justified in finding that SM was organized for
no other purpose than to defraud the Government of its lawful revenues. In the first
place, this corporation was organized in June, 1946 when it could not have caused
Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than
one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn
resold them to SM. During that period, it is not disputed that GM as importer, was
the one solely liable for sales taxes. Neither Yutivo or SM was subject to the sales
taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise
until July 1, 1947 when it became the importer and simply continued its practice of
selling to SM. The decision, therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the fact that there was no tax to
evade.
Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945
it was known that GM was preparing to leave the Philippines and terminate its
business of importing vehicles," the court below speculated that Yutivo anticipated
the withdrawal of GM from business in the Philippines in June, 1947. This
observation, which was made only in the resolution on the motion for
reconsideration, however, finds no basis in the record. On the other hand, GM had
been an importer of cars in the Philippines even before the war and had but recently
resumed its operation in the Philippines in 1946 under an ambitious plan to expand
its operation by establishing an assembly plant here, so that it could not have been
expected to make so drastic a turnabout of not merely abandoning the assembly
plant project but also totally ceasing to do business as an importer. Moreover, the
newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely
reported a rumored plan that GM would abandon the assembly plant project in the
Philippines. There was no mention of the cessation of business by GM which must
not be confused with the abandonment of the assembly plant project. Even as
respect the assembly plant, the newspaper clipping was quite explicit in saying that
the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost
a year after SM was organized.
At this juncture, it should be stated that the intention to minimize taxes, when used
in the context of fraud, must be proved to exist by clear and convincing evidence
amounting to more than mere preponderance, and cannot be justified by a mere
speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs.
U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509;
Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs.
Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F
(2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378;
National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA
316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law,
pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.)
Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining
Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under circumstance that
belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud
thru the use of pretenses and forbidden devices to lessen or defeat taxes. The
transactions between Yutivo and SM, however, have always been in the open,
embodied in private and public documents, constantly subject to inspection by the
tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and
trucks for Visayas and Mindanao, it merely continued the method of distribution that
it had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM,
such justification certainly ceased with the passage of Republic Act No. 594 on
February 16, 1951, governing payment of advance sales tax by the importer based on
the landed cost of the imported article, increased by mark-ups of 25%, 50%, and
100%, depending on whether the imported article is taxed under sections 186, 185
and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at
which the article is sold is immaterial to the amount of the sales tax. And yet after
the passage of that Act, SM continued to exist up to the present and operates as it
did many years past in the promotion and pursuit of the business purposes for which
it was organized.
In the third place, sections 184 to 186 of the said Code provides that the sales tax
shall be collected "once only on every original sale, barter, exchange . . , to be paid
by the manufacturer, producer or importer." The use of the word "original" and the
express provision that the tax was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this connection, it should be
stated that a taxpayer has the legal right to decrease the amount of what otherwise
would be his taxes or altogether avoid them by means which the law permits. (U.S.
vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs.
Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the
taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may,
therefore, perform an act that he honestly believes to be sufficient to exempt him
from taxes. He does not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held
that though an incorrect position in law had been taken by the corporation there was
no suppression of the facts, and a fraud penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the respondent Collector himself
showed a great deal of doubt or hesitancy as to the existence of fraud. He even
doubted the validity of his first assessment dated November 7, 1959. It must be
remembered that the fraud which respondent Collector imputed to Yutivo must be
related to its filing of sales tax returns of less taxes than were legally due. The
allegation of fraud, however, cannot be sustained without the showing that Yutivo,
in filing said returns, did so fully knowing that the taxes called for therein called for
therein were less than what were legally due. Considering that respondent Collector
himself with the aid of his legal staff, and after some two years of investigation and
duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were
correct — only to reverse himself after another two years — it would seem harsh and
unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax
returns were inaccurate.
On this point, one other consideration would show that the intent to save taxes could
not have existed in the minds of the organizers of SM. The sales tax imposed, in
theory and in practice, is passed on to the vendee, and is usually billed separately as
such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the
retail, the additional tax that would have been payable by it, could have been easily
passed off to the consumer, especially since the period covered by the assessment
was a "seller's market" due to the post-war scarcity up to late 1948, and the
imposition of controls in the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion
in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-
inclusion was explained to have been due to an inadvertent accounting omission, and
could hardly be considered as proof of willful channelling and fraudulent evasion of
sales tax. Mere understatement of tax in itself does not prove fraud. (James
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The
amount involved, moreover, is extremely small inducement for Yutivo to go thru all
the trouble of organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo,
which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-
719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was actually owned
and controlled by petitioner as to make it a mere subsidiary or branch of the latter
created for the purpose of selling the vehicles at retail and maintaining stores for
spare parts as well as service repair shops. It is not disputed that the petitioner, which
is engaged principally in hardware supplies and equipment, is completely controlled
by the Yutivo, Young or Yu family. The founders of the corporation are closely related
to each other either by blood or affinity, and most of its stockholders are members
of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by
the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its
incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in
five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and
Washington Sycip. The first three named subscribers are brothers, being the sons of
Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are
respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo.
According to the Articles of Incorporation of the said subscriptions, the amount of
P62,500 was paid by the aforenamed subscribers, but actually the said sum was
advanced by Yutivo. The additional subscriptions to the capital stock of SM and
subsequent transfers thereof were paid by Yutivo itself. The payments were made,
however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly advanced by Yutivo in payment
of the shares. Whether a charge was to be made against the accounts of the
subscribers or said subscribers were to subscribe shares appears to constitute a
unilateral act on the part of Yutivo, there being no showing that the former initiated
the subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was
Yutivo who undertook the subscription of shares, employing the persons named or
"charged" with corresponding account as nominal stockholders. Of course, Yu Khe
Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the principal officers and constituted
the majority of the Board of Directors of both Yutivo and SM, their subscriptions
could readily or easily be that of Yutivo's Moreover, these persons were related to
death other as brothers or first cousins. There was every reason for them to agree in
order to protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by
various person's but except Ng Sam Bak and David Sycip, "payments" thereof were
effected by merely debiting 'or charging the accounts of said stockholders and
crediting the corresponding amounts in favor of SM, without actually transferring
cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by
the mere unilateral act of Yutivo a accounts of the virtue of its control over the
individual persons charged, would necessarily exercise preferential rights and control
directly or indirectly, over the shares, it being the party which really undertook to pay
or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and in
behalf of Yutivo, so even conceding that the original subscribers were stockholders
bona fide Yutivo was at all times in control of the majority of the stock of SM and that
the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but
the transfers were made to their immediate relatives, either to their respective
spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were
transferred to immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes in stock
ownership in both corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin
and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in
both boards. All these, as observed by the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common ownership and interest in the two
corporations.
SM is under the management and control of Yutivo by virtue of a management
contract entered into between the two parties. In fact, the controlling majority of the
Board of Directors of Yutivo is also the controlling majority of the Board of Directors
of SM. At the same time the principal officers of both corporations are identical. In
addition both corporations have a common comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt
that by virtue of such control, the business, financial and management policies of
both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash
transactions. All cash assets of SM were handled by Yutivo and all cash transactions
of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM
including its branches were transmitted or transferred immediately and directly to
Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other
obligations incurred by SM are referred to Yutivo which in turn prepares the
corresponding disbursement vouchers and payments in relation there, the payment
being made out of the cash deposits of SM with Yutivo, if any, or in the absence
thereof which occurs generally, a corresponding charge is made against the account
of SM in Yutivo's books. The payments for and charges against SM are made by Yutivo
as a matter of course and without need of any further request, the latter would
advance all such cash requirements for the benefit of SM. Any and all payments and
cash vouchers are made on Yutivo stationery and made under authority of Yutivo's
corporate officers, without any copy thereof being furnished to SM. All detailed
records such as cash disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a summary record thereof
on the basis of information received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches
which are directly remitted to Yutivo, are placed in the custody and control of Yutivo,
resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's
control, the former's operations and existence became dependent upon the latter.
Consideration of various other circumstances, especially when taken together,
indicates that Yutivo treated SM merely as its department or adjunct. For one thing,
the accounting system maintained by Yutivo shows that it maintained a high degree
of control over SM accounts. All transactions between Yutivo and SM are recorded
and effected by mere debit or credit entries against the reciprocal account
maintained in their respective books of accounts and indicate the dependency of SM
as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or independently show
that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod,
Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home Office"
as shown by their letters of remittances or other correspondences. These
correspondences were actually received by Yutivo and the reference to Yutivo as the
head or home office is obvious from the fact that all cash collections of the SM's
branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use
forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made more patent by
the fact that arrastre conveying, and charges paid for the "operation of receiving,
loading or unloading" of imported cars and trucks on piers and wharves, were
charged against SM. Overtime charges for the unloading of cars and trucks as
requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise
charged against and treated as expenses of SM. If Yutivo were the importer, these
arrastre and overtime charges were Yutivo's expenses in importing goods and not
SM's. But since those charges were made against SM, it plainly appears that Yutivo
had sole authority to allocate its expenses even as against SM in the sense that the
latter is a mere adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the parties, the management fees
due from SM to Yutivo were taken up as expenses of SM and credited to the account
of Yutivo. If it were to be assumed that the two organizations are separate juridical
entities, the corresponding receipts or receivables should have been treated as
income on the part of Yutivo. But such management fees were recorded as "Reserve
for Bonus" and were therefore a liability reserve and not an income account. This
reserve for bonus were subsequently distributed directly to and credited in favor of
the employees and directors of Yutivo, thereby clearly showing that the management
fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and
actually extended all the credit to the latter not only in the form of starting capital
but also in the form of credits extended for the cars and vehicles allegedly sold by
Yutivo to SM as well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock were made in
advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds
of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and
directors common to it and SM, exercised full control over the cash funds, policies,
expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of
Tax Appeals correctly disregarded the technical defense of separate corporate entity
in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to
issue the disputed assessment by reason of prescription. The contention, in our
opinion, cannot be sustained. It will be noted that the first assessment was made on
November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding
returns filed by petitioner covering the said period was made at the earliest on
October 1, as regards the third quarter of 1947, so that it cannot be claimed that the
assessment was not made within the five-year period prescribed in section 331 of the
Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by
the Collector on insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject to the approval of
the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of
section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous
assessment of November 7, Collector countermanding the as 1950 was forwarded to
the Board of Tax Appeals through the Secretary of Finance but that official,
apparently disagreeing with the decision, sent it back for re-investigation.
Consequently, the assessment of November 7, 1950 cannot be considered to have
been finally withdrawn. That the assessment was subsequently reiterated in the
decision of respondent Collector on December 16, 1954 did not alter the fact that it
was made seasonably. In this connection, it would appear that a warrant of distraint
and levy had been issued on March 28, 1951 in relation with this case and by virtue
thereof the properties of Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up to the present, which
shows that the assessment of November 7, 1950 has always been valid and
subsisting.
Anent the deficiency sale tax for 1950, considering that the assessment thereof was
made on December 16, 1954, the same was assessed well within the prescribed five-
year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend
the prescriptive period on assessment. The argument is untenable, for, as already
seen, the assessment was never finally withdrawn, since it was not approved by the
Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to
act upon the assessment cannot be questioned, for he is expressly granted such
authority under section 9 of Executive Order No. 401-And under section 79 (c) of the
Revised Administrative Code, he has "direct control, direction and supervision over
all bureaus and offices under his jurisdiction and may, any provision of existing law
to the contrary not withstanding, repeal or modify the decision of the chief of said
Bureaus or offices when advisable in public interest."
It should here also be stated that the assessment in question was consistently
protested by petitioner, making several requests for reinvestigation thereof. Under
the circumstances, petitioner may be considered to have waived the defense of
prescription.
"Estoppel has been employed to prevent the application of the statute of
limitations against the government in certain instances in which the
taxpayer has taken some affirmative action to prevent the collection of the
tax within the statutory period. It is generally held that a taxpayer is
estopped to repudiate waivers of the statute of limitations upon which the
government relied. The cases frequently involve dissolved corporations. If
no waiver has been given, the cases usually show come conduct directed to
a postponement of collection, such, for example, as some variety of request
to apply an overassessment. The taxpayer has 'benefited' and 'is not in a
position to contest' his tax liability. A definite representation of implied
authority may be involved, and in many cases the taxpayer has received the
'benefit' of being saved from the inconvenience, if not hardship of
immediate collection. "
Conceivably even in these cases a fully informed Commissioner may err to
the sorrow of the revenues, but generally speaking, the cases present a
strong combination of equities against the taxpayer, and few will seriously
quarrel with their application of the doctrine of estoppel." (Mertens Law of
Federal Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es
involving an original assessment of more than P5,000 — refers only to compromises
and refunds of taxes, but not to total withdrawal of the assessment. The contention
is without merit. A careful examination of the provisions of both sections 8 and 9 of
Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein
is intended as a check or control upon the powers of the Collector of Internal Revenue
in respect to assessment and refunds of taxes. If it be conceded that a decision of the
Collector of Internal Revenue on partial remission of taxes is subject to review by the
Secretary of Finance and the Board of Tax Appeals, then with more reason should the
power of the Collector to withdraw totally an assessment be subject to such review.
We find merit, however, in petitioner's contention that the Court of Tax Appeals
erred in the imposition of the 5% fraud surcharge. As already shown in the early part
of this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge
should be added to the deficiency sales tax "in case a false or fraudulent return is
willfully made." Although the sales made by SM are in substance by Yutivo this does
not necessarily establish fraud nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943,
2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation
consisting of only two stockholders, to wit: Minnie Miller and her husband Louis
Miller. The only assets of third husband and wife corporation consisted of an
apartment building which had been acquired for a very low price at a judicial sale.
Louis Miller, the husband, who directed the company's business, verbally agreed to
sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of
$54,000.00, payable in various installments. He received $1,000.00 as down
payment. The sale of this property for the price mentioned would have netted the
corporation a handsome profit on which a large corporate income tax would have to
be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got
together for the execution of the document of sale, the Millers announced that their
attorney had called their attention to the large corporate tax which would have to be
paid if the sale was made by the corporation itself. So instead of proceeding with the
sale as planned, the Millers approved a resolution to declare a dividend to themselves
"payable in the assets of the corporation, in complete liquidation and surrender of
all the outstanding corporate stock." The building, which as above stated was the
only property of the corporation, was then transferred to Mr. and Mrs. Miller who in
turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms
as had been previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent Commissioner of
Internal Revenue reported no taxable gain as having been received from the sale of
its assets. The Millers, of course, reported a long term capital gain on the exchange
of their corporate stock with the corporate property. The Commissioner of Internal
Revenue contended that the liquidating dividend to stockholders had no purpose
other than that of tax avoidance and that, therefore, the sale by the Millers to the
Fines of the corporation's property was in substance a sale by the corporation itself,
for which the corporation is subject to the taxable profit thereon. In requiring the
corporation to pay the taxable profit on account of the sale, the Commissioner of
Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional
surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was for no other
purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co.,
and that, therefore, the said corporation should be liable for the assessed taxable
profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal
Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals
disapproved the fraud penalties, holding that an attempt to avoid a tax does not
necessarily establish fraud; that it is a settled principle that a taxpayer may diminish
his tax liability by means which the law permits; that if the petitioner, the Court
Holding Co., was of the opinion that the method by which it attempted to effect the
sale in question was legally sufficient to avoid the imposition of a tax upon it, its
adoption of that methods not subject to censure; and that in taking a position with
respect to a question of law, the substance of which was disclosed by the statement
indorsed on it return, it may not be said that that position was taken fraudulently.
We quote in full the pertinent portion of the decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the petitioner's failure to report
as income the taxable profit on the real estate sale was fraudulent and with
intent to evade the tax. The petitioner filed a reply denying fraud and
averring that the loss reported on its return was correct to the best of its
knowledge and belief. We think the respondent has not sustained the
burden of proving a fraudulent intent. We have concluded that the sale of
the petitioner's property was in substance a sale by the petitioner, and that
the liquidating dividend to stockholders had no purpose other than that of
tax avoidance. But the attempt to avoid tax does not necessarily establish
fraud. It is a settled principle that a taxpayer may diminish his liability by any
means which the law permits. United States v. Isham, 17 Wall. 496; Gregory
v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the
petitioner here was of the opinion that the method by which it attempted
to effect the sale in question was legally sufficient to avoid the imposition of
tax upon it, its adoption of that method is not subject to censure. Petitioner
took a position with respect to a question of law, the substance of which
was disclosed by the statement endorsed on its return. We can not say,
under the record before us, that that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the
sales tax was paid only once and on the original sales by the former and neither the
latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore,
honestly believed that the payment by it, as importer, of the sales tax was enough as
in the case of GM Consequently, in filing its return on the basis of its sales to SM and
not on those by the latter to the public, it cannot be said that Yutivo deliberately
made a false return for the purpose of defrauding the government of its revenues
which will justify the imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred in computing
the alleged deficiency sales tax on the selling price of SM without previously
deducting therefrom the sales tax due thereon. The sales tax provisions (sees.
184.186, Tax Code) impose a tax on original sales measured by "gross selling price"
or "gross value in money". These terms, as interpreted by the respondent Collector,
do not include the amount of the sales tax, if invoiced separately. Thus, General
Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which
implements sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the articles sold, bartered,
exchanged, transferred as the term is used in the aforecited sections
(sections 184, 185 and 186) of the National Internal Revenue Code, is the
total amount of money or its equivalent which the purchaser pays to the
vendor to receive or get the goods. However, if a manufacturer, producer,
or importer, in fixing the gross selling price of an article sold by him has
included an amount intended to cover the sales tax in the gross selling price
of the articles, the sales tax shall be based on the gross selling price less the
amount intended to cover the tax, if the same is billed to the purchaser as a
separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate em so as not
to pay a tax on the tax. — On sales made after he third quarter of 1939, the
amount intended to cover the sales tax must be billed to the purchaser as
separate items in the, invoices in order that the reduction thereof from the
gross ailing price may be allowed in the computation of the merchants'
percentage tax on the sales. Unless billed to the purchaser as a separate
item in the invoice, the amounts intended to cover the sales tax shall be
considered as part of the gross selling price of the articles sold, and
 deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall
Code, Annotated, Vol. II, pp. 52-53.) constitute a quorum, and the concurrence of two judges shall be necessary to
Yutivo complied with the above circulars on its sales to SM, and as separately billed, promulgate decision thereof. . . . " It is on record that the present case was heard by
the sales taxes did not form part of the "gross selling price" as the measure of the two judges of the lower court. And while Judge Nable expressed his opinion on the
tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to issue of whether or not the amount of the sales tax should be excluded from the
SM General Circulars Nos. 431 and 440 should be deemed to have been complied. gross selling price in computing the deficiency sales tax due from the petitioner, the
Respondent Collector's method of computation, as opined by Judge Nable in the opinion, apparently, is merely an expression of his general or "private sentiment" on
decision complained of — the particular issue, for he concurred the dispositive part of the decision. At any rate,
. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. assuming that there is no valid decision for lack of concurrence of two judges, the
Besides, the adoption of the procedure would in certain cases elevate the case was submitted for decision of the court below on March 28, 1957 and under
bracket under which the tax is based. The late payment is already penalized, section 13 of Republic Act 1125, cases brought before said court hall be decided
thru the imposition of surcharges, by adopting the theory of the Collector, within 30 days after submission thereof. "If no decision is rendered by the Court
we will be creating an additional penalty not contemplated by law." within thirty days from the date a case is submitted for decision, the party adversely
If the taxes based on the sales of SM are computed in accordance with Gen. Circulars affected by said ruling, order or decision, may file with said Court a notice of his
Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25% and 50% intention to appeal to the Supreme Court, and if no decision has as yet been rendered
surcharges for late payment and for fraud, would amount only to P820,549.91 as by the Court, the aggrieved party may file directly with the Supreme Court an appeal
shown in the following computation: from said ruling, order or decision, notwithstanding the foregoing provisions of this
Sales Taxes Due and section." The case having been brought before us on appeal, the question raised by
Gross Sales of Total Gross Selling petitioner as become purely academic.
Rates of Computed under
Vehicles Exclusive of Price Charged to the IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review
Sales Tax Gen. Cir Nos. 431 &
Sales Tax Public is hereby modified in that petitioner shall be ordered to pay to respondent the sum
400
of P820,549.91, plus 25% surcharge thereon for late payment.
5% P11,912,219.57 P595,610.98 P12,507,83055
So ordered without costs.
7% 909,559.50 63,669.16 973,228.66 Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.
10% 2,618,695.28 261,869.53 2,880,564.81 Padilla, J., took no part.

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60
30% 837,146.97 251,114.09 1,088,291.06
50% 74,244.30 37,122.16 111,366.46
75% 8,000.00 6,000.00 14,000.00
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still due P820,549.91
This is the exact amount which, according to Presiding Judge Nable of the Court of
Tax Appeals, Yutivo would pay, exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of
its jurisdiction in promulgating judgment for the affirmance of the decision of
respondent Collector by less than the statutory requirement of at least two votes of
its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the
G.R. No. 142616 July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioner seeks to annul and set aside the Court of Appeals' decision in C.A. CV G.R.
S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ of preliminary
injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and
its Order dated October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing
under Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto
International, Inc. and Dadasan General Merchandise are domestic corporations,
likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of
PNB, organized and doing business in Hong Kong, extended a letter of credit in favor
of the respondents in the amount of US$300,000.00 secured by real estate
mortgages constituted over four (4) parcels of land in Makati City. This credit facility
was later increased successively to US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and
decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the
loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong
Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in-fact PNB, notified the respondents of the foreclosure of all
the real estate mortgages and that the properties subject thereof were to be sold at
a public auction on May 27, 1999 at the Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order
before the Regional Trial Court of Makati. The Executive Judge of the Regional Trial
Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the
case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge
then set a hearing on June 8, 1999. At the hearing of the application for preliminary
injunction, petitioner was given a period of seven days to file its written opposition
to the application. On June 15, 1999, petitioner filed an opposition to the application
for a writ of preliminary injunction to which the respondents filed a reply. On June
25, 1999, petitioner filed a motion to dismiss on the grounds of failure to state a
cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the issuance
of a writ of preliminary injunction, which writ was correspondingly issued on July 14,
1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge
for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance
of the writ of preliminary injunction before the Court of Appeals. In the impugned
decision,1 the appellate court dismissed the petition. Petitioner thus seeks recourse
to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE
COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS
NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT
TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY
INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE
COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000
and the trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and
the dismissal of the complaint in the instant case.3
In their Comment, respondents argue that even assuming arguendo that petitioner
and PNB-IFL are two separate entities, petitioner is still the party-in-interest in the
application for preliminary injunction because it is tasked to commit acts of
foreclosing respondents' properties.4 Respondents maintain that the entire credit
facility is void as it contains stipulations in violation of the principle of mutuality of
contracts.5 In addition, respondents justified the act of the court a quo in applying
the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is
merely an alter ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT,
THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE
REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and restrain
PNB from the foreclosure and eventual sale of the property in order to protect their
rights to said property by reason of void credit facilities as bases for the real estate
mortgage over the said property.8
The contract questioned is one entered into between respondent and PNB-IFL, not
PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact
for the PNB-IFL with full power and authority to, inter alia, foreclose on the
properties mortgaged to secure their loan obligations with PNB-IFL. In other words,
herein petitioner is an agent with limited authority and specific duties under a special
power of attorney incorporated in the real estate mortgage. It is not privy to the loan
contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents. Yet,
despite the recognition that petitioner is a mere agent, the respondents in their
complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling
of the interest to be paid by them in accordance with the terms and conditions in the
documents evidencing the credit facilities, and crediting the amount previously paid
to PNB by herein respondents.9
Clearly, petitioner not being a part to the contract has no power to re-compute the
interest rates set forth in the contract. Respondents, therefore, do not have any
cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL,
is a wholly owned subsidiary of defendant Philippine National Bank, the suit against
the defendant PNB is a suit against PNB-IFL.10 In justifying its ruling, the trial court,
citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may
be disregarded where a corporation is the mere alter ego, or business conduit of a
person or where the corporation is so organized and controlled and its affairs are so
conducted, as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the
personal rights, obligations and transactions of the latter. 13 The mere fact that a
corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiary's separate existence may be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to
prevent the abuses of separate entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In
said case, this Court disregarded the separate existence of the parent and the
subsidiary on the ground that the latter was formed merely for the purpose of
evading the payment of higher taxes. In the case at bar, respondents fail to show any
cogent reason why the separate entities of the PNB and PNB-IFL should be
disregarded.
While there exists no definite test of general application in determining when a
subsidiary may be treated as a mere instrumentality of the parent corporation, some
factors have been identified that will justify the application of the treatment of the
doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway
Co.14 is enlightening. The case involved a suit against the Southern Railway Company.
Plaintiff was employed by Lenoir Car Works and alleged that he sustained injuries
while working for Lenoir. He, however, filed a suit against Southern Railway Company
on the ground that Southern had acquired the entire capital stock of Lenoir Car
Works, hence, the latter corporation was but a mere instrumentality of the former.
The Tennessee Supreme Court stated that as a general rule the stock ownership
alone by one corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may be useful in the
determination of whether the subsidiary is but a mere instrumentality of the parent-
corporation:
The Circumstance rendering the subsidiary an instrumentality. It is
manifestly impossible to catalogue the infinite variations of fact that can
arise but there are certain common circumstances which are important and
which, if present in the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the
subsidiary.
(b) The parent and subsidiary corporations have common directors or
officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of
the subsidiary.
(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
(h) In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the
parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
 (j) The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary but take their orders from the parent
corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the
ownership of most of the capital stock of Lenoir by Southern, and possibly
subscription to the capital stock of Lenoir. . . The complaint must be
dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate
veil is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes. The
doctrine applies when the corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse
the legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and, unjust act in contravention of plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate
veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated
and the individual defendant's relationship to the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there
is no showing of the indicative factors that the former corporation is a mere
instrumentality of the latter are present. Neither is there a demonstration that any
of the evils sought to be prevented by the doctrine of piercing the corporate veil
exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on
the alter ego or instrumentality doctrine finds no application in the case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued
because it is the parent company of PNB-IFL. Rather, the petitioner was sued because
it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A
suit against an agent cannot without compelling reasons be considered a suit against
the principal. Under the Rules of Court, every action must be prosecuted or defended
in the name of the real party-in-interest, unless otherwise authorized by law or these
Rules.18 In mandatory terms, the Rules require that "parties-in-interest without
whom no final determination can be had, an action shall be joined either as plaintiffs
or defendants."19 In the case at bar, the injunction suit is directed only against the
agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a
mere provisional remedy but adjunct to the main suit.20 A writ of preliminary
injunction is an ancillary or preventive remedy that may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose during
the pendency of the principal action. The dismissal of the principal action thus results
in the denial of the prayer for the issuance of the writ. Further, there is no showing
that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the
1997 Rules of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually,
(b) That the commission, continuance or non-performance of the acts or
acts complained of during the litigation would probably work injustice to the
applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity
to avoid injurious consequences which cannot be remedied under any standard
compensation.21 Respondents do not deny their indebtedness. Their properties are
by their own choice encumbered by real estate mortgages. Upon the non-payment
of the loans, which were secured by the mortgages sought to be foreclosed, the
mortgaged properties are properly subject to a foreclosure sale. Moreover,
respondents questioned the alleged void stipulations in the contract only when
petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to
prove that they have a right protected and that the acts against which the writ is to
be directed are violative of said right.22 The Court is not unmindful of the findings of
both the trial court and the appellate court that there may be serious grounds to
nullify the provisions of the loan agreement. However, as earlier discussed,
respondents committed the mistake of filing the case against the wrong party, thus,
they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter
is not privy to the contract the provisions of which respondents seek to declare void.
Accordingly, the case before the Regional Trial Court must be dismissed and the
preliminary injunction issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision
of the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and
October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No.
99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said case
DISMISSED.
SO ORDERED.
Puno, Pardo and Santiago, JJ ., concur.
Davide, Jr., C .J ., on official leave.
G.R. No. L-69494 June 10, 1986
A.C. RANSOM LABOR UNION-CCLU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, First Division, A.C. RANSOM (PHILS.)
CORPORATION, RUBEN HERNANDEZ, MAXIMO C. HERNANDEZ, JR., PORFIRIO R.
VALENCIA, LAURA H. CORNEJO, FRANCISCO HERNANDEZ, CELESTINO C.
HERNANDEZ & MA. ROSARIO HERNANDEZ, respondents.
MELENCIO-HERRERA, J.:
The facts relevant to this case may be related as follows:
1. Respondent A. C. Ransom (Philippines) Corporation (RANSOM, for short) was
established in 1933 by Maximo C. Hernandez, Sr. It was a "family" corporation, the
stockholders of which were/are members of the Hernandez family. It has a
compound in Las Pinas Rizal, where it has been engaged in the manufacture mainly
of ink and articles associated with ink.
2. On June 6, 1961, employees of RANSOM, most of them being members of
petitioner Labor UNION, went on strike and established a picket line which, however,
was lifted on June 21st with most of the strikers returning and being allowed to
resume their work by RANSOM Twenty-two (22) strikers were refused reinstatement
by the Company.
3. During 1969, the same Hernandez family organized another corporation, Rosario
Industrial Corporation (ROSARIO, for short) which also engaged, in the RANSOM
Compound, in the business of manufacture of ink and products associated with ink.
4. The strike became the subject of Cases Nos. 2848 — ULP and 2880 — ULP of the
Court of Industrial Relations which, on December 19, 1972, ordered RANSOM "its
officers and agents to reinstate the 22 strikers with back wages from July 25, 1969.
5. On April 2, 1973, RANSOM filed an application for clearance to close or cease
operations effective May 1, 1973, which was granted by the Ministry of Labor and
Employment in its Order of June 7, 1973, without prejudice to the right of employees
to seek redress of grievance, if any. Although it has stopped operations, RANSOM has
continued its personality as a corporation. For practical purposes, reinstatement of
the 22 strikers has been precluded. As a matter of fact, reinstatement is not an issue
in this case.
6. Back wages of the 22 strikers were subsequently computed at P164,984.00,
probably in early 1974. The exact date is not reflected in the record.
7. Up to September 9, 1976, petitioner UNION had filed about ten (10) motions for
execution against RANSOM; but all of them could not be implemented, presumably
for failure to find leviable assets of RANSOM; although it appears that, in 1975,
RANSOM had sold machineries and equipment for P28million to Revelations
Manufacturing Corporation.
8. Directly related to this case is the last Motion for Execution, dated December 18,
1978, filed by petitioner UNION wherein it asked that officers and agents of RANSOM
be held personally liable for payment of the back wages. That Motion was granted by
Labor Arbiter, Tito F. Genilo, on March 11, 1980 (The GENILO ORDER), wherein he
expressly authorized a Writ of Execution to be issued for P164,984.00 (the back
wages) against RANSOM and seven officers and directors of the Company who are
the named individual respondents herein. RANSOM took an appeal to NLRC which
affirmed the GENILO ORDER, except as modified in the body of its decision of July 31,
1984.
9. In RANSOM's appeal to the NLRC, two issues were raised:
(a) One of the issues was:
THE DECISION OF THE INDUSTRIAL RELATIONS COURT HAVING
BECOME FINAL AND EXECUTORY IN 1973, IS IT ENFORCEABLE BY A
WRIT OF EXECUTION ISSUED IN 1980 OR MORE THAN FIVE YEARS
AFTER THE FINALITY OF THE DECISION SOUGHT TO BE ENFORCED?
The corresponding ruling made by NLRC was:
Perforce respondent's theory that execution proceedings must
stop after the lapse of five (5) years and that a motion to revive
need be filed, must fail. Suffice it to state also that the statute of
limitations has been devised to operate primarily against those
who sleep on their rights, not against those who assert their right
but fail for causes beyond their control. The above recital of facts
contradicts respondent's contention that the CIR decision of
August 19, 1972 had remained dormant to require a motion to
revive.
(b) The second issue raised was:
IS THE JUDGMENT AGAINST A CORPORATION TO REINSTATE ITS
DISMISSED EMPLOYEES WITH BACKWAGES, ENFORCEABLE
AGAINST ITS OFFICERS AND AGENTS IN THEIR INDIVIDUAL, PRIVATE
AND PERSONAL CAPACITIES WHO WERE NOT PARTIES IN THE CASE
WHERE THE JUDGMENT WAS RENDERED;
The NLRC ruling was:
As to the liability of the respondent's officers and agents, we agree
with the contention of the respondent-appellant that there is
nothing in the Order dated May 11, 1986 that would justify the
holding of the individual officers and agents of respondent in their
personal capacity. As a general rule, officers of the corporation are
not liable personally for the official acts unless they have exceeded
the scope of their authority. In the absence of evidence showing
that the officers mentioned in the Order of the Labor Arbiter dated
March 11, 1980 have exceeded their authority, the writ of
execution can not be enforced against them, especially so since
they were not given a chance to be heard.
RANSOM and the seven individual respondents in this case have not appealed from
the ruling of the NLRC that Section 6, Rule 39, is not invocable by them in regards to
the execution of the decision of December 19, 1972. Hence, the issue can no longer
be raised herein. Even if the said section were applicable, the 5-year period therein
mentioned may not have expired by December 18, 1978 because the period should
be counted only from the time the back wages were determined, which could have (d) The record does not clearly Identify "the officer or officers" of RANSOM directly
been in early 1974. responsible for failure to pay the back wages of the 22 strikers. In the absence of
We now come to the NLRC's decision upholding non-personal liabilities of the definite proof in that regard, we believe it should be presumed that the responsible
individual respondents herein for back wages of the 22 strikers. officer is the President of the corporation who can be deemed the chief operation
(a) Article 265 of the labor Code, in part. expressly provides: officer thereof. Thus, in RA 602, criminal responsibility is with the "Manager" or in his
Any worker whose employment has been terminated as a default, the person acting as such. In RANSOM, the President appears to be the
consequence of an unlawful lockout shall be entitled Manager.
to reinstatement with fill back wages. (e) Considering that non-payment of the back wages of the 22 strikers has been a
Article 273 of the Code provides that: continuing situation, it is our opinion What the personal liability of the RANSOM
Any person violating any of the provisions of Article 265 of this President, at the time the back wages were ordered to be paid should also be a
Code shall be punished by a fine of not exceeding five hundred continuing joint and several personal liabilities of all who x-ray have thereafter
pesos and/or imprisonment for not less than one (1) day nor more succeeded to the office of president; otherwise, the 22 strikers may be deprived of
than six (6) months. their rights by the election of a president without leviable assets.
(b) How can the foregoing provisions be implemented when the employer is a WHEREFORE, the questioned Decision of the National Labor Relations Commission is
corporation? The answer is found in Article 212 (c) of the Labor Code which provides: SET ASIDE, and the Order of Labor Arbiter Tito F. Genilo of March 11, 1980 is
(c) 'Employer includes any person acting in the interest of an reinstated with the modification that personal liability for the back wages due the 22
employer directly or indirectly. The term shall not include any labor strikers shall be limited to Ruben Hernandez, who was President of RANSOM in 1974,
organization or any of its officers or agents except when acting as jointly and severally with other Presidents of the same corporation who had been
employer. elected as such after 1972 or up to the time the corporate life was terminated.
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since SO ORDERED.
RANSOM is an artificial person, it must have an officer who can be presumed to be Abad Santos (Chairman), Yap, Cruz and Paras, * , JJ., concur.
the employer, being the "person acting in the interest of (the) employer" RANSOM. Narvasa, J., took no part.
The corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held personally, not to say
even criminally, liable for non-payment of back wages. That is the policy of the law.
In the Minimum Wage Law, Section 15(b) provided:
(b) If any violation of his Act is committed by a corporation, trust,
partnership or association, the manager or in his default, the
person acting as such when the violation took place, shall be
responsible. In the case of a government corporation, the
managing head shall be made responsible, except when shown that
the violation was due to an act or commission of some other
person, over whom he has no control, in which case the latter shall
be held responsible.
In PD 525, where a corporation fails to pay the emergency allowance therein
provided, the prescribed penalty "shall be imposed upon the guilty officer or officers"
of the corporation.
(c) If the policy of the law were otherwise, the corporation employer can have
devious ways for evading payment of back wages. in the instant case, it would appear
that RANSOM, in 1969, foreseeing the possibility or probability of payment of back
wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to
be eventually phased out if the 22 strikers win their case. RANSOM actually ceased
operation on May 1, 1973, after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against RANSOM.

G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B.
CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance
of writ of preliminary injunction, arose out of two cases filed by petitioner with the
Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a petition for
"declaration of nullity of amended by-laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs.
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao,
Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation",
was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so
on a resolution of the stockholders adopted on March 13, 1961, when the
outstanding capital stock of respondent corporation was only P70,139.740.00,
divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid
up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was
contended that according to section 22 of the Corporation Law and Article VIII of the
by-laws of the corporation, the power to amend, modify, repeal or adopt new by-
laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the amendment was based on the
1961 authorization, petitioner contended that the Board acted without authority and
in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board
ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being
a Substantial stockholder thereof; that as a stockholder, petitioner had acquired
rights inherent in stock ownership, such as the rights to vote and to be voted upon in
the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as
afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent
power to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business;
that the portion of the amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board may consider such factors
as business and family relationship, is unreasonable and oppressive and, therefore,
void; and that the portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in writing to the Board of
Directors at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to
pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and
Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for
production of certain documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the stockholder's
meeting field on March 13, 1961, (b) copy of the management contract between San
Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of
San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of
respondent corporation in San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any, received by Andres M. Soriano,
Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the
demand is not based on good faith; that the motion is premature since the materiality
or relevance of the evidence sought cannot be determined until the issues are joined,
that it fails to show good cause and constitutes continued harrasment, and that some
of the information sought are not part of the records of the corporation and,
therefore, privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to
the petition, denying the substantial allegations therein and stating, by way of
affirmative defenses that "the action taken by the Board of Directors on September
18, 1976 resulting in the ... amendments is valid and legal because the power to
"amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13,
1961 and long prior thereto has never been revoked of SMC"; that contrary to
petitioner's claim, "the vote requirement for a valid delegation of the power to
amend, repeal or adopt new by-laws is determined in relation to the total subscribed
capital stock at the time the delegation of said power is made, not when the Board
opts to exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure its
repeal by vote of the stockholders representing a majority of the subscribed capital
stock at any regular or special meeting, as provided in Article VIII, section I of the by-
laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other amendments made on the
basis of the same 1961 authorization: that the power of the corporation to amend its
by-laws is broad, subject only to the condition that the by-laws adopted should not
be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize
or eliminate situations where its directors might be tempted to put their personal
interests over t I hat of the corporation; that the questioned amended by-laws is a
matter of internal policy and the judgment of the board should not be interfered
with: That the by-laws, as amended, are valid and binding and are intended to
prevent the possibility of violation of criminal and civil laws prohibiting combinations
in restraint of trade; and that the petition states no cause of action. It was, therefore,
prayed that the petition be dismissed and that petitioner be ordered to pay damages
and attorney's fees to respondents. The application for writ of preliminary injunction
was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their
affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina),
a corporation engaged in business competitive to that of respondent corporation,
began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent (corporation. until
its total holdings amounted to P543,959.00 in September 1976; that on January 12,
1976, petitioner, who is president and controlling shareholder of Robina and CFC
(both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted
malevolent and malicious publicity campaign against SMC" to generate support from
the stockholder "in his effort to secure for himself and in representation of Robina
and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders'
meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to
secure a seat in the Board of Directors on the basic issue that petitioner was engaged
in a competitive business and his securing a seat would have subjected respondent
corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a
seat in the Board of Directors at the next annual meeting; that thereafter the Board
of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of
litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for
production and inspection of documents was filed by all the respondents. This was
duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and
Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed
their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion
for production and inspection of documents by issuing Order No. 26, Series of 1977,
stating, in part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby
ordered:
1. That respondents produce and permit the inspection, copying
and photographing, by or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the stockholders' meeting of the
respondent San Miguel Corporation held on March 13, 1961, which
are in the possession, custody and control of the said corporation,
it appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents should
allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14,
1977, at 9:30 o'clock in the morning for purposes of enforcing the
rights herein granted; it being understood that the inspection,
copying and photographing of the said documents shall be
undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or
papers not heretofore included are not covered by this Order and
any inspection thereof shall require the prior permission of this
Commission;
 2. As to the Balance Sheet of San Miguel International, Inc. as well
as the list of salaries, allowances, bonuses, compensation and/or
remuneration received by respondent Jose M. Soriano, Jr. and
Andres Soriano from San Miguel International, Inc. and/or its
successors-in- interest, the Petition to produce and inspect the
same is hereby DENIED, as petitioner-movant is not a stockholder
of San Miguel International, Inc. and has, therefore, no inherent
right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated
November 29, 1976, withdrawing his request to copy and inspect
the management contract between San Miguel Corporation and A.
Soriano Corporation and the renewal and amendments thereof for
the reason that he had already obtained the same, the Commission
takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the
matter of production and inspection of the authority of the
stockholders of San Miguel Corporation to invest the funds of
respondent corporation in San Miguel International, Inc., until after
the hearing on the merits of the principal issues in the above-
entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard,
respondent corporation issued a notice of special stockholders' meeting for the
purpose of "ratification and confirmation of the amendment to the By-laws", setting
such meeting for February 10, 1977. This prompted petitioner to ask respondent
Commission for a summary judgment insofar as the first cause of action is concerned,
for the alleged reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments of
September 18, 1976. The motion for summary judgment was opposed by private
respondents. Pending action on the motion, petitioner filed an "Urgent Motion for
the Issuance of a Temporary Restraining Order", praying that pending the
determination of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary restraining order be
issued, restraining respondents from holding the special stockholder's meeting as
scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion
for issuance of temporary restraining order. After receipt of the order of denial,
respondents conducted the special stockholders' meeting wherein the amendments
to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated
motion for contempt and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said
motion had not yet been scheduled for hearing. Likewise, the motion for
reconsideration of the order granting in part and denying in part petitioner's motion
for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation
had been scheduled for May 10, 1977, petitioner filed with respondent Commission
a Manifestation stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977 that he does
not come within the disqualifications specified in the amendment to the by-laws,
subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a
manifestation and motion to resolve pending incidents in the case and to issue a writ
of injunction, alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's
irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to
prod respondent Commission to act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part
of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has
been investing corporate funds in other corporations and businesses outside of the
primary purpose clause of the corporation, in violation of section 17 1/2 of the
Corporation Law, he filed with respondent Commission, on January 20, 1977, a
petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and
ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which
a consolidated motion to strike and to declare individual respondents in default and
an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact
that said motions were filed as early as February 4, 1977, the commission acted
thereon only on April 25, 1977, when it denied respondents' motion to dismiss and
gave them two (2) days within which to file their answer, and set the case for hearing
on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the
Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by
the stockholders at the meeting on March 20, 1972 to invest
corporate funds in other companies or businesses or for purposes
other than the main purpose for which the Corporation has been
organized, and ratification of the investments thereafter made
pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private
respondents from taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on May 3, 1977, the date set
for the second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and
17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3,
1977, but this notwithstanding, no action has been taken up to the date of the filing
of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before
this Court that respondent Commission gravely abused its discretion when it failed
to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal
and/or arbitrary impositions or limitations upon his rights as stockholder of
respondent corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due process. He
prayed that this Court direct respondent SEC to act on collateral incidents pending
before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being
voted as director of respondent corporation and from submitting for ratification or
confirmation or from causing the ratification or confirmation of Item 6 of the Agenda
of the annual stockholders' meeting on May 10, 1977, or from Making effective the
amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion
for reconsideration, with its supplement, of the order of the Commission denying in
part petitioner's motion for production of documents, petitioner's motion for
reconsideration of the order denying the issuance of a temporary restraining order
denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the validity of the bylaws
in dispute, and denying deferment of Item 6 of the Agenda for the annual
stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion
for reconsideration of the order of respondent Commission denying petitioner's
motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing the
aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due process when it
decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request
to have the same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a stockholder,
warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be
declared null and void and that respondent Commission be ordered to allow
petitioner to undertake discovery proceedings relative to San Miguel International.
Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive
and antagonistic to that of respondent San Miguel Corporation, it appearing that the
owns and controls a greater portion of his SMC stock thru the Universal Robina
Corporation and the Consolidated Foods Corporation, which corporations are
engaged in business directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has substantial investments.
Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the
clear and present danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC
from the clear and present danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to its business secrets
and plans for their own private gain to the irreparable prejudice of respondent SMC,
and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antogonistic parties,
under the law of self-preservation, and it should be allowed a wide latitude in the
selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was
emphasized that it was only on April 29, 1977 that petitioner calendared the
aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977.
The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot
and academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging
that the petition has become moot and academic for the reason, among others that
the acts of private respondent sought to be enjoined have reference to the annual
meeting of the stockholders of respondent San Miguel Corporation, which was held
on may 10, 1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director; and that in
the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and
confirmed. Further it was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which has acquired
jurisdiction over the case, and no hearing on the merits has been had; hence the
elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against
petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the
instant case, is not rendered academic by the act of a majority of stockholders, such
that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is
void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment,
alleging that after receiving a copy of the restraining order issued by this Court and
noting that the restraining order did not foreclose action by it, the Commission en
banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450
which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting
of respondent corporation, took into consideration an urgent manifestation filed
with the Commission by petitioner on May 3, 1977 which prayed, among others, that
the discussion of Item 6 of the Agenda be deferred. The reason given for denial of
deferment was that "such action is within the authority of the corporation as well as
falling within the sphere of stockholders' right to know, deliberate upon and/or to
express their wishes regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer
for preliminary injunction, alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible questions on the facts
now pending before the respondent Commission are now before this Honorable
Court which has the authority and the competence to act on them as it may see fit."
(Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are
valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel International,
Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10,
1977, and the ratification of the investment in a foreign corporation of the corporate
funds, allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public
interest requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-
laws in compliance with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the amended by-laws are
intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... "; second: "it is for the interest
and guidance of the public that an immediate and final ruling on the question be
made ... "; third: "petitioner was denied due process by SEC" when "Commissioner
de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner
Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay
rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a
single proceeding leaving no root or branch to bear the seeds of future ligiation",
citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its amended by laws and the rights
and obligations of the parties thereunder, otherwise "the time spent and effort
exerted by the parties concerned and, more importantly, by this Honorable Court,
would have been for naught because the main question will come back to this
Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a
similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary
jurisdiction to hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to
settle the entire controversy in a single proceeding, leaving nor root or branch to bear
the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court
resolved to decide the case on the merits instead of remanding it to the trial court
for further proceedings since the ends of justice would not be subserved by the preventive measure to assure stockholders of San Miguel Corporation of reasonable
remand of the case. In Republic v. Security Credit and Acceptance Corporation, et protective from the unrestrained self-interest of those charged with the promotion
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case of the corporate enterprise; that access to confidential information by a competitor
on the merits "because public interest demands an early disposition of the case", and may result either in the promotion of the interest of the competitor at the expense
in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of of the San Miguel Corporation, or the promotion of both the interests of petitioner
the third-party complaint to the trial court for further proceedings, citing precedent and respondent San Miguel Corporation, which may, therefore, result in a
where this Court, in similar situations resolved to decide the cases on the merits, combination or agreement in violation of Article 186 of the Revised Penal Code by
instead of remanding them to the trial court where (a) the ends of justice would not destroying free competition to the detriment of the consuming public. It is further
be subserved by the remand of the case; or (b) where public interest demand an early argued that there is not vested right of any stockholder under Philippine Law to be
disposition of the case; or (c) where the trial court had already received all the voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has
evidence presented by both parties and the Supreme Court is now in a position, exercised, personally or thru two corporations owned or controlled by him, control
based upon said evidence, to decide the case on its merits. 8 It is settled that the over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei,
doctrine of primary jurisdiction has no application where only a question of law is Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC
involved. 8a Because uniformity may be secured through review by a single Supreme Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding
Court, questions of law may appropriately be determined in the first instance by capital stock of San Miguel Corporation, as of the present date, is represented by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the 33,139,749 shares with a par value of P10.00, the total shares owned or controlled
amended by-laws were adopted by the Board of Directors of the San Miguel by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation in the exercise of the power delegated by the stockholders ostensibly Corporation. It is also contended that petitioner is the president and substantial
pursuant to section 22 of the Corporation Law; that in a special meeting on February stockholder of Universal Robina Corporation and CFC Corporation, both of which are
10, 1977 held specially for that purpose, the amended by-laws were ratified by more allegedly controlled by petitioner and members of his family. It is also claimed that
than 80% of the stockholders of record; that the foreign investment in the Hongkong both the Universal Robina Corporation and the CFC Corporation are engaged in
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by businesses directly and substantially competing with the alleged businesses of San
the San Miguel Corporation in 1948; and that in the stockholders' annual meeting Miguel Corporation, and of corporations in which SMC has substantial investments.
held in 1972 and 1977, all foreign investments and operations of San Miguel ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN
Corporation were ratified by the stockholders. MIGUEL CORPORATION
II According to respondent San Miguel Corporation, the areas of, competition are
Whether or not the amended by-laws of SMC of disqualifying a competitor from enumerated in its Board the areas of competition are enumerated in its Board
nomination or election to the Board of Directors of SMC are valid and reasonable — Resolution dated April 28, 1978, thus:
The validity or reasonableness of a by-law of a corporation in purely a question of Product Line Estimated Market Share Total
law. 9 Whether the by-law is in conflict with the law of the land, or with the charter 1977 SMC Robina-CFC
of the corporation, or is in a legal sense unreasonable and therefore unlawful is a Table Eggs 0.6% 10.0% 10.6%
question of law. 10 This rule is subject, however, to the limitation that where the Layer Pullets 33.0% 24.0% 57.0%
reasonableness of a by-law is a mere matter of judgment, and one upon which Dressed Chicken 35.0% 14.0% 49.0%
reasonable minds must necessarily differ, a court would not be warranted in Poultry & Hog Feeds 40.0% 12.0% 52.0%
substituting its judgment instead of the judgment of those who are authorized to Ice Cream 70.0% 13.0% 83.0%
make by-laws and who have exercised their authority. 11 Instant Coffee 45.0% 40.0% 85.0%
Petitioner claims that the amended by-laws are invalid and unreasonable because Woven Fabrics 17.5% 9.1% 26.6%
they were tailored to suppress the minority and prevent them from having Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
representation in the Board", at the same time depriving petitioner of his "vested involved product sales of over P400 million or more than 20% of the P2 billion total
right" to be voted for and to vote for a person of his choice as director. product sales of SMC. Significantly, the combined market shares of SMC and CFC-
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant
Miguel Corporation content that ex. conclusion of a competitor from the Board is coffee and woven fabrics would result in a position of such dominance as to affect
legitimate corporate purpose, considering that being a competitor, petitioner cannot the prevailing market factors.
devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478
million. In addition, CFC-Robina was directly competing in the sale of coffee with
Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting
to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct competition with Ramie
Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million.
The areas of competition between SMC and CFC-Robina in 1977 represented,
therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18,
1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC,
or more than 90% of the total outstanding shares of SMC, rejected petitioner's
candidacy for the Board of Directors because they "realized the grave dangers to the
corporation in the event a competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting
of February 10, 1977, these amendments were confirmed and ratified by 5,716
shareholders owning 24,283,945 shares, or more than 80% of the total outstanding
shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation
and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting,
12,480 shareholders, owning more than 30 million shares, or more than 90% of the
total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by
the Board of Directors of San Miguel Corporation a-, a measure of self-defense to
protect the corporation from the clear and present danger that the election of a
business competitor to the Board may cause upon the corporation and the other
stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue
— whether or not respondent San Miguel Corporation could, as a measure of self-
protection, disqualify a competitor from nomination and election to its Board of
Directors.
It is recognized by an authorities that 'every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. 12 At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United
States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter or in general
law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees ... " This must necessarily refer to a qualification in addition
to that specified by section 30 of the Corporation Law, which provides that "every
director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El Hogar, 14 the Court
sustained the validity of a provision in the corporate by-law requiring that persons
elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section
21 of the Corporation Law expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors and is "highly prudent and in conformity
with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majorityof the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of
the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To
this extent, therefore, the stockholder may be considered to have "parted with his
personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it to the will of the
majority of his fellow incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is
infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles
of incorporation by a vote or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation If the amendment
changes, diminishes or restricts the rights of the existing shareholders then the
disenting minority has only one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the owners of the majority
of the subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as stockholder was
acquired contained the prescription that the corporate charter and the by-law shall
be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications
of its directors, the next question that must be considered is whether the
disqualification of a competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a
fiduciary insofar as the corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for the collective benefit
of the stockholders, "they occupy a fiduciary relation, and in this sense the relation
is one of trust." 18 "The ordinary trust relationship of directors of a corporation and
stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary
obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He
who is in such fiduciary position cannot serve himself first and his
cestuis second. ... He cannot manipulate the affairs of his
corporation to their detriment and in disregard of the standards of
common decency. He cannot by the intervention of a corporate
entity violate the ancient precept against serving two masters ... He
cannot utilize his inside information and strategic position for his
own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot use his
power for his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is
too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will
you find any express prohibition against a discretion to select
directors having the company's interest at heart, and it would
simply be going far to deny by mere implication the existence of
such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the
wife and immediate member of the family of such stockholder, on account of the
supposed interest of the wife in her husband's affairs, and his suppose influence over
her. It is perhaps true that such stockholders ought not to be condemned as selfish
and dangerous to the best interest of the corporation until tried and tested. So it is
also true that we cannot condemn as selfish and dangerous and unreasonable the
action of the board in passing the by-law. The strife over the matter of control in this
corporation as in many others is perhaps carried on not altogether in the spirit of
brotherly love and affection. The only test that we can apply is as to whether or not
the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment
which renders ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is antagonistic to
the other corporation is valid." 24This is based upon the principle that where the
director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey, where the Supreme
Court held that the Corporation Law in New Jersey prescribed the only qualification,
and therefore the corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus, it has been
held that an officer of a corporation cannot engage in a business in direct competition
with that of the corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." 27 In a case where
directors of a corporation cancelled a contract of the corporation for exclusive sale
of a foreign firm's products, and after establishing a rival business, the directors
entered into a new contract themselves with the foreign firm for exclusive sale of its
products, the court held that equity would regard the new contract as an offshoot of
the old contract and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting for
two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of
an opportunity for his own personal profit when the interest of the corporation justly
calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such as: (a)
marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding, availability
of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of
San Miguel Corporation, who is also the officer or owner of a competing corporation,
from taking advantage of the information which he acquires as director to promote
his individual or corporate interests to the prejudice of San Miguel Corporation and
its stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained
as valid and reasonable an amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents, nominees or attorneys
of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information
concerning the business and plans of a bank which would likely be
injurious to the bank if known to another bank, and it was
reasonable and prudent to enlarge this minimum disqualification
to include any director, officer, employee, agent, nominee, or
attorney of any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and others who
might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law
protection. With respect to attorneys or persons associated with a
firm which is attorney for another bank, in addition to the direct
conflict or potential conflict of interest, there is also the danger of
inadvertent leakage of confidential information through casual
office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity
for conflicting loyalties and potential misuse and leakage of
confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as
follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate member of the family of
any stockholder in any other firm, company, or association which
competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or
trustee in any other firm, company, or association which compete
with the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a law
suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience — that a
person cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not
detract from the validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it would be
inconsistent with petitioner's primary motive in running for board membership —
which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law is to encourage
and enforce responsible corporate management. As explained by Oleck: 31 "The law
win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty
to control and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward seeing
to it that these policies are carried out. It is only then that directors may be said to
have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem manifest that in
such situations, the director has an economic incentive to appropriate for the benefit
of his own corporation the corporate plans and policies of the corporation where he
sits as director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the latter to
a competitive disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the development of existing or
new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining whether or not the
amended by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV
of the Constitution provides: "The State shall regulate or prohibit private monopolies
when the public interest so requires. No combinations in restraint of trade or unfair
competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. —The
penalty of prision correccional in its minimum period or a fine
ranging from two hundred to six thousand pesos, or both, shall be
imposed upon:
1. Any person who shall enter into any contract or agreement or
shall take part in any conspiracy or combination in the form of a
trust or otherwise, in restraint of trade or commerce or to prevent
by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of
trade or commerce, or shall combine with any other person or
persons to monopolize said merchandise or object in order to alter
the price thereof by spreading false rumors or making use of any
other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor
of any merchandise or object of commerce or an importer of any
merchandise or object of commerce from any foreign country,
either as principal or agent, wholesale or retailer, shall combine,
conspire or agree in any manner with any person likewise engaged
in the manufacture, production, processing, assembling or
importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of
making transactions prejudicial to lawful commerce, or of
increasing the market price in any part of the Philippines, or any
such merchandise or object of commerce manufactured,
produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the
consumers' effectiveness as the final arbiter in free markets. These laws are designed
to preserve free and unfettered competition as the rule of trade. "It rests on the
premise that the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest quality ...
." 34 they operate to forestall concentration of economic power. 35 The law against
monopolies and combinations in restraint of trade is aimed at contracts and
combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition"
appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces
any combination the tendency of which is to prevent competition in the broad and
general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when
desired. 38 Further, it must be considered that the Idea of monopoly is now
understood to include a condition produced by the mere act of individuals. Its
dominant thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are
not in accord with reality. The election of petitioner to the Board of respondent
Corporation can bring about an illegal situation. This is because an express agreement
is not necessary for the existence of a combination or conspiracy in restraint of
trade. 40 It is enough that a concert of action is contemplated and that the defendants
conformed to the arrangements, 41 and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act prohibits a
person from serving at the same time as a director in any two or more corporations,
if such corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between them would
constitute violation of any provision of the anti-trust laws. 42 There is here a statutory
recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common
director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing
even one director is that the interlock permits the coordination of
policies between nominally independent firms to an extent that
competition between them may be completely eliminated. Indeed,
if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both
Corporation A and Corporation B. X could hardly vote for a policy
by A that would injure B without violating his duty of loyalty to B at
the same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do compete —
in the sense of vying for economic advantage at the expense of the
other — there can hardly be any reason for an interlock between
competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on
section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a
great number of corporations ... to the detriment of the small ones dependent upon
them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for
the purpose of serving the lowest priced goods to the consuming public would be
frustrated, The competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the
market this could lead to collusion and combination in restraint of trade. Reason and
experience point to the inevitable conclusion that the inherent tendency of
interlocking directorates between companies that are related to each other as
competitors is to blunt the edge of rivalry between the corporations, to seek out ways
of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries
and regions in the country win enable the former to practice price discrimination.
CFC-Robina can segment the entire consuming population by geographical areas or
income groups and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable volume at which
it could produce for every product line in which it competes with SMC. Access to SMC
pricing policy by CFC-Robina would in effect destroy free competition and deprive
the consuming public of opportunity to buy goods of the highest possible quality at
the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a
violation of the prohibition contained in section 13(5) of the Corporation Law. Said
section provides in part that "any stockholder of more than one corporation
organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in
the case of one stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a discriminatory manner.
However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to bring his case
within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation is valid
and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may
be accorded to the corporation in adopting measures to protect legitimate
corporation interests. Thus, "where the reasonableness of a by-law is a mere matter
of judgment, and upon which reasonable minds must necessarily differ, a court would
not be warranted in substituting its judgment instead of the judgment of those who
are authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers
to perpetua themselves in power such fears appear to be misplaced. This power, but
is very nature, is subject to certain well established limitations. One of these is
inherent in the very convert and definition of the terms "competition" and
"competitor". "Competition" implies a struggle for advantage between two or more
forces, each possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an independent endeavor
of two or more persons to obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46 The test must be whether
the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics activity. 47 It is,
therefore, obvious that not every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place of business, Identity of
products and area of competition should be taken into consideration. It is, therefore,
necessary to show that petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the validity of
the amended by-laws, it does not follow as a necessary consequence that petitioner
is ipso facto disqualified. Consonant with the requirement of due process, there must
be due hearing at which the petitioner must be given the fullest opportunity to show
that he is not covered by the disqualification. As trustees of the corporation and of
the stockholders, it is the responsibility of directors to act with fairness to the
stockholders.48 Pursuant to this obligation and to remove any suspicion that this
power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the
Board of Directors should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless reversed by this Court on
certiorari. 49 Indeed, it is a settled principle that where the action of a Board of
Directors is an abuse of discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in
waste, dissipation or misapplication of the corporation assets, a court of equity has
the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully
owned subsidiary of San Miguel Corporation —
Respondent San Miguel Corporation stated in its memorandum that petitioner's
claim that he was denied inspection rights as stockholder of SMC "was made in the
teeth of undisputed facts that, over a specific period, petitioner had been furnished
numerous documents and information," to wit: (1) a complete list of stockholders
and their stockholdings; (2) a complete list of proxies given by the stockholders for
use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6
million investment in associated companies and other companies as of December 31,
1975; (5) a listing of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC; (6) a copy of
the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the
minutes of all meetings of the Board of Directors from January 1975 to May 1976,
with deletions of sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was
SMC's first venture abroad, having started in 1948 with an initial outlay of
?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under
the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2)
that as of December 31, 1975, the estimated value of SMI would amount to almost
P400 million (3) that the total cash dividends received by SMC from SMI since 1953
has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare
cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record
of all business transactions of the corporation and minutes of any meeting shall be
open to the inspection of any director, member or stockholder of the corporation at
reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore,
an incident of ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, a beneficial ownership, or a
ownership. 52 This right is predicated upon the necessity of self-protection. It is
generally held by majority of the courts that where the right is granted by statute to
the stockholder, it is given to him as such and must be exercised by him with respect
to his interest as a stockholder and for some purpose germane thereto or in the
interest of the corporation. 53 In other words, the inspection has to be germane to
the petitioner's interest as a stockholder, and has to be proper and lawful in character
and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this
Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for
specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application
for mandamus to enforce the right, it is proper for the court to inquire into and
consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and
may be refused when the information is not sought in good faith or is used to the
detriment of the corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take
cognizance of it as a qualification. In other words, the specific provisions take from
the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive. 58 It appears to
be the general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that the company
is being mismanaged or that it is being managed for the personal benefit of officers
or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation
for a lawful purpose is a matter of law, the right of such stockholder to examine the
books and records of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not.
Thus, it has been held that where a corporation owns approximately no property
except the shares of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of distinct corporate
entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents
and purposes, the records of the parent even though subsidiary was not named as a
party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the
parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally subject to the control of
the parent company, although it owned a vast majority of the stock of the
subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder
of the parent company which owns all the stock of the subsidiary has been refused
on the ground that the stockholder was not within the class of "persons having an
interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right
of former stockholders to inspect books and records of the corporation included the
right to inspect corporation's subsidiaries' books and records which were in
corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had
Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had been
attempting to suppress information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of some documents
which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders are entitled to
inspect the books and records of a corporation in order to investigate the conduct of
the management, determine the financial condition of the corporation, and generally
take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be
more in accord with equity, good faith and fair dealing to construe the statutory right
of petitioner as stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds in
a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent
corporation invested corporate funds in SMI without prior authority of the
stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders
for ratification is a sound corporate practice and should not be thwarted but
encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for
which it was organized" provided that its Board of Directors has been so authorized
by the affirmative vote of stockholders holding shares entitling them to exercise at
least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when
the purchase of shares is done solely for investment and not to accomplish the
purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is
necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities
by SMC was an investment in the same business stated as its main purpose in its
Articles of Incorporation, which is to manufacture and market beer. It appears that
the original investment was made in 1947-1948, when SMC, then San Miguel
Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI
in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an
investment made by Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders' voting power, in the
Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar
bags. The lower court said that "there is more logic in the stand that if the investment
is made in a corporation whose business is important to the investing corporation
and would aid it in its purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court affirmed the ruling of
the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. — A private
corporation, in order to accomplish is purpose as stated in its
articles of incorporation, and subject to the limitations imposed by
the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence
of indebtedness of any domestic or foreign corporation. Such an
act, if done in pursuance of the corporate purpose, does not need
the approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of
the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established
by the Corporations law; namely, (a) that no agricultural or mining
corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law
by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. — A private corporation has
the power to invest its corporate funds "in any other corporation
or business, or for any purpose other than the main purpose for
which it was organized, provide that 'its board of directors has been
so authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a propose at a stockholders'
 meeting called for that purpose,' and provided further, that no The afore-mentioned six (6) Justices, together with Justice Fernando, voted to
agricultural or mining corporation shall in anywise be interested in declare the issue on the validity of the foreign investment of respondent corporation
any other agricultural or mining corporation. When the investment as moot.
is necessary to accomplish its purpose or purposes as stated in its Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-
articles of incorporation the approval of the stockholders is not laws, pending hearing by this Court on the applicability of section 13(5) of the
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259). Corporation Law to petitioner.
Assuming arguendo that the Board of Directors of SMC had no authority to make the Justice Fernando reserved his vote on the validity of subject amendment to the by-
assailed investment, there is no question that a corporation, like an individual, may laws but otherwise concurs in the result.
ratify and thereby render binding upon it the originally unauthorized acts of its Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
officers or other agents. 70 This is true because the questioned investment is neither Guerrero filed a separate opinion, wherein they voted against the validity of the
contrary to law, morals, public order or public policy. It is a corporate transaction or questioned amended bylaws and that this question should properly be resolved first
contract which is within the corporate powers, but which is defective from a by the SEC as the agency of primary jurisdiction. They concur in the result that
supported failure to observe in its execution the. requirement of the law that the petitioner may be allowed to run for and sit as director of respondent SMC in the
investment must be authorized by the affirmative vote of the stockholders holding scheduled May 6, 1979 election and subsequent elections until disqualified after
two-thirds of the voting power. This requirement is for the benefit of the proper hearing by the respondent's Board of Directors and petitioner's
stockholders. The stockholders for whose benefit the requirement was enacted may, disqualification shall have been sustained by respondent SEC en banc and ultimately
therefore, ratify the investment and its ratification by said stockholders obliterates by final judgment of this Court.
any defect which it may have had at the outset. "Mere ultra vires acts", said this Court In resume, subject to the qualifications aforestated judgment is hereby rendered
in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely GRANTING the petition by allowing petitioner to examine the books and records of
within the scope of the articles of incorporation, are merely voidable and may San Miguel International, Inc. as specified in the petition. The petition, insofar as it
become binding and enforceable when ratified by the stockholders. assails the validity of the amended by- laws and the ratification of the foreign
Besides, the investment was for the purchase of beer manufacturing and marketing investment of respondent corporation, for lack of necessary votes, is hereby
facilities which is apparently relevant to the corporate purpose. The mere fact that DISMISSED. No costs.
respondent corporation submitted the assailed investment to the stockholders for Makasiar, Santos Abad Santos and De Castro, JJ., concur.
ratification at the annual meeting of May 10, 1977 cannot be construed as an Aquino, and Melencio Herrera JJ., took no part.
admission that respondent corporation had committed an ultra vires act, considering
the common practice of corporations of periodically submitting for the gratification
of their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner
be allowed to examine the books and records of San Miguel International, Inc., as
specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos,
Abad Santos and De Castro, voted to sustain the validity per se of the amended by-
laws in question and to dismiss the petition without prejudice to the question of the
actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court. Unless disqualified in the manner herein
provided, the prohibition in the afore-mentioned amended by-laws shall not apply to
petitioner.
G.R. No. L-26649 July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-
General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for
defendant.
Wm. J. Rohde as amicus curiae.
STREET, J.:
This is a quo warranto proceeding instituted originally in this court by the
Government of the Philippine Islands on the relation of the Attorney-General against
the building and loan association known as El Hogar Filipino, for the purpose of
depriving it of its corporate franchise, excluding it from all corporate rights and
privileges, and effecting a final dissolution of said corporation. The complaint
enumerates seventeen distinct causes of action, to all of which the defendant has
answered upon the merits, first admitting the averments of the first paragraph in the
statement of the first cause of action, wherein it is alleged that the defendant was
organized in the year 1911 as a building and loan association under the laws of the
Philippine Islands, and that, since its organization, the corporation has been doing
business in the Philippine Islands, with its principal office in the City of Manila. Other
facts alleged in the various causes of action in the complaint are either denied in the
answer or controverted in legal effect by other facts.
After issue had been thus joined upon the merits, the attorneys entered into an
elaborate agreement as to the fact, thereby removing from the field of dispute such
matters of fact as are necessary to the solution of the controversy. It follows that we
are here confronted only with the legal questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what is known as the
Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171
to 190, inclusive, of this Act are devoted to the subject of building and loan
associations, defining their objects making various provisions governing their
organization and administration, and providing for the supervision to be exercised
over them. These provisions appear to be adopted from American statutes governing
building and loan associations and they of course reflect the ideals and principles
found in American law relative to such associations. The respondent, El Hogar
Filipino, was apparently the first corporation organized in the Philippine Islands under
the provisions cited, and the association has been favored with extraordinary
success. The articles of incorporation bear the date of December 28, 1910, at which
time capital stock in the association had been subscribed to the amount of P150,000
of which the sum of P10,620 had been paid in. Under the law as it then stood, the
capital of the Association was not permitted to exceed P3,000,000, but by Act No.
2092, passed December 23, 1911, the statute was so amended as to permit the
capitalization of building and loan associations to the amount of ten millions. Soon
thereafter the association took advantage of this enactment by amending its articles
so as to provide that the capital should be in an amount not exceeding the then lawful
limit. From the time of its first organization the number of shareholders has
constantly increased, with the result that on December 31, 1925, the association had
5,826 shareholders holding 125,750 shares, with a total paid-up value of
P8,703,602.25. During the period of its existence prior to the date last above-
mentioned the association paid to withdrawing stockholders the amount of
P7,618,257,.72; and in the same period it distributed in the form of dividends among
its stockholders the sum of P7,621,565.81.
First cause of action. — The first cause of action is based upon the alleged illegal
holding by the respondent of the title to real property for a period in excess of five
years after the property had been bought in by the respondent at one of its own
foreclosure sales. The provision of law relevant to the matter is found in section 75
of Act of Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the
Corporation Law.) In both of these provisions it is in substance declared that while
corporations may loan funds upon real estate security and purchase real estate when
necessary for the collection of loans, they shall dispose of real estate so obtained
within five years after receiving the title.
In this connection it appears that in the year 1920 El Hogar Filipino was the holder of
a recorded mortgage upon a tract of land in the municipality of San Clemente,
Province of Tarlac, as security for a loan of P24,000 to the shareholders of El Hogar
Filipino who were the owners of said property. The borrowers having defaulted in
their payments, El Hogar Filipino foreclosed the mortgage and purchased the land at
the foreclosure sale for the net amount of the indebtedness, namely, the sum of
P23,744.18. The auction sale of the mortgaged property took place November 18,
1920, and the deed conveying the property to El Hogar Filipino was executed and
delivered December 22, 1920. On December 27, 1920, the deed conveying the
property to El Hogar Filipino was sent to the register of deeds of the Province of
Tarlac, with the request that the certificate of title then standing in the name of the
former owners be cancelled and that a new certificate of title be issued in the name
of El Hogar Filipino. Said deed was received in the office of the register of deeds of
Tarlac on December 28, 1920, together with the old certificate of title, and thereupon
the register made upon the said deed the following annotation:
The foregoing document was received in this office at 4.10 p. m., December
28, 1920, according to entry 1898, page 50 of Book One of the Day Book and
registered on the back of certificate of title No. 2211 and its duplicate, folio
193 of Book A-10 of the register of original certificate. Tarlac, Tarlac, January
12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the register of deeds of
Tarlac, and letters were written to him by El Hogar Filipino on the subject in March
and April, 1921, requesting action. No answer having been received to these letters,
a complaint was made by El Hogar Filipino to the Chief of the General Land
Registration Office; and on May 7, 1921, the certificate of title to the San Clemente
land was received by El Hogar Filipino from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution
authorizing Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer
for the San Clemente land. On July 27, 1921, El Hogar Filipino authorized one Jose
Laguardia to endeavor to find a purchaser for the San Clemente land for the sum of
P23,000 undertaking to pay the said Laguardia a commission of 5 per centum of the
selling price for his services, but no offers to purchase were obtained through this
agent or through the agent Bengzon. In July, 1923, plans of the San Clemente land
were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as
prospective purchasers, but no offers were received from them. In January, 1926, the
agent not having succeeded in finding a buyer, the San Clemente land was advertised
for sale by El Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers
of general circulation in the Philippine Islands published in the City of Manila. On
March 16, 1926, the first offer for the purchase of the San Clemente land was
received by El Hogar Filipino. This offer was made to it in writing by one Alcantara,
who offered to buy it for the sum of P4,000, Philippine currency, payable P500 in
cash, and the remainder within thirty days. Alcantara's offer having been reported by
the manager of El Hogar Filipino to its board of directors, it was decided, by a
resolution adopted at a meeting of the board held on March 25, 1926, to accept the
offer, and this acceptance was communicated to the prospective buyer. Alcantara
was given successive extensions of the time, the last of which expired April 30, 1926,
within which to make the payment agreed upon; and upon his failure to do so El
Hogar Filipino treated the contract with him as rescinded, and efforts were made at
once to find another buyer. Finally the land was sold to Doña Felipa Alberto for
P6,000 by a public instrument executed before a notary public at Manila, P. I., on July
30, 1926.
Upon consideration of the facts above set forth it is evident that the strict letter of
the law was violated by the respondent; but it is equally obvious that its conduct has
not been characterized by obduracy or pertinacity in contempt of the law. Moreover,
several facts connected with the incident tend to mitigate the offense. The Attorney-
General points out that the respondent acquired title on December 22, 1920, when
the deed was executed and delivered, by which the property was conveyed to it as
purchaser at its foreclosure sale, and this title remained in it until July 30, 1926, when
the property was finally sold to Felipa Alberto. The interval between these two
conveyances is thus more than five years; and it is contended that the five year period
did not begin to run against the respondent until May 7, 1921, when the register of
deeds of Tarlac delivered the new certificate of title to the respondent pursuant to
the deed by which the property was acquired. As an equitable consideration affecting
the case this contention, though not decisive, is in our opinion more than
respectable. It has been held by this court that a purchaser of land registered under
the Torrens system cannot acquire the status of an innocent purchaser for value
unless his vendor is able to place in his hands an owner's duplicate showing the title
of such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19;
Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar
Filipino was not really in a position to pass an indefeasible title to any purchaser. In
this connection it will be noted that section 75 of the Act of Congress of July 1, 1902,
and the similar provision in section 13 of the Corporation Law, allow the corporation
"five years after receiving the title," within which to dispose of the property. A fair
interpretation of these provisions would seem to indicate that the date of the
receiving of the title in this case was the date when the respondent received the
owner's certificate, or May 7, 1921, for it was only after that date that the respondent
had an unequivocal and unquestionable power to pass a complete title. The failure
of the respondent to receive the certificate sooner was not due in any wise to its
fault, but to unexplained delay on the part of the register of deeds. For this delay the
respondent cannot be held accountable.
Again, it is urged for the respondent that the period between March 25, 1926, and
April 30, 1926, should not be counted as part of the five-year period. This was the
period during which the respondent was under obligation to sell the property to
Alcantara, prior to the rescission of the contract by reason of Alcantara's failure to
make the stipulated first payment. Upon this point the contention of the respondent
is, in our opinion, well founded. The acceptance by it of Alcantara's offer obligated
the respondent to Alcantara; and if it had not been for the default of Alcantara, the
effective sale of the property would have resulted. The respondent was not at all
chargeable with the collapse of these negotiations; and hence in any equitable
application of the law this period should be deducted from the five-year period within
which the respondent ought to have made the sale. Another circumstance
explanatory of the respondent's delay in selling the property is found in the fact that
it purchased the property for the full amount of the indebtedness due to it from the
former owner, which was nearly P24,000. It was subsequently found that the
property was not salable for anything like that amount and in the end it had to be
sold for P6,000, notwithstanding energetic efforts on the part of the respondent to
find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid of the San
Clemente property within five years after it first acquired the deed thereto, even
supposing the five-year period to be properly counted from that date, is such a
violation of law as should work a forfeiture of its franchise and require a judgment to
be entered for its dissolution in this action of quo warranto. Upon this point we do
not hesitate to say that in our opinion the corporation has not been shown to have
offended against the law in a manner that should entail a forfeiture of its charter.
Certainly no court with any discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the extreme penalty of the law as a
consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the Code of
Civil Procedure, as applied by this court in Government of the Philippine Islands vs.
Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in
prescribing the judgment to be rendered against a corporation in an action of quo
warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture,
 or has misused a franchise or exercised a power not conferred by law, but
not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be outset from the continuance of such
offense or the exercise of such power.
This provision clearly shows that the court has a discretion with respect to the
infliction of capital punishment upon corporation and that there are certain
misdemeanors and misuses of franchises which should not be recognized as requiring
their dissolution. In Government of the Philippine Islands vs. Philippine Sugar Estates
Development Co.(38 Phil., 15), it was found that the offending corporation had been
largely (though indirectly) engaged in the buying and holding or real property for
speculative purposes in contravention of its charter and contrary to the express
provisions of law. Moreover, in that case the offending corporation was found to be
still interested in the properties so purchased for speculative at the time the action
was brought. Nevertheless, instead of making an absolute and unconditional order
for the dissolution of the corporation, the judgment of ouster was made conditional
upon the failure of the corporation to discontinue its unlawful conduct within six
months after final decision. In the case before us the respondent appears to have rid
itself of the San Clemente property many months prior to the institution of this
action. It is evident from this that the dissolution of the respondent would not be an
appropriate remedy in this case. We do not of course undertake to say that a
corporation might not be dissolved for offenses of this nature perpetrated in the past,
especially if its conduct had exhibited a willful obduracy and contempt of law. We
content ourselves with holding that upon the facts here before us the penalty of
dissolution would be excessively severe and fraught with consequences altogether
disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations with respect
to the tenure of land was to prevent the revival of the entail (mayorazgo) or other
similar institution by which land could be fettered and its alienation hampered over
long periods of time. In the case before us the respondent corporation has in good
faith disposed of the piece of property which appears to have been in its hands at the
expiration of the period fixed by law, and a fair explanation is given of its failure to
dispose of it sooner. Under these circumstances the destruction of the corporation
would bring irreparable loss upon the thousand of innocent shareholders of the
corporation without any corresponding benefit to the public. The discretion
permitted to this court in the application of the remedy of quo warranto forbids so
radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in matters like
that now before us has been expressly taken away by the third section of Act No.
2792, and that the dissolution of the corporation is obligatory upon the court a mere
finding that the respondent has violated the provision of the Corporation Law in any
respect. This makes necessary to examine the Act last above-mentioned with some
care. Upon referring thereto, we find that it consists of three sections under the
following style:
No. 2792. — An Act to amend certain sections of the Corporation Law, Act
Numbered Fourteen hundred and fifty-nine, providing for the publication of
the assets and liabilities of corporations registering in the Bureau of
Commerce and Industry, determining the liability of the officers of
corporations with regard to the issuance of stock or bonus, establishing
penalties for certain things, and for other purposes.
The first two section contain amendments to the Corporation Law with respect to
matters with which we are not here concurred. The third section contains anew
enactment to be inserted as section 190 (A) in the corporation Law immediately
following section 190. This new section reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the provisions of this Act
and its amendments not otherwise penalized therein, shall be punished by
a fine of not more than one thousand pesos, or by imprisonment for not
more than five years, or both, in the discretion of the court. If the violation
being proved, be dissolved by quo warranto proceedings instituted by the
Attorney-General or by any provincial fiscal, by order of said Attorney-
General: Provided, That nothing in this section provided shall be construed
to repeal the other causes for the dissolution of corporation prescribed by
existing law, and the remedy provided for in this section shall be considered
as additional to the remedies already existing.
The contention for the plaintiff is to the effect that the second sentence in this
enactment has entirely abrogated the discretion of this court with respect to the
application of the remedy of qou warranto, as expressed in section 212 of the Code
of Civil Procedure, and that it is now mandatory upon us to dissolved any corporation
whenever we find that it has committed any violation of the Corporation Law,
however trivial. In our opinion in this radical view of the meaning of the enactment
is untenable. When the statute says, "If the violation is committed by a corporation,
the same shall, upon such violation being proved, be dissolved by quo
warranto proceedings . . .," the intention was to indicate that the remedy against the
corporation shall be by action of quo warranto. There was no intention to define the
principles governing said remedy, and it must be understood that in applying the
remedy the court is still controlled by the principles established in immemorial
jurisprudence. The interpretation placed upon this language in the brief of the
Attorney-General would be dangerous in the extreme, since it would actually place
the life of all corporate investments in the official. No corporate enterprise of any
moment can be conducted perpetually without some trivial misdemeanor against
corporate law being committed by some one or other of its numerous employees. As
illustrations of the preposterous effects of the provision, in the sense contended for
by the Attorney-General, the attorneys for the respondent have called attention to
the fact that under section 52 of the Corporation Law, a business corporation is
required to keep a stock book and a transfer book in which the names of stockholders
shall kept in alphabetical order. Again, under section 94, railroad corporations are
required to cause all employees working on passenger trains or at a station for
passengers to wear a badge on his cap or hat which will indicate his office. Can it be
supposed that the Legislature intended to penalize the violation of such provisions as
these by dissolution of the corporation involved? Evidently such could not have been
the intention; and the only way to avoid the consequence suggested is to hold, as we
now hold, that the provision now under consideration has not impaired the
discretion of this court in applying the writ of quo warranto.
Another way to put the same conclusion is to say that the expression "shall be
dissolved by quo warrantoproceedings" means in effect, "may be dissolved by quo
warranto proceedings in the discretion of the court." The proposition that the word
"shall" may be construed as "may", when addressed by the Legislature to the courts,
is well supported in jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry.
Co., (188 Pa., 484), the Supreme Court of Pennsylvania had under consideration a
statute providing as follows:
It shall be the duty of the court . . . to examine, inquire and ascertain
whether such corporation does in fact posses the right or franchise to do the
act from which such alleged injury to private rights or to the rights and
franchises of other corporations results; and if such rights or franchises have
not been conferred upon such corporations, such courts, it exercising
equitable power, shall, by injunction, at suit of the private parties or other
corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive relief as a matter of
right. But this was denied the court saying:
Notwithstanding, therefore, the use of the imperative "shall" the injunction
is not to be granted unless a proper case for injunction be made out, in
accordance with the principles and practice of equity. The word "shall" when
used by the legislature to a court, is usually a grant of authority and means
"may", and even if it be intended to be mandatory it must be subject to the
necessary limitation that a proper case has been made out for the exercise
of the power.
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129,
133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71;
Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509,
511; In re Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's
Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E.,
789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506; Beasley vs. People,
89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the ground that the
subject-matter of this section is not expressed in the title of the Act, with the result
that the section is invalid. This criticism is in our opinion well founded. Section 3 of
our organic law (Jones Bill) declares, among other things, that "No bill which may be
enacted into law shall embrace more than one subject, and that subject shall be
expressed in the title of the bill." Any law or part of a law passed by the Philippine
Legislature since this provision went into effect and offending against its requirement
is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to three ends
which are successively dealt with in the first three sections of the Act. But it will be
noted that these three matters all relate to the Corporation Law; and it is at once
apparent that they might properly have been embodied in a single Act if a title of
sufficient unity and generality had been prefixed thereto. Furthermore, it is obvious,
even upon casual inspection, that the subject-matter of each of the first two sections
is expressed and defined with sufficient precision in the title. With respect to the
subject-matter of section 3 the only words in the title which can be taken to refer to
the subject-matter of said section are these, "An Act . . . establishing penalties for
certain things, and for other purposes." These words undoubtedly have sufficient
generality to cover the subject-matter of section 3 of the Act. But this is not enough.
The Jones Law requires that the subject-matter of the bill "shall be expressed in the
title of the bill."
When reference is had to the expression "establishing penalties for certain things,"
it is obvious that these words express nothing. The constitutional provision was
undoubtedly adopted in order that the public might be informed as to what the
Legislature is about while bills are in process of passage. The expression "establishing
penalties for certain things" would give no definite information to anybody as to the
project of legislation intended under this expression. An examination of the decided
cases shows that courts have always been indulgent of the practices of the
Legislature with respect to the form and generality of title, for if extreme refinements
were indulged by the courts, the work of legislation would be unnecessarily
hampered. But, as has been observed by the California court, there must be some
reasonable limit to the generality of titles that will be allowed. The measure of legality
is whether the title is sufficient to give notice of the general subject of the proposed
legislation to the persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act
to revise the Code of Civil Procedure of the State of California, by amending certain
sections, repealing others, and adding certain new sections." This title was held to
embrace more than one subject, which were not sufficiently expressed in the title. In
discussing the question the court said:
* * * It is apparent that the language of the title of the act in question, in
and of itself, express no subject whatever. No one could tell from the title
alone what subject of legislation was dealt with in the body of the act; such
subject so far as the title of the act informs us, might have been entirely
different from anything to be found in the act itself.
We cannot agree with the contention of some of respondent's counsel —
apparently to some extent countenanced by a few authorities — that the
provision of the constitution in question can be entirely avoided by the
simple device of putting into the title of an act words which denote a subject
"broad" enough to cover everything. Under that view, the title, "An act
concerning the laws of the state," would be good, and the convention and
people who framed and adopted the constitution would be convicted of the
folly of elaborately constructing a grave constitutional limitation of
 legislative power upon a most important subject, which the legislature could
at once circumvent by a mere verbal trick. The word "subject" is used in the
constitution embrace but "one subject" it necessarily implies — what
everybody knows — that there are numerous subjects of the legislation, and
declares that only one of these subjects shall embraced in any one act. All
subjects cannot be conjured into one subject by the mere magic of a word
in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New
Jersey made the following observation:
* * * It is true, that it may be difficult to indicate, by a formula, how
specialized the title of a statute must be; but it is not difficult to conclude
that it must mean something in the way of being a notice of what is doing.
Unless it does not enough that it embraces the legislative purpose — it must
express it; and where the language is too general, it will accomplish the
former, but not the latter. Thus, a law entitled "An act for a certain purpose,"
would embrace any subject, but would express none, and, consequently, it
would not stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we think, fairly summed
up in a current repository of jurisprudence in the following language:
* * * While it may be difficult to formulate a rule by which to determine the
extent to which the title of a bill must specialize its object, it may be safely
assumed that the title must not only embrace the subject of proposed
legislation, but also express it clearly and fully enough to give notice of the
legislative purpose. (25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for other purposes "found
at the end of the caption of Act No. 2792, must be laid completely out of
consideration. They express nothing, and amount to nothing as a compliance with
the constitutional requirement to which attention has been directed. This expression
"(for other purposes") is frequently found in the title of acts adopted by the Philippine
Legislature; and its presence in our laws is due to the adoption by our Legislature of
the style used in Congression allegation. But it must be remembered that the
legislation of Congress is subject to no constitutional restriction with respect to the
title of bills. Consequently, in Congressional legislation the words "and for other
purposes" at least serve the purpose of admonishing the public that the bill whose
heading contains these words contains legislation upon other subjects than that
expressed in the title. Now, so long as the Philippine Legislature was subject to no
restriction with respect to the title of bills intended for enactment into general laws,
the expression "for other purposes" could be appropriately used in titles, not
precisely for the purpose of conveying information as to the matter legislated upon,
but for the purpose ad admonishing the public that any bill containing such words in
the title might contain other subjects than that expressed in the definitive part of the
title. But, when congress adopted the Jones Law, the restriction with which we are
now dealing became effective here and the words "for other purposes" could no
longer be appropriately used in the title of legislative bills. Nevertheless, the custom
of using these words has still been followed, although they can no longer serve to
cover matter not germane to the bill in the title of which they are used. But the futility
of adding these words to the style of any act is now obvious (Cooley, Const. Lims.,
8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional restriction which we
have been discussing is more or less of a dead letter in this jurisdiction; and it seems
to be taken for granted that no court would ever presume to hold a legislative act or
part of a legislative act invalid for non-compliance with the requirement. This is a
mistake; and no utterance of this court can be cited as giving currency to any such
notion. On the contrary the discussion contained in Central Capiz vs. Ramirez (40
Phil., 883), shows that when a case arises where a violation of the restriction is
apparent, the court has no alternative but to declare the legislation affected thereby
to be invalid.
Second cause of action. — The second cause of action is based upon a charge that
the respondent is owning and holding a business lot, with the structure thereon, in
the financial district of the City of Manila is excess of its reasonable requirements and
in contravention of subsection 5 of section 13 of the corporation Law. The facts on
which this charge is based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square meters of land at the
corner of Juan Luna Street and the Muelle de la Industria, in the City of Manila,
immediately adjacent to the building then occupied by the Hongkong and Shanghai
Banking Corporation. At the time the respondent acquired this lot there stood upon
it a building, then nearly fifty years old, which was occupied in part by the offices of
an importing firm and in part by warehouses of the same firm. The material used in
the construction was Guadalupe stone and hewn timber, and the building contained
none of the facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the purchase of the property,
the directors of the El Hogar Filipino caused the old building to be demolished; and
they erected thereon a modern reinforced concrete office building. As at first
constructed the new building was three stories high in the main, but in 1920, in order
to obtain greater advantage from the use of the land, an additional story was added
to the building, making a structure of four stories except in one corner where an
additional story was place, making it five stories high over an area of 117.52 square
meters. It is admitted in the plaintiffs brief that this "noble and imposing structure"
— to use the words of the Attorney-General — "has greatly improved the aspect of
the banking and commercial district of Manila and has greatly contributed to the
movement and campaign for the Manila Beautiful." It is also admitted that the
competed building is reasonably proportionate in value and revenue producing
capacity to the value of the land upon which it stands. The total outlay of the
respondent for the land and the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the company, while the assessed
valuation of the land and improvements is at P786,478.
Since the new building was completed the respondent has used about 324 square
meters of floor space for its own offices and has rented the remainder of the office
space in said building, consisting of about 3,175 square meters, to other persons and
entities. In the second cause of action of the complaint it is supposed that the
acquisition of this lot, the construction of the new office building thereon, and the
subsequent renting of the same in great part to third persons, are ultra vires acts on
the part of the corporation, and that the proper penalty to be enforced against it in
this action is that if dissolution.
With this contention we are unable to agree. Under subsection 5 of section 13 of the
Corporation Law, every corporation has the power to purchase, hold and lease such
real property as the transaction of the lawful business of the corporation may
reasonably and necessarily require. When this property was acquired in 1916, the
business of El Hogar Filipino had developed to such an extent, and its prospects for
the future were such as to justify its directors in acquiring a lot in the financial district
of the City of Manila and in constructing thereon a suitable building as the site of its
offices; and it cannot be fairly said that the area of the lot — 1,413 square meters —
was in excess of its reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably necessary to enable them
to carry out the purposes for which they were created; and we are of the opinion
that the owning of a business lot upon which to construct and maintain its offices is
reasonably necessary to a building and loan association such as the respondent was
at the time this property was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in leased offices — a
result which could serve no useful end but would retard industrial growth and be
inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully
acquired by the respondent, it is entitled to the full beneficial use thereof. No
legitimate principle can discovered which would deny to one owner the right to enjoy
his (or its) property to the same extent that is conceded to any other owner; and an
intention to discriminate between owners in this respect is not lightly to be imputed
to the Legislature. The point here involved has been the subject of consideration in
many decisions of American courts under statutes even more restrictive than that
which prevails in this jurisdiction; and the conclusion has uniformly been that a
corporations whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in excess
of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared
that the respondent corporation owned and controlled a large ten-story business
block in the City of Chicago, worth $2,000,000, and that it occupied only about one-
fourth thereof for its own purposes, leasing the remainder to others at heavy rentals.
The corporate charter merely permitted the holding of such real estate by the
respondent as might be necessary for the successful prosecution of its business. An
attempt was made to obtain the dissolution of the corporation in a quo
warranto proceeding similar to that now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the power of the
Deposit Company to erect and own a fourteen-story building — containing eight
storerooms, one hundred suites of offices, and one safety deposit vault, under a
statute authorizing the corporation to possess so much real estate "as shall be
necessary for the transaction of their business." The court said:
That the appellee company possessed ample power to acquire real property
and construct a building thereon for the purpose of transacting therein the
legitimate business of the corporation is beyond the range of debate. Nor is
the contrary contended, but the insistence is that, under the guise of
erecting a building for corporate purposes, the appellee company purposely
constructed a much larger building than its business required, containing
many rooms intended to be rented to others for offices and business
purposes, — among them, the basement rooms contracted to be leased to
the appellant, — and that in so doing it designedly exceeded its corporate
powers. The position off appellant therefore is that the appellee corporation
has flagrantly abused its general power to acquire real estate and construct
a building thereon . . . It was within the general scope of the express powers
of the appellee corporation to own and possess a building necessary for its
proper corporate purposes. In planning and constructing such a building, as
was said in People vs. Pullman's Palace Car Co., supra, the corporation
should not necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more, but that the
future probable growth and volume of its business might be considered and
anticipated, and a larger building, and one containing more rooms than the
present volume of business required be erected, and the rooms not needed
might be rented by the corporation, — provided, of course, such course
should be taken in good faith, and not as a mere evasion of the public law
and the policy of the state relative to the ownership of real estate by
corporations. In such state of case the question is whether the corporation
has abused or excessively and unjustifiably used the power and authority
granted it by the state to construct buildings and own real estate necessary
for its corporate purposes.
In Home savings building Association vs. Driver (129 Ky., 754), one of the questions
before the court was precisely the same as that now before us. Upon this the
Supreme Court of Kentucky said:
The third question is, has the association the right to erect, remodel, or own
a building of more than sufficient capacity to accommodate its own business
and to rent out the excess? There is nothing in the Constitution, charter of
the association, or statutes placing any limitation upon the character of a
building which a corporation may erect as a home in which to conduct its
business. A corporation conducting a business of the character of that in
which appellant is engaged naturally expects its business to grow and
expand from time to time, and, in building a home it would be exercising but
a short-sighted judgment if it did not make provision for the future by
building a home large enough to take care of its expanding business, and
hence, even if it should build a house larger and roomier than its present
 needs or interests require, it would be acting clearly with the exercise of its
corporate right and power. The limitation which the statute imposes is that
proper conduct of its business, but it does not attempt to place any
restriction or limitation upon the right of the corporation or association as
to the character of building it shall erect on said real estate; and, while the
Constitution and the statutes provide that no corporation shall engage in
any business other than that expressly authorized by its charter, we are of
opinion that, in renting out the unoccupied and unused portions of the
building so erected, the association could not be said to engaged in any
other business than that authorized by its charter. The renting of the unused
portions of the building is a mere incident in the conduct of its real business.
We would not say that a building association might embark in the business
of building houses and renting or leasing them, but there is quite a
difference in building or renting a house in which to conduct its own
business and leasing the unused portion thereof for the time being, or until
such time as they may be needed by the association, and in building houses
for the purpose of renting or leasing them. The one might properly be said
to be the proper exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that provision of
the statute which denies to any corporation the right to conduct any
business other than that authorized by its charter. To hold otherwise would
be to charge most of the banking institutions, trust companies and other
corporations, such as title guaranty companies, etc., doing with violating the
law; for it is known that there are few of such institutions that do not, at
times, rent out or lease the unneeded portions of the building occupied by
them as homes. We do not think that in so doing they are violating any
provisions of the law, but that the renting out of the unused or unoccupied
portions of their buildings is but an incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a
stockholder sought to enjoin the bank from building a six-story building owned by
the bank in the commercial district of Hagerstown of which only the first story was
to be used by the bank, the remaining stories to be rented out for offices and places
of business, on the theory that such action was ultra vires and in violation of the
provisions of the national banking act confining such corporations to the holding,
only, of such real estate "as shall be necessary for its immediate accommodation in
the transaction of its business."
The injunction was denied, the court adopting the opinion of the lower court in which
the following was said:
'The other ground urged by the complainant is that the proposed action is
violative of the restriction which permits a national bank to hold only such
real estate as shall be necessary for its immediate accommodation in the
transaction of its business, and that, therefore, the erection of a building
which will contain offices not necessary for the business of the bank is not
permitted by the law, although that method of improving the lot may be the
most beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the contrary.
Where ground is valuable, it may probably be truly said that the majority of
national bank buildings are built with accommodations in excess of the
needs of the bank for the purpose of lessening the bank's expense by renting
out the unused portion. If that were not allowable, many smaller banks in
cities would be driven to become tenants as the great cost of the lot would
be prohibitive of using it exclusively for the banking accommodation of a
single bank. As indicative of the interpretation of the law commonly
received and acted upon, reference may be made to the reply of the
Comptroller of the Currency to the injury by the bank in this case asking
whether the law forbids the bank constructing such a building as was
contemplated.
'The reply was follows: "Your letter of the 9th instant received, stating that
the directors contemplate making improvements in the bank building and
inquiring if there is anything in the national banking laws prohibiting the
construction of a building which will contain floors for offices to be rented
out by the bank as well as the banking room. Your attention is called to the
case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court
held that: 'If the land which a national bank purchases or leases for the
accommodation of its business is very valuable it may exercise the same
rights that belong to other landowners of improving it in a way that will yield
the largest income, lessen its own rent, and render that part of its funds
which are invested in realty most productive.'" This seems to be the
common sense interpretation of the act of Congress and is the one which
prevails.'
It would seem to be unnecessary to extend the opinion by lengthy citations upon the
point under consideration, butBrown vs. Schleier (118 Fed., 981), may be cited as
being in harmony with the foregoing authorities. In dealing with the powers of a
national bank the court, in this case, said:
When an occasion arises for an investment in real property for either of the
purposes specified in the statute the national bank act permits banking
associations to act as any prudent person would act in making an investment
in real estate, and to exercise the same measure of judgment and discretion.
The act ought not to be construed in such as way as to compel a national
bank, when it acquires real property for a legitimate purpose, to deal with it
otherwise than a prudent land owner would ordinarily deal with such
property.
In the brief of the Attorney-General reliance is place almost entirely upon two Illinois
cases, namely Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380),
and First Methodist Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our
opinion these cases are either distinguishable from that now before us, or they
reflect a view of the law which is incorrect. At any rate the weight of judicial opinion
is so overwhelmingly in favor of sustaining the validity of the acts alleged in the
second cause of action to have been done by the respondent in excess of its powers
that we refrain from commenting at any length upon said cases. The ground stated
in the second cause of action is in our opinion without merit.
Third cause of action. — Under the third cause of action the respondent is charged
with engaging in activities foreign to the purposes for which the corporation was
created and not reasonable necessary to its legitimate ends. The specifications under
this cause of action relate to three different sorts of activities. The first consist of the
administration of the offices in the El Hogar building not used by the respondent itself
and the renting of such offices to the public. As stated in the discussion connected
with the second cause of action, the respondent uses only about ten per cent of the
office space in the El Hogar building for its own purposes, and it leases the remainder
to strangers. In the years 1924 and 1925 the respondent received as rent for the
leased portions of the building the sums of P75,395.06 and P58,259.27, respectively.
The activities here criticized clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the second cause of
action. This matter will therefore no longer detain us. If the respondent had the
power to acquire the lot, construct the edifice and hold it beneficially, as there
decided, the beneficial administration by it of such parts of the building as are let to
others must necessarily be lawful.
The second specification under the third cause of action has reference to the
administration and management of properties belonging to delinquent shareholders
of the association. In this connection it appears that in case of delinquency on the
part of its shareholders in the payment of interest, premium, and dues, the
association has been accustomed (pursuant to clause 8 of its standard mortgage) to
take over and manage the mortgaged property for the purpose of applying the
income to the obligations of the debtor party. For these services the respondent
charges a commission at the rate of 2½ per centum on sums collected. The case for
the government supposes that the only remedy which the respondent has in case of
default on the part of its shareholders is to proceed to enforce collection of the whole
loan in the manner contemplated in section 185 of the Corporation Law. It will be
noted, however, that, according to said section, the association may treat the whole
indebtedness as due, "at the option of the board of directors," and this remedy is not
made exclusive. We see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the security for the
delinquent debt and to manage it with a view to the satisfaction of the obligations
due to the debtor than the immediate enforcement of the entire obligation, and the
validity of the clause allowing this course to be taken appears to us to be not open to
doubt. The second specification under this cause of action is therefore without merit,
as was true of the first.
The third specification under this cause of action relates to certain activities which
are described in the following paragraphs contained in the agreed statements of
facts:.
El Hogar Filipino has undertaken the management of some parcels of
improved real estate situated in Manila not under mortgage to it, but owned
by shareholders, and has held itself out by advertisement as prepared to do
so. The number of properties so managed during the years 1921 to 1925,
inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons whose
properties are so managed for them became shareholders only to enable
them to take advantage thereof.
The services rendered in the management of such improved real estate by
El Hogar Filipino consist in the renting of the same, the payment of real
estate taxes and insurance for the account of the owner, causing the
necessary repairs for upkeep to be made, and collecting rents due from
tenants. For the services so rendered in the management of such properties
El Hogar Filipino receives compensation in the form of commissions upon
the gross receipts from such properties at rates varying from two and one-
half per centum to five per centum of the sums so collected, according to
the location of the property and the effort involved in its management.
The work of managing real estate belonging to non-borrowing shareholders
administered by El Hogar Filipino is carried on by the same members of the
staff who attend to the details of the management of properties
administered by the manager of El Hogar Filipino under the provisions of
paragraph 8 of the standard mortgage form, and of properties bought in on
foreclosure of mortgage.
The practice described in the passage above quoted from the agreed facts is in our
opinion unauthorized by law. Such was the view taken by the bank examiner of the
Treasury Bureau in his report to the Insular Treasurer on December 21, 1925, wherein
the practice in question was criticized. The administration of property in the manner
described is more befitting to the business of a real estate agent or trust company
than to the business of a building and loan association. The practice to which this
criticism is directed relates of course solely to the management and administration
of properties which are not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to one or more shares
of the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such express
powers. The management and administration of the property of the shareholders of
the corporation is not expressly authorized by law, and we are unable to see that,
upon any fair construction of the law, these activities are necessary to the exercise
of any of the granted powers. The corporation, upon the point now under the
criticism, has clearly extended itself beyond the legitimate range of its powers. But it
does not result that the dissolution of the corporation is in order, and it will merely
be enjoined from further activities of this sort.
Fourth cause of action. — It appears that among the by laws of the association there
is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an absolute majority
of its members, is empowered to cancel shares and to return to the owner
thereof the balance resulting from the liquidation thereof whenever, by
reason of their conduct, or for any other motive, the continuation as
members of the owners of such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with the latter part
of section 187 of the Corporation Law, which expressly declares that the board of
directors shall not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation of the corporation or of forfeiture of
the stock for delinquency. It is agreed that this provision of the by-laws has never
been enforced, and in fact no attempt has ever been made by the board of directors
to make use of the power therein conferred. In November, 1923, the Acting Insular
Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its
by-laws and expressing the view that said article was invalid. It was therefore
suggested that the article in question should be eliminated from the by-laws. At the
next meeting of the board of directors the matter was called to their attention and it
was resolved to recommend to the shareholders that in their next annual meeting
the article in question be abrogated. It appears, however, that no annual meeting of
the shareholders called since that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the provision referred to
has no been eliminated from the by-laws, and it still stands among the by-laws of the
association, notwithstanding its patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this article among
the by-laws of the association is a misdemeanor on the part of the respondent which
justifies its dissolution. In this view we are unable to concur. The obnoxious by-law,
as it stands, is a mere nullity, and could not be enforced even if the directors were to
attempt to do so. There is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a corporation; and if there were
such, the hazards incident to corporate effort would certainly be largely increased.
There is no merit in this cause of action.
Fifth cause of action. — In section 31 of the Corporation Law it is declared that, "at
all elections of directors there must be present, either in person or by representative
authorized to act by written proxy, the owners of the majority of the subscribed
capital stock entitled to vote. . . ." Conformably with this requirement it is declared
in article 61 of the by-laws of El Hogar Filipino that, "the attendance in person or by
proxy of shareholders owning one-half plus one of the shareholders shall be
necessary to constitute a quorum for the election of directors. At the general annual
meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a quorum
of shares present or represented at the meetings and directors were duly elected
accordingly. As the corporation has grown, however, it has been fond increasingly
difficult to get together a quorum of the shareholders, or their proxies, at the annual
meetings; and with the exception of the annual meeting held in 1917, when a new
directorate was elected, the meetings have failed for lack of quorum. It has been
foreseen by the officials in charge of the respondent that this condition of affairs
would lead to embarrassment, and a special effort was made by the management to
induce a sufficient number of shareholders to attend the annual meeting for
February, 1923. In addition to the publication of notices in the newspapers, as
required by the by-laws, a letter of notification was sent to every shareholder at his
last known address, together with a blank form of proxy to be used in the event the
shareholder could not personally attend the meeting. Notwithstanding these special
efforts the meeting was attended only by shareholders, in person and by proxy,
representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to
vote.
Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to fill
vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in article 71 of the by-laws, which reads
as follows:
ART. 71. The directors shall elect from among the shareholders members to
fill the vacancies that may occur in the board of directors until the election
at the general meeting.
The person thus chosen to fill vacancies in the directorate have, it is admitted,
uniformly been experienced and successful business and professional men of means,
enjoying earned incomes of from P12,000 to P50,000 per annum, with an annual
average of P30,000 in addition to such income as they derive from their properties.
Moreover, it appears that several of the individuals constituting the original
directorate and persons chosen to supply vacancies therein belong to prominent
Filipino families, and that they are more or less related to each other by blood or
marriage. In addition to this it appears that it has been the policy of the directorate
to keep thereon some member or another of a single prominent American law firm
in the city.
It is supposed in the statement of the fifth cause of action in the complaint that the
failure of the corporation to hold annual meetings and the filling of vacancies in the
directorate in the manner described constitute misdemeanors on the part of the
respondent which justify the resumption of the franchise by the Government and
dissolution of the corporation; and in this connection it is charge that the board of
directors of the respondent has become a permanent and self perpetuating body
composed of wealthy men instead of wage earners and persons of moderate means.
We are unable to see the slightest merit in the charge. No fault can be imputed to
the corporation on account of the failure of the shareholders to attend the annual
meetings; and their non-attendance at such meetings is doubtless to be interpreted
in part as expressing their satisfaction of the way in which things have been
conducted. Upon failure of a quorum at any annual meeting the directorate naturally
holds over and continues to function until another directorate is chosen and
qualified. Unless the law or the charter of a corporation expressly provides that an
office shall become vacant at the expiration of the term of office for which the officer
was elected, the general rule is to allow the officer to holdover until his successor is
duly qualified. Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation (Quitman Oil Company vs.
Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry.
Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865;
Youree vs. Home Town Matual Ins. Company, 180 Missouri, 153;
Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine
above stated finds expressions in article 66 of the by-laws of the respondent which
declares in so many words that directors shall hold office "for the term of one year
on until their successors shall have been elected and taken possession of their
offices."
It result that the practice of the directorate of filling vacancies by the action of the
directors themselves is valid. Nor can any exception be taken to then personality of
the individuals chosen by the directors to fill vacancies in the body. Certainly it is no
fair criticism to say that they have chosen competent businessmen of financial
responsibility instead of electing poor persons to so responsible a position. The
possession of means does not disqualify a man for filling positions of responsibility in
corporate affairs.
Sixth cause of action. — Under the sixth cause of action it is alleged that the directors
of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed
salary, — as the complaint supposes would be proper, — have been receiving large
compensation, varying in amount from time to time, out of the profits of the
respondent. The facts relating to this cause of action are in substance these:
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit
shown by the annual balance sheet is distributed to the directors in proportion to
their attendance at meetings of the board. The compensation paid to the directors
from time to time since the organization was organized in 1910 to the end of the year
1925, together with the number of meetings of the board held each year, is exhibited
in the following table:
Compensation Number of Rate per
Year paid directors meetings meeting
as a whole held as a whole
1911 .................................. P 4,167.96 25 P 166.71
1912 .................................. 10,511.87 29 362.47
1913 .................................. 15,479.29 27 573.30
1914 .................................. 19,164.72 27 709.80
1915 .................................. 24,032.85 25 961.31
1916 .................................. 27,539.50 28 983.55
1917 .................................. 31,327.00 26 1,204.88
1918 .................................. 32,858.35 20 1,642.91
1919 .................................. 36,318.78 21 1,729.46
1920 .................................. 63,517.01 28 2,268.46
1921 .................................. 36,815.33 25 1,472.61
1922 .................................. 43,133.73 25 1,725.34
1923 .................................. 39,773.61 27 1,473.09
1924 .................................. 38,651.92 26 1,486.61
1925 .................................. 35,719.27 26 1,373.81
It will be note that the compensation above indicated as accruing to the directorate
as a whole has been divided among the members actually present at the different
meetings. As a result of this practice, and the liberal measure of compensation
adopted, we find that the attendance of the membership at the board meetings has
been extraordinarily good. Thus, during the years 1920 to 1925, inclusive, when the
board was composed of nine members, the attendance has regularly been eight
meeting with the exception of two years when the average attendance was seven. It
is insisted in the brief for the Attorney-General that the payment of the
compensation indicated is excessive and prejudicial to he interests of the
shareholders at large. For the respondent, attention is directed to the fact that the
liberal policy adopted by the association with respect to the compensation of the
directors has had highly beneficial results, not only in securing a constant attendance
on the part of the membership, but in obtaining their intelligent attention to the
affairs of the association. Certainly, in this connection, the following words from the
report of the government examiners for 1918 to the Insular Treasurer contain matter
worthy of consideration:
The management of the association is entrusted to men of recognized ability in
financial affairs and it is believed that they have long foreseen all possible future
contingencies and that under such men the interests of the stockholders are duly
protected. The steps taken by the directorate to curtail the influx of unnecessary
capital into the association's coffers, as mentioned above, reveals how the men at
grasp the situation and to apply the necessary remedy as the circumstances were
found in the same excellent condition as in the previous examination.
In so far as this court is concerned the question here before us is not one concerning
the propriety and wisdom of the measure of compensation adopted by the
respondent but rather the question of the validity of the measure. Upon this point
there can, it seems to us, be no difference of intelligent opinion. The Corporation Law
does not undertake to prescribe the rate of compensation for the directors of
corporations. The power to fixed the compensation they shall receive, if any, is left
to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant
to this authority the compensation for the directors of El Hogar Filipino has been fixed
in section 92 of its by-laws, as already stated. The justice and property of this
provision was a proper matter for the shareholders when the by-laws were framed;
and the circumstance that, with the growth of the corporation, the amount paid as
compensation to the directors has increased beyond what would probably be
necessary to secure adequate service from them is matter that cannot be corrected
in this action; nor can it properly be made a basis for depriving the respondent of its
franchise, or even for enjoining it from compliance with the provisions of its own by-
laws. If a mistake has been made, or the rule adopted in the by-laws meeting to
change the rule. The remedy, if any, seems to lie rather in publicity and competition,
rather than in a court proceeding. The sixth cause of action is in our opinion without
merit.
Seventh cause of action. — It appears that the promoter and organizer of El Hogar
Filipino was Mr. Antonio Melian, and in the early stages of the organization of the
association the board of directors authorized the association to make a contract with
him with regard to the services him therefor. Pursuant to this authority the president
of the corporation, on January 11, 1911, entered into a written agreement with Mr.
Melian, which is reproduced in the agreed statement of facts and of which the
important clauses are these:
1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y
Prestamos," and on its behalf its president, Don Antonio R. Roxas, hereby
confers on Don Antonio Melian the office of manager of said association for
the period of one year from the date of this contract.
2. Don Antonio Melian accepts said office and undertakes to render the
services thereto corresponding for the period of one year, as prescribed by
the by-laws of the corporation, without salary.
3. Don Antonio Melian furthermore undertakes to pay for his own account,
all the expenses incurred in the organization of the corporation.
4. Don Antonio Melian further undertakes to lend to the corporation,
without interest the sum of six thousand pesos (P6,000), Philippine
Currency, for the purpose of meeting the expense of rent, office supplies,
etcetera, until such time as the association has sufficient funds of its own
with which to return this loan: Provided, nevertheless, That the maximum
period thereof shall not exceed three (3) years.
5. Don Antonio Melian undertakes that the capital of the association shall
amount to the sum of four hundred thousand pesos (P400,000), Philippine
currency, par value, during the first year of its duration.
6. In compensation of the studies made and services rendered by Don
Antonio Melian for its organization, the expenses incurred by him to that
end, and in further consideration of the said loan of six thousand pesos
(P6,000), and of the services to be rendered by him as manager, and of the
obligation assumed by him that the nominal value of the capital of the
association shall reach the sum of four hundred thousand pesos (P400,000)
during the first year of its duration, the corporation 'El Hogar Filipino
Sociedad Mutua de Construccion y Prestamos' hereby grants him five per
centum (5%) of the net profits to be earned by it in each year during the
period fixed for the duration of the association by its articles of
incorporation; Provided, that this participation in the profits shall be
transmitted to the heirs of Señor Melian in the event of his death; And
provided further, that the performance of all the obligations assumed by
Señor Melian in favor of the association, in accordance with this contract,
shall and does constitute a condition precedent to the acquisition by Señor
Melian of the right to the said participation in the profits of the association,
unless the non-performance of such obligations shall be due to a fortuitous
event or force majeure.
In conformity with this agreement there was inserted in section 92 of the by-laws of
the association a provision recognizing the rights of Melian, as founder, to 5 per
centum of the net profits shown by the annual balance sheet, payment of the same
to be made to him or his heirs during the life of the association. It is declared in said
article that this portion of the earnings of the association is conceded to him in
compensation for the studies, work and contributions made by him for the
organization of El Hogar Filipino and the performance on his part of the contract of
January 11, 1911, above quoted. During the whole life of the association, thus far, it
has complied with the obligations assumed by it in the contract above- mentioned;
and during the years 1911 to 1925, inclusive, it paid to him as founder's royalty the
sum of P459,011.19, in addition to compensation received from the association by
him in to remuneration of services to the association in various official capacities.
As a seventh cause of action it is alleged in the complaint that this royalty of the
founder is "unconscionable, excessive and out of all proportion to the services
rendered, besides being contrary to and incompatible with the spirit and purpose of
building and loan associations." It is not alleged that the making of this contract was
beyond the powers of the association (ultra vires); nor it alleged that it is vitiated by
fraud of any kind in its procurement. Nevertheless, it is pretended that in making and
observing said contract the respondent committed an offense requiring its
dissolution, or, as is otherwise suggested, that the association should be enjoined
from performing the agreement.
It is our opinion that this contention is entirely without merit. Stated in its true
simplicity, the primary question here is whether the making of a (possibly) indiscreet
contract is a capital offense in a corporation, — a question which answers itself. No
possible doubt exists as to the power of a corporation to contract for services
rendered and to be rendered by a promoter in connection with organizing and
maintaining the corporation. It is true that contracts with promoters must be
characterized by good faith; but could it be said with certainty, in the light of facts
existing at the time this contract was made, that the compensation therein provided
was excessive? If the amount of the compensation now appears to be a subject of
legitimate criticism, this must be due to the extraordinary development of the
association in recent years.
If the Melian contract had been clearly ultra vires — which is not charged and is
certainly untrue — its continued performance might conceivably be enjoined in such
a proceeding as this; but if the defect from which it suffers is mere matter for an
action because Melian is not a party. It is rudimentary in law that an action to annul
a contract cannot be maintained without joining both the contracting parties as
defendants. Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.
The mere fact that the compensation paid under this contract is in excess of what, in
the full light of history, may be considered appropriate is not a proper consideration
for this court, and supplies no ground for interfering with its performance. In the case
of El Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this court nearly ten
years ago, this court held that the El Hogar Filipino is contract with Mr. Melian did
not affect the association's legal character. The inference is that the contract under
consideration was then considered binding, and it occurred to no one that it was
invalid. It would be a radical step indeed for a court to attempt to substitute its
judgment for the judgment of the contracting parties and to hold, as we are invited
to hold under this cause of action, that the making of such a contract as this removes
the respondent association from the pale of the law. The majority of the court is of
the opinion that our traditional respect for the sanctity of the contract obligation
should prevail over the radical and innovating tendencies which find acceptance with
some and which, if given full rein, would go far to sink legitimate enterprise in the
Islands into the pit of populism and bolshevism. The seventh count is not sustainable.
Eight cause of action. — Under the fourth cause of action we had case where the
alleged ground for the revocation of the respondent's charter was based upon the
presence in the by-laws of article 10 that was found to be inconsistent with the
express provisions of law. Under the eight cause of action the alleged ground for
putting an end to the corporate life of the respondent is found in the presence of
other articles in the by-laws, namely, articles 70 and 76, which are alleged to be
unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-
laws in effect requires that persons elected to the board of directors must be holders
of shares of the paid up value of P5,000 which shall be held as security may be put
up in the behalf of any director by some other holder of shares in the amount stated.
Article 76 of the by-laws declares that the directors waive their right as shareholders
to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is objectionable in that,
under the requirement for security, a poor member, or wage-earner, cannot serve as
director, irrespective of other qualifications and that as a matter of fact only men of
means actually sit on the board. Article 76 is criticized on the ground that the
provision requiring directors to renounce their right to loans unreasonably limits their
rights and privileges as members. There is nothing of value in either of theses
suggestions. Section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge of the duties of their
office, in the manner prescribed in article 70, is highly prudent and in conformity with
good practice. Article 76, prohibiting directors from making loans to themselves, is of
course designed to prevent the possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to insert in the by-laws of a
building and loan association would be hard to imagine. Clearly, the eighth cause of
action cannot be sustained.
Ninth cause of action. — The specification under this head is in effect that the
respondent has abused its franchise in issuing "special" shares. The issuance of these
shares is allege to be illegal and inconsistent with the plan and purposes of building
and loan associations; and in particular, it is alleged and inconsistent with the plan
and purposes of building and loan associations; and in particular, it is alleged that
they are, in the main, held by well-to-wage-earners for accumulating their modest
savings for the building of homes.
In the articles of incorporation we find the special shares described as follows:
"Special" shares shall be issued upon the payment of 80 per cent of their par
value in cash, or in monthly dues of P10. The 20 per cent remaining of the
par value of such shares shall be completed by the accumulation thereto of
their proportionate part of the profits of the corporation. At the end of each
quarter the holders of special shares shall be entitled to receive in cash such
part of the net profits of the corporation corresponding to the amount on
such date paid in by the holders of special shares, on account thereof, as
shall be determined by the directors, and at the end of each year the full
amount of the net profits available for distribution corresponding to the
special shares. The directors shall apply such part as they deem advisable to
the amortization of the subscription to capital with respect to shares not
fully paid up, and the remainder of the profits, if any, corresponding to such
shares, shall be delivered to the holders thereof in accordance with the
provision of the by-laws.
The ground for supposing the issuance of the "special" shares to be unlawful is that
special shares are not mentioned in the Corporation Law as one of the forms of
security which may be issued by the association. In the agreed statement of facts it
is said that special shares are issued upon two plans. By the second, the shareholder,
upon subscribing, pays in cash P10 for each share taken, and undertakes to pay P10
a month, as dues, until the total so paid in amounts to P160 per share. On December
31, 1925, there were outstanding 20,844 special shares of a total paid value
(including accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since
1915, has been to accumulate to each special share, at the end of the year, one-tenth
of the divident declared and to pay the remainder of the divident in cash to the
holders of shares. Since the same year dividend have been declared on the special
and common shares at the rate of 10 per centum per annum. When the amount paid
in upon any special share plus the accumulated dividends accruing to it, amounts to
the par value of the share (P200), such share matures and ceases to participate
further in the earning. The amount of the par value of the share (P200) is then
returned to the shareholder and the share cancelled. Holders of special and ordinary
shares participate ratably in the dividends declared and distributed, the part
pertaining to each share being computed on the basis of the capital paid in, plus the
accumulated dividends pertaining to each share at the end of the year. The total
number of shares of El Hogar Filipino outstanding on December 31, 1925, was
125,750, owned by 5,826 shareholders, and dividend into classes as follows:
Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar Filipino has
been before this court in two earlier cases, in both of which the question has received
the fullest consideration from this court. In El Hogar Filipino vs. Rafferty (37 Phil.,
995), it was insisted that the issuance of such shares constituted a departure on the
part of the association from the principle of mutuality; and it was claimed by the
Collector of Internal Revenue that this rendered the association liable for the income
tax to which other corporate entities are subject. It was held that this contention was
untenable and that El Hogar Filipino was a legitimate building and loan association
notwithstanding the issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R.
No. 24926),2 and the related cases of Gervasio Miraflores and Gil Lopes against the
same entity, it was asserted by the plaintiffs that the emission of special shares
deprived the herein responded of the privileges and immunities of a building and
loan association and that as a consequence the loans that had been made to the
plaintiffs in those cases were usurious. Upon an elaborate review of the authorities,
the court, though divided, adhered to the principle announced in the earlier case and
held that the issuance of the special shares did not affect the respondent's character
as a building and loan association nor make its loans usurious. In view of the lengthy
discussion contained in the decisions above-mentioned, it would appear to be an act
of supererogation on our part to go over the same ground again. The discussion will
therefore not be repeated, and what is now to be said should be considered
supplemental thereto.
Upon examination of the nature of the special shares in the light of American usage,
it will be found that said shares are precisely the same kind of shares that, in some
American jurisdictions, are generally known as advance payment shares; in if close
attention be paid to the language used in the last sentence of section 178 of the
Corporation Law, it will be found that special shares where evidently created for the
purpose of meeting the condition cause by the prepayment of dues that is there
permitted. The language of this provision is as follow "payment of dues or interest
may be made in advance, but the corporation shall not allow interest on such
advance payment at a greater rate than six per centum per annum nor for a longer
period than one year." In one sort of special shares the dues are prepaid to the extent
of P160 per share; in the other sort prepayment is made in the amount of P10 per
share, and the subscribers assume the obligation to pay P10 monthly until P160 shall
have been paid.
It will escape notice that the provision quoted say that interest shall not be allowed
on the advance payments at a greater rate than six per centum per annum nor for a
longer period than one year. The word "interest " as there used must be taken in its
true sense of compensation for the used of money loaned, and it not must not be
confused with the dues upon which it is contemplated that the interest may be paid.
Now, in the absence of any showing to the contrary, we infer that no interest is ever
paid by the association in any amount for the advance payments made on these
shares; and the reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section 188 of the
Corporation Law, sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary to induce inventors to
purchase the stock.
It will be observed that the final 20 per centum of the par value of each special share
is not paid for by the shareholder with funds out of the pocket. The amount is
satisfied by applying a portion of the shareholder's participation in the annual
earnings. But as the right of every shareholder to such participation in the earnings
is undeniable, the portion thus annually applied is as much the property of the
shareholder as if it were in fact taken out of his pocket. It follows that the mission of
the special shares does not involve any violation of the principle that the shares must
be sold at par.
From what has been said it will be seen that there is express authority, even in the
very letter of the law, for the emission of advance-payment or "special" shares, and
the argument that these shares are invalid is seen to be baseless. In addition to this
it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even
assuming that the statute has not expressly authorized such shares, yet the
association has implied authority to issue them. The complaint consequently fails also
as regards the stated in the ninth cause of action.
Tenth cause of action. — Under this head of the complaint it is alleged that the
defendant is pursuing a policy of depreciating, at the rate of 10 per centum per
annum, the value of the real properties acquired by it at its sales; and it is alleged
that this rate is excessive. From the agreed statement it appears that since its
organization in 1910 El Hogar Filipino, prior to the end of the year 1925, had made
1,373 loans to its shareholders secured by first mortgages on real estate as well as by
the pledge of the shares of the borrowers. In the same period the association has
purchased at foreclosure sales the real estate constituting the security for 54 of the
aforesaid loans. In making these purchases the association has always bid the full
amount due to it from the debtor, after deducting the withdrawal value of the shares
pledged as collateral, with the result that in no case has the shareholder been called
upon to pay a deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at actual cost, as
determined by the amount bid on foreclosure sale; and thereafter until sold the book
value of such real estate is depreciated at the rate fixed by the directors in
accordance with their judgment as to each parcel, the annual average depreciation
having varied from nothing to a maximum of 14.138 per cent. The sales thereof, but
sales are made for the best prices obtainable, whether greater or less than the book
value.
It is alleged in the complaint that depreciation is charged by the association at the
rate of 10 per centum per annum. The agreed statement of facts on this point shows
that the annual average varies from nothing to a maximum of something over 14 per
centum. We are thus left in the dark as to the precise depreciation allowed from year
to year. It is not claimed for the Government that the association is without power
to allow some depreciation; and it is quite clear that the board of directors possesses
a discretion in this matter. There is no positive provision of law prohibiting the
association from writing off a reasonable amount for depreciation on its assets for
the purpose of determining its real profits; and article 74 of its by-laws expressly
authorizes the board of directors to determine each year the amount to be written
down upon the expenses of installation and the property of the corporation. There
can be no question that the power to adopt such a by-law is embraced within the
power to make by-laws for the administration of the corporate affairs of the
association and for the management of its business, as well as the care, control and
disposition of its property (Act No. 1459, sec. 13 [7]). But the Attorney-General
questions the exercise of the direction confided to the board; and it is insisted that
the excessive depreciation of the property of the association is objectionable in
several respects, but mainly because it tends to increase unduly the reserves of the
association, thereby frustrating the right of the shareholders to participate annually
and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an erroneous notion as
to what a court may do in determining the internal policy of a business corporation.
If the criticism contained in the brief of the Attorney-General upon the practice of
the respondent association with respect to depreciation be well founded, the
Legislature should supply the remedy by defining the extent to which depreciation
may be allowed by building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of the association about
an administrative matter as to which they have legitimate power of action. The tenth
cause of action is therefore not well founded.
Eleventh and twelfth causes of action. — The same comment is appropriate with
respect to the eleventh and twelfth causes of action, which are treated together in
the briefs, and will be here combined. The specification in the eleventh cause of
action is that the respondent maintains excessive reserve funds, and in the twelfth
cause of action that the board of directors has settled upon the unlawful policy of
paying a straight annual dividend of 10 per centum, regardless of losses suffered and
profits made by the corporation and in contravention of the requirements of section
188 of the Corporation Law. The facts relating to these two counts in the complaint,
as set forth in the stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the
net profits earned each year, as shown by the annual balance sheet shall be carried
to a reserve fund. The fund so created is called the General Reserve. Article 93 of the
by-laws authorizes the directors to carry funds to a special reserve, whenever in their
judgment it is advisable to do so, provided that the annual dividend in the year in
which funds are carried to special reserve exceeds 8 per centum. It appears to have
been the policy of the board of directors for several years past to place in the special
reserve any balance in the profit and loss account after the satisfaction of preferential
charges and the payment of a dividend of 10 per centum to all special and ordinary
shares (with accumulated dividends). As things stood in 1926 the general reserve
contained an amount equivalent to about 5 per centum of the paid-in value of
shared. This fund has never been drawn upon for the purpose of maintaining the
regular annual dividend; but recourse has been had to the special reserve on three
different occasions to make good the amount necessary to pay dividends. It appears
that in the last five years the reserves have declined from something over 9 per cent
to something over 7.
It is insisted in the brief of the Attorney-General that the maintenance of reserve
funds is unnecessary in the case of building and loan associations, and at any rate the
keeping of reserves is inconsistent with section 188 of the Corporation Law.
Moreover, it is said that the practice of the association in declaring regularly a 10 per
cent dividend is in effect a guaranty by the association of a fixed dividend which is
contrary to the intention of the statute.
Upon careful consideration of the questions involved we find no reason to doubt the
right of the respondent to maintain these reserves. It is true that the corporation law
does not expressly grant this power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises encounter periods when
earnings fall below the average, and the prudent manager makes provision for such
contingencies. To regard all surplus as profit is to neglect one of the primary canons
of good business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in
the dividend rate are highly detrimental to any fiscal institutions, while uniformity in
the payments of dividends, continued over long periods, supplies the surest
foundations of public confidence.
The question now under consideration is not new in jurisprudence, for the American
courts have been called upon more than once to consider the legality of the
maintenance of reserves by institutions of this or similar character.
In Greeff vs. Equitable Life Assurance Society, the court had under consideration a
charter provision of a life insurance company, organized on the mutual plan, in its
relation to the power of the company to provide reserves. There the statute provided
that "the officers of the company, within sixty days from the expiration of the first
five years, from December 31, 1859, and within the first sixty days of every
subsequent period of five years, shall cause a balance to be struck of the affairs of
the company, which shall exhibit its assets and liabilities, both present and
contingent, and also the net surplus, after deducting a sufficient amount to cover all
outstanding risks and other obligations. Each policy holder shall be credited with an
equitable share of the said surplus."
The court said:
No prudent person would be inclined to take a policy in a company which
had so improvidently conducted its affairs that it only retained a fund barely
sufficient to pay its present liabilities, and, therefore, was in a condition
where any change by the reduction of interest upon, or depreciation in, the
value of its securities, or any increase of mortality, would render it insolvent
and subject to be placed in the hands of a receiver. The evident purpose of
the provisions of the defendant's charter and policy relating to this subject
was to vest in the directors of the corporation a discretion to determine the
proportion of its surplus which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg.
and Loan Association vs. Knolt, the court, in commenting on the nature of these
reserves, said:
The apparent function of this fund is to insure the stockholders against
losses. Its purpose is not unlike that of the various forms of insurance now
in such common use. This contribution is as legitimate an item of expense
as are the premiums paid on any insurance policy. (See Clarks and Chase,
Building and Loan Association, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain such a fund or not,
but justice and good business policy seem to require it. The retiring
stockholder must be paid the value of his stock in cash and leave for those
remaining a large number of securities and perhaps some real estate
purchased to protect the associations interest. How much will be realized
on these securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation and expense.
There are many other contingencies which might cause a shrinkage in the
association's assets, such as defective titles, undisclosed defalcations on the
part of an officer, a miscalculation of assets and liabilities, and many other
errors and omissions which must always be reckoned within the conduct of
human affairs.
The contingent fund is merely insurance against possible loss. That losses
may occur from time to time seems almost inevitable and it is, therefore,
inequitable that the remaining stockholders should be compelled to accept
all securities at par, so, to say the least, the maintenance of this fund is
justified. The association teaches the duty of providing for the proverbial
rainy day. Why should it not provide for the hour of adversity? The reserve
fund has protected the maturing or withdrawing member during the period
of his membership. In case of loss it has or would have reimbursed him and,
at all times, it has protected him and given strength and standing to the
association. Losses may occur, after his membership ceases, that arose from
some mistake or mismanagement committed during the period of his
membership, and in fairness and equity the remaining members should
have some protection against this. (Sundheim, Law of Building and Loan
Association, sec. 53.)
The government insists, we thing, upon an interpretation of section 188 of the
Corporation Law that is altogether too strict and literal. From the fact that the statute
provides that profits and losses shall be annually apportioned among the
shareholders it is argued that all earnings should be distributed without carrying
anything to the reserve. But it will be noted that it is provided in the same section
that the profits and losses shall be determined by the board of directors: and this
means that they shall exercise the usual discretion of good businessmen in allocating
a portion of the annual profits to purposes needful to the welfare of the association.
The law contemplates the distribution of earnings and losses after other legitimate
obligations have been met.
Our conclusion is that the respondent has the power to maintain the reserves
criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be
supposed that the reserves referred to have become excessive, the remedy is in the
hands of the Legislature. It is no proper function of the court to arrogate to itself the
control of administrative matters which have been confided to the discretion of the
board of directors. The causes of action under discussion must be pronounced to be
without merit.
Thirteenth cause of action. — The specification under this head is, in effect, that the
respondent association has made loans which, to the knowledge of the associations
officers were intended to be used by the borrowers for other purposes than the
building of homes. In this connection it appears that, though loans have been made
by the association exclusively to its shareholders, no attempt has been made by it to
control the borrowers with respect to the use made of the borrowed funds, the
association being content to see that the security given for the loan in each case is
sufficient. On December 31, 1925, the respondent had five hundred forty-four loans
outstanding secured by mortgages upon real estate and by the pledge of the
borrowers' shares in an amount sufficient at maturity to amortize the loans. With
respect to the nature of the real estate upon which these loans were made it appears
that three hundred fifty-one loans were secured by mortgages upon city residences,
seven by mortgages upon commercial building in cities, and three mortgages upon
unimproved city lots. At the same time one hundred eighty-three of the loans were
secured by mortgages upon groves, sugar land, and rice land, with a total area of
about 7,558 hectares. From information gathered by the association from voluntary
statements of borrowers given at the time of application with respect to the use
intended to be made of the borrowed funds, it appears that the amount of P693,200
was borrowed to redeem real property from existing mortgages or pactos de retro,
P280,800 to buy real estate, P449,100 to erect buildings, P24,000 to improve and
repair buildings, P1,480,900 for agricultural purposes, while the amount of
P5,763,700 was borrowed for purposes not disclosed.
Upon these facts an elaborate argument has been constructed in behalf of the
plaintiff to the effect that in making loans for other purposes than the building of
residential houses the association has illegally departed from its character and made
itself amenable to the penalty of dissolution. Aside from being directly opposed to
the decision of this court in Lopez and Javelona vs. El Hogar Filipino and Registrar of
Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial
support in the prevailing decisions made in American courts; and our attention has
not been directed to a single case wherein the dissolution of a building and loan
association has been decreed in a quo warranto proceeding because the association
allowed its borrowers to use the loans for other purposes than the acquisition of
homes.
The case principally relied upon for the Government appears to be Pfeister vs.
Wheeling Building Association (19 W. Va., 676, 716),which involved the question
whether a building and loan association could recover the full amount of a note given
to it by a member and secured by a mortgage from a stranger. At the time the case
arose there was a statute in force in the State of West Virginia expressly forbidding
building and loan associations to use or direct their funds for or to any other object
or purpose than the buying of lots or houses or in building and repairing houses, and
it was declared that in case the funds should be improperly directed to other objects,
the offending association should forfeit all rights and privileges as a corporation.
Under the statute so worded the court held that the plaintiff could only recover the
amount actually advanced by it with lawful interest and fines, without premium; and
judgment was given accordingly. The suggestion in that case that the result would
have been the same even in the absence of statute was mere dictum and is not
supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving
Association. The statute in force in the State of Tennessee at the time this action
arose provided that all loans should be made to the members of the association at
open stated meetings and that the money should be lent to the highest bidder.
Inconsistently with this provision, there was inserted in the by-laws of the association
a provision to the effect that no loan should be made at a greater premium than 30
per cent, nor at a less premium than 29 7/8 per cent. It was held that this by-law
made free and open competition impossible and that it in effect established a fixed
premium. It was accordingly held, in the case cited, that an association could not
recover such part of the loan as had been applied by it to the satisfaction of a
premium of 30 per centum.
We have no criticism to make upon the result reached in either of the two decisions
cited, but it is apparent that much of the discussion contained in the opinions in those
cases does not reflect the doctrine now prevailing in the United States; and much less
are those decisions applicable in this jurisdiction. There is no statute here expressly
declaring that loans may be made by these associations solely for the purpose of
building homes. On the contrary, the building of homes is mentioned in section 171
of the Corporation Law as only one among several ends which building and loan
associations are designed to promote. Furthermore, section 181 of the Corporation
Law expressly authorities the Board of directors of the association from time to time
to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and decisions have
been collated in which the idea is developed that the primary design of building and
loan associations should be to help poor people to procure homes of their own. This
beneficent end is undoubtedly served by these associations, and it is not to be denied
that they have been generally fostered with this end in view. But in this jurisdiction
at least the lawmaker has taken care not to limit the activities of building and loan
associations in an exclusive manner, and the exercise of the broader powers must in
the end approve itself to the business community. Judging from the past history of
these institutions it can be truly said that they have done more to encourage thrift,
economy and saving among the people at large than any other institution of modern
times, not excepting even the saving banks. In this connection Mr. Sundheim, in a
late treatise upon the subject of the law of building and loan associations, makes the
following comment:
They have grown to such an extent in recent years that they no longer
restrict their money to the home buyer, but loan their money to the mere
investor or dealer in real estate. They are the holder of large mortgages
secured upon farms, factories and other business properties and rows of
stores and dwellings. This is not an abuse of their powers or departure from
their main purposes, but only a natural and proper expansion along healthy
and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the same author adds:
Loans are made for the purpose of purchasing a homestead, or other real
estate, or for any lawful purpose or business, but there is no duty or
obligation of the association to inquire for what purpose the loan is
obtained, or to require any stipulation from the borrower as to what use he
will make of the money, or in any manner to supervise or control its
disbursement. (Sundheim, Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
Negros, this court had before it the question whether a loan made by the respondent
association upon the security of a mortgage upon agricultural land, — where the loan
was doubtless used for agricultural purposes, — was usurious or not; and the case
turned upon the point whether, in making such loans, the association had violated
the law and departed from its fundamental purposes. The conclusion of the court
was that the loan was valid and could be lawfully enforced by a nonjudicial
foreclosure in conformity with the terms of the contract between the association and
the borrowing member. We now find no reason to depart from the conclusion
reached in that case, and it is unnecessary to repeat what was then said. The
thirteenth cause of action must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this head is that the loans
made by the defendant for purposes other than building or acquiring homes have
been extended in extremely large amounts and to wealthy persons and large
companies. In this connection attention is directed to eight loans made at different
times in the last several years to different persons or entities, ranging in amounts
from P120,000 to P390,000 and to two large loans made to the Roxas Estate and to
the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000,
respectively. In connection with the larger of the two after this loan was made the
available funds of El Hogar Filipino were reduced to the point that the association
was compelled to take advantage of certain provisions of its by-laws authorizing the
postponement of the payment of claims resulting from withdrawals, whereas
previously the association had always settled these claims promptly from current
funds. At no time was there apparently any delay in the payment of matured shares;
but in four or five cases there was as much as ten months delay in the payment of
withdrawal applications.
There is little that can be said upon the legal aspects of this cause of action. In so far,
as it relates to the purposes for which these loans were made, the matter is covered
by what was said above with reference to the thirteenth cause of action; and in so
far as it relates to the personality of the borrowers, the question belongs more
directly to the discussion under the sixteenth cause of action, which will be found
below. The point, then, which remains for consideration here is whether it is a
suicidal act on the part of a building and loan association to make loans in large
amount. If the loans which are here the subject of criticism had been made upon
inadequate security, especially in case of the largest two, the consequences certainly
would have been disastrous to the association in the extreme; but no such fact is
alleged; and it is to be assumed that none of the ten borrowers have defaulted in
their contracts.
Now, it must be admitted that two of these loans at least are of a very large size,
considering the average range of financial transaction in this country; and the making
of the largest loan was followed, as we have already see, with unpleasant
consequences to the association in dealing with current claims. Nevertheless the
agreed statement of facts shoes that all of the loan referred to are only ten out of a
total of five hundred forty-four outstanding on December 31, 1925; and the average
of all the loans taken together is modest enough. It appears that the chief examiner
of banks and corporations of the Philippine Treasury, after his examination of El
Hogar Filipino at the end of the year 1925, made a report concerning this association
as of January 31, 1926, in which he criticized the Pacific Warehouse Company loan as
being so large that it temporarily crippled the lending power of the association for
some time. This criticism was apparently justified as proper comment on the
activities of the association; but the question for use here to decide is whether the
making of this and the other large loans constitutes such a misuser of the franchise
as would justify us in depriving the association of its corporate life. This question
appears to us to be so simple as almost to answer itself. The law states no limit with
respect to the size of the loans to be made by the association. That matter is confided
to the discretion of the board of directors; and this court cannot arrogate to itself a
control over the discretion of the chosen officials of the company. If it should be
thought wise in the future to put a limit upon the amount of loans to be made to a
single person or entity, resort should be had to the Legislature; it is not a matter
amenable to judicial control. The fourteenth cause of action is therefore obviously
without merit.
Fifteenth cause of action. — The criticism here comes back to the supposed
misdemeanor of the respondent in maintaining its reserve funds, — a matter already
discussed under the eleventh and twelfth causes of action. Under the fifteenth cause
of action it is claimed that upon the expiration of the franchise of the association
through the effluxion of time, or earlier liquidation of its business, the accumulated
reserves and other properties will accrue to the founder, or his heirs, and the then
directors of the corporation and to those persons who may at that time to be holders
of the ordinary and special shares of the corporation. In this connection we note that
article 95 of the by-laws reads as follows:
ART. 95. The funds obtained by the liquidation of the association shall be
applied in the first place to the repayment of shares and the balance, if any,
shall be distribute in accordance with the system established for the
distribution of annual profits.
It will be noted that the cause of action with which we are now concerned is not
directed to any positive misdemeanor supposed to have been committed by the
association. It has exclusive relation to what may happen some thirty-five years
hence when the franchise expires, supposing of course that the corporation should
not be reorganized and continued after that date. There is nothing in article 95 of the
by-laws which is, in our opinion, subject to criticism. The real point of criticism is that
upon the final liquidation of the corporation years hence there may be in existence a
reserve fund out of all proportion to the requirements that may then fall upon it in
the liquidation of the company. It seems to us that this is matter that may be left to
the prevision of the directors or to legislative action if it should be deemed expedient
to require the gradual suppression of the reserve funds as the time for dissolution
approaches. It is no matter for judicial interference, and much less could the
resumption of the franchise on this ground be justified. There is no merit in the
fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns as cause of action that
various loans now outstanding have been made by the respondent to corporations
and partnerships, and that these entities have in some instances subscribed to shares
in the respondent for the sole purpose of obtaining such loans. In this connection it
appears from the stipulation of facts that of the 5,826 shareholders of El Hogar
Filipino, which composed its membership on December 31, 1925, twenty-eight are
juridical entities, comprising sixteen corporations and fourteen partnerships; while
of the five hundred forty-four loans of the association outstanding on the same date,
nine had been made to corporations an five to partnerships. It is also admitted that
some of these juridical entities became shareholders merely for the purpose of
qualifying themselves to take loans from the association, and the same is said with
respect to many natural persons who have taken shares in the association. Nothing
is said in the agreed statement of facts on the point whether the corporations and
partnerships that have taken loans from the respondent are qualified by law
governing their own organization to enter into these contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person" may become a
stockholder in building and loan associations. The word "person" appears to be here
used in its general sense, and there is nothing in the context to indicate that the as a loan on the books of the respondent make it a loan on the books of the
expression is used in the restricted sense of both natural and artificial persons, as respondent make it a loan in law. The contention of the Government under this head
indicated in section 2 of the Administrative Code. We would not say that the word is untenable.
"person" or persons," is to be taken in this broad sense in every part of the In conclusion, the respondent is enjoined in the future from administering real
Corporation Law. For instance, it would seem reasonable to say that the property not owned by itself, except as may be permitted to it by contract when a
incorporators of a corporation ought to be natural persons, although in section 6 it is borrowing shareholder defaults in his obligation. In all other respects the complaint
said that five or more "persons", although in section 6 it is said that five or more is dismissed, without costs. So ordered.
"persons," not exceeding fifteen, may form a private corporation. But the context Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ., concur.
there, as well as the common sense of the situation, suggests that natural persons
are meant. When it is said, however, in section 173, that "any person" may become
a stockholder in a building and loan association, no reason is seen why the phrase
may not be taken in its proper broad sense of either a natural or artificial person. At
any rate the question whether these loans and the attendant subscriptions were
properly made involves a consideration of the power of the subscribing corporations
and partnerships to own the stock and take the loans; and it is not alleged in the
complaint that they were without power in the premises. Of course the mere motive
with which subscriptions are made, whether to qualify the stockholders to take a loan
or for some other reason, is of no moment in determining whether the subscribers
were competent to make the contracts. The result is that we find nothing in the
allegations of the sixteenth cause of action, or in the facts developed in connection
therewith, that would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of action, it is charged
that in disposing of real estates purchased by it in the collection of its loans, the
defendant has no various occasions sold some of the said real estate on credit,
transferring the title thereto to the purchaser; that the properties sold are then
mortgaged to the defendant to secure the payment of the purchase price, said
amount being considered as a loan, and carried as such in the books of the defendant,
and that several such obligations are still outstanding. It is further charged that the
persons and entities to which said properties are sold under the condition charged
are not members or shareholders nor are they made members or shareholders of the
defendant.
This part of the complaint is based upon a mere technicality of bookkeeping. The
central idea involved in the discussion is the provision of the Corporation Law
requiring loans to be stockholders only and on the security of real estate and shares
in the corporation, or of shares alone. It seems to be supposed that, when the
respondent sells property acquired at its own foreclosure sales and takes a mortgage
to secure the deferred payments, the obligation of the purchaser is a true loan, and
hence prohibited. But in requiring the respondent to sell real estate which it acquires
in connection with the collection of its loans within five years after receiving title to
the same, the law does not prescribe that the property must be sold for cash or that
the purchaser shall be a shareholder in the corporation. Such sales can of course be
made upon terms and conditions approved by the parties; and when the association
takes a mortgage to secure the deferred payments, the obligation of the purchaser
cannot be fairly described as arising out of a loan. Nor does the fact that it is carried
[G.R. No. 108905. October 23, 1997]
GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE
VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L.
GO, respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is the right of petitioners representative
to sit in the board of directors of respondent Grace Village Association, Inc. as a
permanent member thereof. For fifteen years from 1975 until 1989 petitioners
representative had been recognized as a permanent director of the association. But
on February 13, 1990, petitioner received notice from the associations committee on
election that the latter was reexamining (actually, reconsidering) the right of
petitioners representative to continue as an unelected member of the board. As the
board denied petitioners request to be allowed representation without election,
petitioner brought an action for mandamus in the Home Insurance and Guaranty
Corporation. Its action was dismissed by the hearing officer whose decision was
subsequently affirmed by the appeals board. Petitioner appealed to the Court of
Appeals, which in turn upheld the decision of the HIGCs appeals board. Hence this
petition for review based on the following contentions:
1. The Petitioner herein has already acquired a vested right to a permanent seat in
the Board of Directors of Grace Village Association;
2. The amended By-laws of the Association drafted and promulgated by a Committee
on December 20, 1975 is valid and binding; and
3. The Practice of tolerating the automatic inclusion of petitioner as a permanent
member of the Board of Directors of the Association without the benefit of election
is allowed under the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in Quezon
City. Private respondent Grace Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees and residents at Grace Village,
while private respondents Alejandro G. Beltran and Ernesto L. Go were its president
and chairman of the committee on election, respectively, in 1990, when this suit was
brought.
As adopted in 1968, the by-laws of the association provided in Article IV, as
follows:
The annual meeting of the members of the Association shall be held on the first
Sunday of January in each calendar year at the principal office of the Association at
2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board
of Directors, composed of eleven (11) members to serve for one (1) year until their
successors are duly elected and have qualified.[2]
It appears, that on December 20, 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws, reading as follows:[3]
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall be held on the second
Thursday of January of each year. Each Charter or Associate Member of the
Association is entitled to vote. He shall be entitled to as many votes as he has
acquired thru his monthly membership fees only computed on a ratio of TEN
(P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared
and proclaimed elected until their successors are elected and qualified. GRACE
CHRISTIAN HIGH SCHOOL representative is a permanent Director of the
ASSOCIATION.
This draft was never presented to the general membership for
approval. Nevertheless, from 1975, after it was presumably submitted to the board,
up to 1990, petitioner was given a permanent seat in the board of directors of the
association. On February 13, 1990, the associations committee on election in a letter
informed James Tan, principal of the school, that it was the sentiment that all
directors should be elected by members of the association because to make a person
or entity a permanent Director would deprive the right of voters to vote for fifteen
(15) members of the Board, and it is undemocratic for a person or entity to hold office
in perpetuity.[4] For this reason, Tan was told that the proposal to make the Grace
Christian High School representative as a permanent director of the association,
although previously tolerated in the past elections should be reexamined. Following
this advice, notices were sent to the members of the association that the provision
on election of directors of the 1968 by-laws of the association would be observed.
Petitioner requested the chairman of the election committee to change the
notice of election by following the procedure in previous elections, claiming that the
notice issued for the 1990 elections ran counter to the practice in previous years and
was in violation of the by-laws (of 1975) and unlawfully deprive[d] Grace Christian
High School of its vested right [to] a permanent seat in the board.[5]
As the association denied its request, the school brought suit for mandamus in
the Home Insurance and Guaranty Corporation to compel the board of directors of
the association to recognize its right to a permanent seat in the board. Petitioner
based its claim on the following portion of the proposed amendment which, it
contended, had become part of the by-laws of the association as Article VI, paragraph
2, thereof:
The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared
and proclaimed elected until their successors are elected and qualified. GRACE
CHRISTIAN HIGH SCHOOL representative is a permanent Director of the
ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission on the
validity of this provision was sought by the association and that in reply to the query,
the SEC rendered an opinion to the effect that the practice of allowing unelected
members in the board was contrary to the existing by-laws of the association and to
92 of the Corporation Code (B.P. Blg. 68).
 Private respondent association cited the SEC opinion in its answer. Additionally,
the association contended that the basis of the petition for mandamus was merely a
proposed by-laws which has not yet been approved by competent authority nor
registered with the SEC or HIGC. It argued that the by-laws which was registered with
the SEC on January 16, 1969 should be the prevailing by-laws of the association and
not the proposed amended by-laws.[6]
In reply, petitioner maintained that the amended by-laws is valid and binding
and that the association was estopped from questioning the by-laws.[7]
A preliminary conference was held on March 29, 1990 but nothing substantial
was agreed upon. The parties merely agreed that the board of directors of the
association should meet on April 17, 1990 and April 24, 1990 for the purpose of
discussing the amendment of the by-laws and a possible amicable settlement of the
case. A meeting was held on April 17, 1990, but the parties failed to reach an
agreement. Instead, the board adopted a resolution declaring the 1975 provision null
and void for lack of approval by members of the association and the 1968 by-laws to
be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing
petitioners action. The hearing officer held that the amended by-laws, upon which
petitioner based its claim, [was] merely a proposed by-laws which, although
implemented in the past, had not yet been ratified by the members of the association
nor approved by competent authority; that, on the contrary, in the meeting held on
April 17, 1990, the directors of the association declared the proposed by-law dated
December 20, 1975 prepared by the committee on by-laws . . . null and void and the
by-laws of December 17, 1968 as the prevailing by-laws under which the association
is to operate until such time that the proposed amendments to the by-laws are
approved and ratified by a majority of the members of the association and duly filed
and approved by the pertinent government agency. The hearing officer rejected
petitioners contention that it had acquired a vested right to a permanent seat in the
board of directors. He held that past practice in election of directors could not give
rise to a vested right and that departure from such practice was justified because it
deprived members of association of their right to elect or to be voted in office, not
to say that allowing the automatic inclusion of a member representative of petitioner
as permanent director [was] contrary to law and the registered by-laws of
respondent association.[8]
The appeals board of the HIGC affirmed the decision of the hearing officer in its
resolution dated September 13, 1990. It cited the opinion of the SEC based on 92 of
the Corporation Code which reads:
92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of the number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall have a term of three (3)
years. Trustees thereafter elected to fill vacancies occurring before the expiration of
a particular term shall hold office only for the unexpired period.
The HIGC appeals board denied claims that the school [was] being deprived of its
right to be a member of the Board of Directors of respondent association, because
the fact was that it may nominate as many representatives to the Associations Board
as it may deem appropriate. It said that what is merely being upheld is the act of the
incumbent directors of the Board of correcting a long standing practice which is not
anchored upon any legal basis.[9]
Petitioner appealed to the Court of Appeals but petitioner again lost as the
appellate court on February 9, 1993, affirmed the decision of the HIGC. The Court of
Appeals held that there was no valid amendment of the associations by-laws because
of failure to comply with the requirement of its existing by-laws, prescribing the
affirmative vote of the majority of the members of the association at a regular or
special meeting called for the adoption of amendment to the by-laws. Article XIX of
the by-laws provides:[10]
The members of the Association by an affirmative vote of the majority at any regular
or special meeting called for the purpose, may alter, amend, change or adopt any
new by-laws.
This provision of the by-laws actually implements 22 of the Corporation Law
(Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital stock, or a majority of the
members if there be no capital stock, may, at a regular or special meeting duly called
for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of
two-thirds of the subscribed capital stock, or two-thirds of the members if there be
no capital stock, may delegate to the board of directors the power to amend or repeal
any by-law or to adopt new by-laws: Provided, however, That any power delegated
to the board of directors to amend or repeal any by-law or adopt new by-laws shall
be considered as revoked whenever a majority of the stockholders or of the members
of the corporation shall so vote at a regular or special meeting. And provided, further,
That the Director of the Bureau of Commerce and Industry shall not hereafter file an
amendment to the by-laws of any bank, banking institution or building and loan
association, unless accompanied by certificate of the Bank Commissioner to the
effect that such amendments are in accordance with law.
The proposed amendment to the by-laws was never approved by the majority
of the members of the association as required by these provisions of the law and by-
laws. But petitioner contends that the members of the committee which prepared
the proposed amendment were duly authorized to do so and that because the
members of the association thereafter implemented the provision for fifteen years,
the proposed amendment for all intents and purposes should be considered to have
been ratified by them. Petitioner contends:[11]
Considering, therefore, that the agents or committee were duly authorized to draft
the amended by-laws and the acts done by the agents were in accordance with such
authority, the acts of the agents from the very beginning were lawful and binding on
the homeowners (the principals) per se without need of any ratification or
adoption. The more has the amended by-laws become binding on the homeowners
when the homeowners followed and implemented the provisions of the amended
by-laws. This is not merely tantamount to tacit ratification of the acts done by duly
authorized agents but express approval and confirmation of what the agents did
pursuant to the authority granted to them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent
seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the board of the
Association was granted by the members of the Association themselves and this
grant has been implemented by members of the board themselves all through the
years. Outside the present membership of the board, not a single member of the
Association has registered any desire to remove the right of herein petitioner to an
automatic membership in the board. If there is anybody who has the right to take
away such right of the petitioner, it would be the individual members of the
Association through a referendum and not the present board some of the members
of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving petitioners
representative a permanent seat in the board of the association, is contrary to
law. Petitioner claims that that is not so because there is really no provision of law
prohibiting unelected members of boards of directors of corporations. Referring to
92 of the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides for the
manner of election of the members of the board of trustees of non-stock
corporations which may be more than fifteen in number and which manner of
election is even subject to what is provided in the articles of incorporation or by-laws
of the association thus showing that the above provisions [are] not even mandatory.
Even a careful perusal of the above provision of the Corporation Code would not
show that it prohibits a non-stock corporation or association from granting one of its
members a permanent seat in its board of directors or trustees. If there is no such
legal prohibition then it is allowable provided it is so provided in the Articles of
Incorporation or in the by-laws as in the instant case.
....
If fact, the truth is that this is allowed and is being practiced by some corporations
duly organized and existing under the laws of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the by-laws of this
corporation, that whoever is the Archbishop of Manila is considered a member of the
board of trustees without benefit of election.And not only that. He also automatically
sits as the Chairman of the Board of Trustees, again without need of any election.
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also
provided in the by-laws of this corporation that whoever is the Archbishop of Manila
is considered a member of the board of trustees year after year without benefit of
any election and he also sits automatically as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29
of the former one which require members of the boards of directors of corporations
to be elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all corporations
formed under this Act shall be exercised, all business conducted and all property of
such corporations controlled and held by a board of not less than five nor more than
eleven directors to be elected from among the holders of stock or, where there is no
stock, from the members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States has or may have a vested
interest, pursuant to the powers granted or delegated by the Trading with the Enemy
Act, as amended, and similar Acts of Congress of the United States relating to the
same subject, or by Executive Order No. 9095 of the President of the United States,
as heretofore or hereafter amended, or both, the directors need not be elected from
among the holders of the stock, or, where there is no stock from the members of the
corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such subsequent
meeting as may be then determined, directors shall be elected to hold their offices
for one year and until their successors are elected and qualified. Thereafter
the directors of the corporation shall be elected annually by the stockholders if it be
a stock corporation or by the members if it be a nonstock corporation, and if no
provision is made in the by-laws for the time of election the same shall be held on
the first Tuesday after the first Monday in January. Unless otherwise provided in the
by-laws, two weeks notice of the election of directors must be given by publication
in some newspaper of general circulation devoted to the publication of general news
at the place where the principal office of the corporation is established or located,
and by written notice deposited in the post-office, postage pre-paid, addressed to
each stockholder, or, if there be no stockholders, then to each member, at his last
known place of residence. If there be no newspaper published at the place where the
principal office of the corporation is established or located, a notice of the election
of directors shall be posted for a period of three weeks immediately preceding the
election in at least three public places, in the place where the principal office of the
corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980,[12] similarly provides:
23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation, who shall hold
office for one (1) year and until their successors are elected and qualified. (Emphasis
added)
These provisions of the former and present corporation law leave no room for
doubt as to their meaning: the board of directors of corporations must be elected
from among the stockholders or members. There may be corporations in which there
are unelected members in the board but it is clear that in the examples cited by
petitioner the unelected members sit as ex officio members, i.e., by virtue of and for
as long as they hold a particular office. But in the case of petitioner, there is no reason
at all for its representative to be given a seat in the board.Nor does petitioner claim
a right to such seat by virtue of an office held. In fact it was not given such seat in the
beginning. It was only in 1975 that a proposed amendment to the by-laws sought to
give it one.
Since the provision in question is contrary to law, the fact that for fifteen years
it has not been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to
its validity. Neither can it attain validity through acquiescence because, if it is
contrary to law, it is beyond the power of the members of the association to waive
its invalidity. For that matter the members of the association may have formally
adopted the provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.[13]
It is probable that, in allowing petitioners representative to sit on the board, the
members of the association were not aware that this was contrary to law. It should
be noted that they did not actually implement the provision in question except
perhaps insofar as it increased the number of directors from 11 to 15, but certainly
not the allowance of petitioners representative as an unelected member of the board
of directors. It is more accurate to say that the members merely tolerated petitioners
representative and tolerance cannot be considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of
practice. Practice, no matter how long continued, cannot give rise to any vested right
if it is contrary to law. Even less tenable is petitioners claim that its right is coterminus
with the existence of the association.[14]
Finally, petitioner questions the authority of the SEC to render an opinion on
the validity of the provision in question. It contends that jurisdiction over this case is
exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC merely cited
as authority for its ruling the opinion of the SEC chairman. The HIGC could have cited
any other authority for the view that under the law members of the board of
directors of a corporation must be elected and it would be none the worse for doing
so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Puno, and Torres, Jr., JJ., concur.
Regalado, (Chairman), J., on leave.
[G.R. No. 122452. January 29, 2001]
TAM WING TAK, petitioner, vs. HON. RAMON P. MAKASIAR (in his Capacity as
Presiding Judge of the Regional Trial Court of Manila, Branch 35) and
ZENON DE GUIA (in his capacity as Chief State Prosecutor), respondents.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Regional Trial
Court of Manila, Branch 35, dated September 14, 1995, which dismissed herein
petitioners special civil action for mandamus and sustained the Letter-Order of
respondent Chief State Prosecutor. The latter dismissed petitioners appeal from the
resolution of the City Prosecutor of Quezon City, which, in turn, dismissed petitioners
complaint against Vic Ang Siong for violation of the Bouncing Checks Law or B.P. Blg.
22.
The factual background of this case is as follows:
On November 11, 1992, petitioner, in his capacity as director of Concord-World
Properties, Inc., (Concord for brevity), a domestic corporation, filed an affidavit-
complaint with the Quezon City Prosecutors Office, charging Vic Ang Siong with
violation of B.P. Blg. 22. Docketed by the prosecutor as I.S. No. 93-15886, the
complaint alleged that a check for the amount of P83,550,000.00, issued by Vic Ang
Siong in favor of Concord, was dishonored when presented for encashment.
Vic Ang Siong sought the dismissal of the case on two grounds: First, that
petitioner had no authority to file the case on behalf of Concord, the payee of the
dishonored check, since the firms board of directors had not empowered him to act
on its behalf. Second, he and Concord had already agreed to amicably settle the issue
after he made a partial payment of P19,000,000.00 on the dishonored check.
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the
following grounds: (1) that petitioner lacked the requisite authority to initiate the
criminal complaint for and on Concords behalf; and (2) that Concord and Vic Ang
Siong had already agreed upon the payment of the latters balance on the dishonored
check.
A copy of the City Prosecutors resolution was sent by registered mail to
petitioner in the address he indicated in his complaint-affidavit. Notwithstanding
that petitioner was represented by counsel, the latter was not furnished a copy of
the resolution.
On June 27, 1994, petitioners counsel was able to secure a copy of the
resolution dismissing I.S. No. 93-15886. Counting his 15-day appeal period from said
date, petitioner moved for reconsideration on July 7, 1994.
On October 21, 1994, the City Prosecutor denied petitioners motion for
reconsideration. Petitioners counsel received a copy of the denial order on
November 3, 1994.
On November 7, 1994, petitioners lawyer filed a motion to extend the period to
appeal by an additional 15 days counted from November 3, 1994 with the Chief State
Prosecutor. He manifested that it would take time to communicate with petitioner
who is a Hong Kong resident and enable the latter to verify the appeal as procedurally
required.
On November 8, 1994, petitioner appealed the dismissal of his complaint by the
City Prosecutor to the Chief State Prosecutor. The appeal was signed by petitioners
attorney only and was not verified by petitioner until November 23, 1994.
On December 8, 1994, the Chief State Prosecutor dismissed the appeal for
having been filed out of time. Petitioners lawyer received a copy of the letter-
resolution dismissing the appeal on January 20, 1995.
On January 30, 1995, petitioner moved for reconsideration.
On March 9, 1995, respondent Chief State Prosecutor denied the motion for
reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional
Trial Court of Quezon City to compel the Chief State Prosecutor to file or cause the
filing of an information charging Vic Ang Siong with violation of B.P. Blg. 22.
On September 14, 1995, the trial court disposed of the action as follows:
WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is
DENIED and DISMISSED.
SO ORDERED.[1]
Petitioner moved for reconsideration, but the trial court denied this motion in
its order dated October 24, 1995.
Hence, the instant petition.
Before this Court, petitioner claims respondent judge committed grave errors
of law in sustaining respondent Chief State Prosecutor whose action flagrantly
contravenes: (1) the established rule on service of pleadings and orders upon parties
represented by counsel; (b) the basic principle that except in private crimes, any
competent person may initiate a criminal case; and (3) the B.P. Blg. 22 requirement
that arrangement for full payment of a bounced check must be made by the drawer
with the drawee within five (5) banking days from notification of the checks
dishonor.[2]
We find pertinent for our resolution the following issues:
(1) Was there valid service of the City Prosecutors resolution upon
petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the necessary
information in court?
In upholding respondent Chief State Prosecutor, the court a quo held:
It is a generally accepted principle in the service of orders, resolutions, processes and
other papers to serve them on the party or his counsel, either in his office, if known,
or else in the residence, also if known. As the party or his counsel is not expected to
be present at all times in his office or residence, service is allowed to be made with a
person in charge of the office, or with a person of sufficient discretion to receive the
same in the residence.
In the case under consideration, it is not disputed that the controverted Resolution
dismissing the complaint of the petitioner against Vic Ang Siong was served on the
former by registered mail and was actually delivered by the postmaster on April 9,
1994 at said petitioners given address in the record at No.5 Kayumanggi Street, West
Triangle, Quezon City. The registered mail was in fact received by S. Ferraro. The
service then was complete and the period for filing a motion for reconsideration or
appeal began to toll from that date. It expired on April 24, 1994. Considering that his
motion for reconsideration was filed only on July 7, 1994, the same was filed beyond
the prescribed period, thereby precluding further appeal to the Office of the
respondent.[3]
Petitioner, before us, submits that there is no such generally accepted practice
which gives a tribunal the option of serving pleadings, orders, resolutions, and other
papers to either the opposing party himself or his counsel. Petitioner insists that the
fundamental rule in this jurisdiction is that if a party appears by counsel, then service
can only be validly made upon counsel and service upon the party himself becomes
invalid and without effect. Petitioner relies upon Rule 13, Section 2 of the Rules of
Court[4] and our ruling in J.M. Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to
support his stand.In the J.M. Javier case, we held:
[W]here a party appears by attorney, notice to the former is not a notice in law,
unless service upon the party himself is ordered by the court... [5]
The Solicitor General, for respondents, contends that the applicable rule on
service in the present case is Section 2 of the Department of Justice (DOJ) Order No.
223,[6] which allows service to be made upon either party or his counsel. Respondents
argue that while a preliminary investigation has been considered as partaking of the
nature of a judicial proceeding,[7] nonetheless, it is not a court proceeding and hence,
falls outside of the ambit of the Rules of Court.
We agree with petitioner that there is no generally accepted practice in the
service of orders, resolutions, and processes, which allows service upon either the
litigant or his lawyer. As a rule, notice or service made upon a party who is
represented by counsel is a nullity.[8] However, said rule admits of exceptions, as
when the court or tribunal orders service upon the party [9] or when the technical
defect is waived.[10]
To resolve the issue on validity of service, we must make a determination as to
which is the applicable rule the rule on service in the Rules of Court, as petitioner
insists or the rule on service in DOJ Order No. 223?
The Rules of Court were promulgated by this Court pursuant to Section 13,
Article VII of the 1935 Constitution[11] (now Section 5 [5], Article VIII of the
Constitution)[12] to govern pleadings, practice and procedure in all courts of the
Philippines. The purpose of the Rules is clear and does not need any
interpretation. The Rules were meant to govern court (stress supplied) procedures
and pleadings. As correctly pointed out by the Solicitor General, a preliminary
investigation, notwithstanding its judicial nature, is not a court proceeding. The
holding of a preliminary investigation is a function of the Executive Department and
not of the Judiciary.[13] Thus, the rule on service provided for in the Rules of Court
cannot be made to apply to the service of resolutions by public prosecutors,
especially as the agency concerned, in this case, the Department of Justice, has its
own procedural rules governing said service.
A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in
preliminary investigation, service can be made upon the party himself or through his
counsel. It must be assumed that when the Justice Department crafted the said
section, it was done with knowledge of the pertinent rule in the Rules of Court and
of jurisprudence interpreting it. The DOJ could have just adopted the rule on service
provided for in the Rules of Court, but did not. Instead, it opted to word Section 2 of
DOJ Order No. 223 in such a way as to leave no doubt that in preliminary
investigations, service of resolutions of public prosecutors could be made upon either
the party or his counsel.
Moreover, the Constitution provides that Rules of procedure of special courts
and quasi-judicial bodies shall remain effective unless disapproved by the Supreme
Court.[14] There is naught in the records to show that we have disapproved and
nullified Section 2 of DOJ Order No. 223 and since its validity is not an issue in the
instant case, we shall refrain from ruling upon its validity.
We hold that there was valid service upon petitioner pursuant to Section 2 of
DOJ Order No. 223.
On the issue of whether mandamus will lie. In general, mandamus may be
resorted to only where ones right is founded clearly in law and not when it is
doubtful.[15] The exception is to be found in criminal cases where mandamus is
available to compel the performance by the public prosecutor of an ostensibly
discretionary function, where by reason of grave abuse of discretion on his part, he
willfully refuses to perform a duty mandated by law.[16] Thus, mandamus may issue
to compel a prosecutor to file an information when he refused to do so in spite of
the prima facie evidence of guilt.[17]
Petitioner takes the stance that it was grave abuse for discretion on the part of
respondent Chief State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on
the grounds that: (1) Vic Ang Siongs obligation which gave rise to the bounced check
had already been extinguished by partial payment and agreement to amicably settle
balance, and (2) petitioner had no standing to file the criminal complaint since he was
neither the payee nor holder of the bad check. Petitioner opines that neither ground
justifies dismissal of his complaint.
Petitioners stand is unavailing. Respondent Chief State Prosecutor in refusing to
order the filing of an information for violation of B.P. Blg. 22 against Vic Ang Siong did
not act without or in excess of jurisdiction or with grave abuse of discretion.
First, with respect to the agreement between Concord and Victor Ang Siong to
amicably settle their difference, we find this resort to an alternative dispute
settlement mechanism as not contrary to law, public policy, or public order. Efforts
of parties to solve their disputes outside of the courts are looked on with favor, in
view of the clogged dockets of the judiciary.
Second, it is not disputed in the instant case that Concord, a domestic
corporation, was the payee of the bum check, not petitioner. Therefore, it is Concord,
as payee of the bounced check, which is the injured party. Since petitioner was
neither a payee nor a holder of the bad check, he had neither the personality to sue
nor a cause of action against Vic Ang Siong. Under Section 36 of the Corporation
Code[18], read in relation to Section 23,[19] it is clear that where a corporation is an
injured party, its power to sue is lodged with its board of directors or
trustees.[20] Note that petitioner failed to show any proof that he was authorized or
deputized or granted specific powers by Concords board of director to sue Victor Ang
Siong for and on behalf of the firm. Clearly, petitioner as a minority stockholder and
member of the board of directors had no such power or authority to sue on Concords
behalf. Nor can we uphold his act as a derivative suit. For a derivative suit to prosper,
it is required that the minority stockholder suing for and on behalf of the corporation
must allege in his complaint that he is suing on a derivative cause of action on behalf
of the corporation and all other stockholders similarly situated who may wish to join
him in the suit.[21] There is no showing that petitioner has complied with the
foregoing requisites. It is obvious that petitioner has not shown any clear legal right
which would warrant the overturning of the decision of public respondents to dismiss
the complaint against Vic Ang Siong. A public prosecutor, by the nature of his office,
is under no compulsion to file a criminal information where no clear legal justification
has been shown, and no sufficient evidence of guilt nor prima facie case has been
presented by the petitioner.[22] No reversible error may be attributed to the court a
quo when it dismissed petitioners special civil action for mandamus.
WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against
petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Tañada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to
compel the defendant Milling Company to increase plaintiff's share in the sugar
produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and Company, had been and
are sugar planters adhered to the defendant-appellee's sugar central mill under
identical milling contracts. Originally executed in 1919, said contracts were stipulated
to be in force for 30 years starting with the 1920-21 crop, and provided that the
resulting product should be divided in the ratio of 45% for the mill and 55% for the
planters. Sometime in 1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar and resulting
molasses, besides other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years. To this effect, a printed Amended
Milling Contract form was drawn up. On August 20, 1936, the Board of Directors of
the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11,
Acuerdo No. 1) granting further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The bone of contention is
paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta
en consideracion a una peticion de los plantadores hecha por un
comite nombrado por los mismos, acuerda enmendar el contrato
de molienda enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda
Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera
parte de la produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores mejores
condiciones que la estipuladas en el presente contrato, entonces
esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este
Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September
10, 1936, but a copy of the resolution of August 10, 1936, signed by the Central's
General Manager, was not attached to the printed contract until April 17, 1937; with
the notation —
Las enmiendas arriba transcritas forman parte del contrato de molienda
enmendado, otorgado por — y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros
sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual
production exceeding one-third of the production of all the sugar central mills in the
province, had already granted increased participation (of 62.5%) to their planters,
and that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted,
the appellee had become obligated to grant similar concessions to the plaintiffs
(appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
and defended by urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore, null and
void ab initio, being in effect a donation that was ultra viresand beyond the powers
of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed
to this Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation
as a supplement to, or further amendment of, the proposed milling contract, and that
it was approved on August 20, 1936, twenty-one days prior to the signing by
appellants on September 10, of the Amended Milling Contract itself; so that when
the Milling Contract was executed, the concessions granted by the disputed
resolution had been already incorporated into its terms. No reason appears of record
why, in the face of such concessions, the appellants should reject them or consider
them as separate and apart from the main amended milling contract, specially taking
into account that appellant Alfredo Montelibano was, at the time, the President of
the Planters Association (Exhibit 4, p. 11) that had agitated for the concessions
embodied in the resolution of August 20, 1936. That the resolution formed an
integral part of the amended milling contract, signed on September 10, and not a
separate bargain, is further shown by the fact that a copy of the resolution was simply
attached to the printed contract without special negotiations or agreement between
the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20,
1936 were supported by the same causa or consideration underlying the main
amended milling contract; i.e., the promises and obligations undertaken thereunder
by the planters, and, particularly, the extension of its operative period for an
additional 15 years over and beyond the 30 years stipulated in the original contract.
Hence, the conclusion of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if
the resolution in question had embodied a separate agreement after the appellants
had already bound themselves to the terms of the printed milling contract. But this
was not the case. When the resolution was adopted and the additional concessions
were made by the company, the appellants were not yet obligated by the terms of
the printed contract, since they admittedly did not sign it until twenty-one days later,
on September 10, 1936. Before that date, the printed form was no more than a
proposal that either party could modify at its pleasure, and the appellee actually
modified it by adopting the resolution in question. So that by September 10, 1936
defendant corporation already understood that the printed terms were not
controlling, save as modified by its resolution of August 20, 1936; and we are satisfied
that such was also the understanding of appellants herein, and that the minds of the
parties met upon that basis. Otherwise there would have been no consent or
"meeting of the minds", and no binding contract at all. But the conduct of the parties
indicates that they assumed, and they do not now deny, that the signing of the
contract on September 10, 1936, did give rise to a binding agreement. That
agreement had to exist on the basis of the printed terms as modified by the
resolution of August 20, 1936, or not at all. Since there is no rational explanation for
the company's assenting to the further concessions asked by the planters before the
contracts were signed, except as further inducement for the planters to agree to the
extension of the contract period, to allow the company now to retract such
concessions would be to sanction a fraud upon the planters who relied on such
additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There
can be no novation unless two distinct and successive binding contracts take place,
with the later designed to replace the preceding convention. Modifications
introduced before a bargain becomes obligatory can in no sense constitute novation
in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of
statutory forms or solemn agreements (and it is not claimed that this is one), it is the
assent and concurrence (the "meeting of the minds") of the parties, and not the
setting down of its terms, that constitutes a binding contract. And the fact that the
addendum is only signed by the General Manager of the milling company emphasizes
that the addition was made solely in order that the memorial of the terms of the
agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of
Directors of the appellee company in November 19, 1936 (Exhibit 4) only made
mention of 90%, the planters having agreed to the 60-40 sharing of the sugar set
forth in the printed "amended milling contracts", and did not make any reference at
all to the terms of the resolution of August 20, 1936. But a reading of this report
shows that it was not intended to inventory all the details of the amended contract;
numerous provisions of the printed terms are alao glossed over. The Directors of the
appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly modifications in
detail of the printed terms, and the only major change was paragraph 9 heretofore
quoted; but when the report was made, that paragraph was not yet in effect, since it
was conditioned on other centrals granting better concessions to their planters, and
that did not happen until after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to
modify the proposed terms of the Amended Milling Contract for the purpose of
making its terms more acceptable to the other contracting parties. The rule is that —
It is a question, therefore, in each case of the logical relation of the act to
the corporate purpose expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful sense, it may
fairly be considered within charter powers. The test to be applied is whether
the act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it;
otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is
valid and binding, and whether or not it will cause losses or decrease the profits of
the central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled
in the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during depression, or
close down at a smaller loss, is a purely business and economic problem to
be determined by the directors of the corporation and not by the court. It is
a well-known rule of law that questions of policy or of management are left
solely to the honest decision of officers and directors of a corporation, and
the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so long
as it acts in good faith its orders are not reviewable by the courts. (Fletcher
on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire
annual sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
 64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the
differential or increase of participation in the milled sugar in accordance with
paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to
the 60% expressed in the printed Amended Milling Contract, or the value thereof
when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said
appellants having received an additional 2% corresponding to said year in
October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they
were withheld; and the right is reserved to plaintiffs-appellants to sue for such
additional increases as they may be entitled to for the crop years subsequent to those
herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ.,
concur.
G.R. No. 6817 July 31, 1958
ESTEFANIA R. VDA. DE PIROVANO, plaintiff-appellant,
vs.
DE LA RAMA STEAMSHIP CO., INC., defendant-appellee.
Angel S. Gamboa for appellant.
Del Rosario and Garcia for appellee.
PADILLA, J.:
Plaintiff seeks to recover from the defendant the sum of P221,975.45, the balance of
the amount of dividends at P100 per share, declared by Resolution No. 50-127 of 29
December 1950, to which she is entitled as the registered owner of 3,424 shares of
stock in the defendant corporation, after deducting the sum of P120,424.55 she had
withdrawn or received from the defendant for advances made to her after the death
of the late Esteban de la Rama, 20 per cent of the sum sought to be recovered for
attorney's fees and expenses of litigation by way of damages, and costs.
Answering the complaint, the defendant avers that although the plaintiff is entitled
to the dividends claimed in the complaint, yet she is indebted to the defendant as of
29 December 1950 in the sum of P444,202.52, and that by reason of the unnecessary
commencement of the suit, the defendant suffered damages in the sum of P100,000.
Upon the foregoing allegations the defendant asks for the dismissal of the complaint
and prays that judgment rendered condemning the plaintiff to pay the amount of
damages it has suffered and costs.
After hearing, the Court dismissed both the complaint and the counterclaim without
pronouncement as to costs. The plaintiff has appealed.
Appellant's theory is that the cash advances to her in the United States during the
Pacific War for her personal expenses and for the support and education of her
children were assumed by Esteban de la Rama, as set forth in his letter dated 5 May
1947 (Exhibit B) to the appellee and the Hijos de I. de la Rama & Co., Inc., consented
to and approved by both corporations. She claims that the advances made to her by
the appellee were debited against the account of Hijos de I. de la Rama & Co., Inc.,
another corporation practically owned by Esteban de Ia Rama; that the only sum the
appellee corporation may deduct from the amount of dividends to which she is
entitled is P120,424.55 which she received after the death of her father Esteban de
la Rama and was not assumed by him; and that as a matter of fact in special
proceedings No. 401 of the Court of First Instance of Iloilo for the administration and
settlement of the estate of the late Esteban de la Rama, the Hijos de I. de la Rama &
Co., Inc., filed a claim charging the estate with the aforesaid advances for expenses
of the appellant and of her children which had been assumed by the deceased in his
lifetime, a claim which, although reduced to P26,000 as per Ballentyne schedule of
monetary value, was approved by the Court of First Instance of Iloilo on 27
September 1950, and the executor of the estate of the late Esteban de la Rama was
directed to pay the claim thus allowed (Exhibit O).
The appellee resists appellant's claim upon the ground that the assumption by
Esteban de la Rama of the total sum of withdrawals by the appellant for her expenses
and of her children was never consented to by the appellee and hence not binding
upon it; and that the accounting method by which the withdrawals were charged
against the Hijas de I. de la Rama & Co., Inc. was to circumvent the prohibition
imposed upon the appellee to declare dividends, agreed upon in the deed of trust
executed by the appellee and the National Development Company, a prohibition
which lasted from 26 February 1940 to 23 September 1949 (Exhibit 7).
There is no dispute that the appellant is the registered owner of 3,424 shares of stock
in the appellee corporation; that on 29 December 1950 the appellee by Resolution
No. 50-127 declared a dividend of P100 for each share of stock; that the appellee
further resolved that the personal accounts of the stockholders of the De la Rama
Steamship Co., Inc., which include that of the appellant in the sum of P444,202.52 set
up in the books of De la Rama Steamship Co., Inc. against the Hijos de I. de la Rama
& Co., Inc., be credited to the account of the last named corporation and debited to
accounts receivable from the stockholders; and that from the amount of dividends,
the personal account of each and every stockholder be deducted (Exhibit A-1).
The determination of the controversy hinges on whether the assumption made by
the late Esteban de la Rama in his lifetime of all the advances made by the appellee
to the appellant was binding upon it. There is no doubt that because of the
prohibition agreed upon in the deed of trust to the effect that no dividends could be
declared by the appellee during the period of time already stated, advances to the
stockholders would constitute a violation of section 12 of the deed of trust. For that
reason it was made to appear that such advances were made to the Hijos de I. de la
Rama & Co., Inc. and debited the same against the latter in the books of the appellee,
and in the books of the Hijos de I. de la Rama & Co., Inc. the said advances were
debited against the individual the stockholders, the stockholders of both
corporations being the same. The pivotal point is whether the assumption by Esteban
de la Rama of the advances made to the appellant by the appellee, as stated in his
letter of 5 May 1947, was consented to by the appellee to constitute a novation.
Express sent by the creditor is necessary to substitute another for the debtor. 1 Such
consent does not appear to have been given by the board of directors of the appellee.
Corporate acts of a corporation must appear in its books or records. No such consent
appears in the books or records of the appellee.
The appellant does not dispute the total sum of her withdrawals which is P444,202.52
as claimed by the appellee.
Aside from the letter of 5 May 1947 of Esteban de la Rama, the appellant relies upon
the financial statements and books of the appellee where the withdrawals by the
appellant were entered in the account of Hijos de I. de la Rama & Co., Inc. or
transferred to the account of Esteban de la Rama. The entries on the withdrawals by
the appellant entered in the account of Hijos de I. de la Rama & Co., Inc. or
transferred to the account of Esteban de la Rama have already been explained
satisfactorily. They were done so in order to circumvent the prohibition referred to
above. As a matter of fact the withdrawals made by the appellant were made by her
and not by the Hijos de I. de la Rama & Co., Inc. Nor is there any evidence that those
advances were used by the Hijos de I. de la Rama & Co., Inc.
As to the inclusion of the withdrawals made by the appellant in the claim of the Hijos
de I. de la Rama & Co., Inc. filed against the estate of the late Esteban de la Rama in
special proceedings No. 401 of the probate court of Iloilo and allowed by the court
although in a reduced amount, suffice it to say that such act of the Hijos de I. de la
Rama & Co., Inc. cannot and does not bind the appellee. Its appearance in the
probate court was by order of that court of 19 June 1950 (Exhibit M), and in its
pleading the appellee disclaimed any interest in the claim filed by the Hijos de I. de
la Rama & Co., Inc. against the estate of the late Esteban de la Rama (Exhibit N).
Resolution No. 50-127 of the board of directors of the appellee of 29 December 1950,
whereby a cash dividend of P2,000,000 was declared in favor of stockholders of
record as of 1 December 1950, or at the rate of P100 per share, subject to the
conditions already stated, does not suffer from any legal infirmity. The segregation
from the account of Hijos de I. de la Rama & Co., Inc. and the setting up in the books
of the De la Rama Steamship Co., Inc. of withdrawals made by the stockholders of
the appellee as accounts receivable due from said stockholders was even suggested
by the President of Hijos de I. de la Rama & Co., Inc. in a letter dated 9 April 1945,
addressed to the De la Rama Steamship Co., Inc. (Exhibit A-1).
There is no room for the application of the in pari delicto principle to the instant case,
because the appellee corporation and the Hijos de I. de la Rama & Co., Inc. have
committed no crime or violation of law, but a violation of section 12 of the deed of
trust by the appellee corporation which gave rise to a cause of action by the National
Development Company, the injured party, against the appellee corporation.
However, the National Development Company chose not to avail itself of its right.
The appellant must answer for the personal advances made to her by the appellee
corporation and the latter may set off the total sum of such advances against the
amount of dividends to which she is entitled.
For the foregoing considerations, the judgment appealed from is affirmed, without
pronouncement as to costs.
Paras, C. J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.
B. L., Endencia, and Felix, JJ., concur.
G.R. No. L-18062 February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts
requesting the opening of a post, telegraph and money order offices at its mining
camp at Sta. Cruz, Zambales, to service its employees and their families that were
living in said camp. Acting on the request, the Director of Posts wrote in reply stating
that if aside from free quarters the company would provide for all essential
equipment and assign a responsible employee to perform the duties of a postmaster
without compensation from his office until such time as funds therefor may be
available he would agree to put up the offices requested. The company in turn replied
signifying its willingness to comply with all the requirements outlined in the letter of
the Director of Posts requesting at the same time that it be furnished with the
necessary forms for the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating
among other things that "In cases where a post office will be opened under
circumstances similar to the present, it is the policy of this office to have the company
assume direct responsibility for whatever pecuniary loss may be suffered by the
Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the
part of the employee of the company who is assigned to take charge of the post
office," thereby suggesting that a resolution be adopted by the board of directors of
the company expressing conformity to the above condition relative to the
responsibility to be assumed buy it in the event a post office branch is opened as
requested. On September 2, 1949, the company informed the Director of Posts of the
passage by its board of directors of a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the Company should accept full
responsibility for all cash received by the Postmaster be complied with, and that a
copy of this resolution be forwarded to the Bureau of Posts." The letter further states
that the company feels that that resolution fulfills the last condition imposed by the
Director of Posts and that, therefore, it would request that an inspector be sent to
the camp for the purpose of acquainting the postmaster with the details of the
operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario
M. Sanchez as postmaster. He is an employee of the company. On May 11, 1954, the
postmaster went on a three-day leave but never returned. The company immediately
informed the officials of the Manila Post Office and the provincial auditor of Zambales
of Sanchez' disappearance with the result that the accounts of the postmaster were
checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in
line with the liability it has assumed having failed, the government commenced the
present action on September 10, 1954 before the Court of First Instance of Manila
seeking to recover the amount of Pl3,867.24. The company in its answer denied
liability for said amount contending that the resolution of the board of directors
wherein it assumed responsibility for the act of the postmaster is ultra vires, and in
any event its liability under said resolution is only that of a guarantor who answers
only after the exhaustion of the properties of the principal, aside from the fact that
the loss claimed by the plaintiff is not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1äwphï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff totalling
P13,867.24, only the sum of P9,515.25 was supported by the evidence, and so it
rendered judgment for the plaintiff only for the amount last mentioned. The court
rejected the contention that the resolution adopted by the company is ultra vires and
that the obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949
is ultra vires in the sense that it has no authority to act on a matter which may render
the company liable as a guarantor has no factual or legal basis. In the first place, it
should be noted that the opening of a post office branch at the mining camp of
appellant corporation was undertaken because of a request submitted by it to
promote the convenience and benefit of its employees. The idea did not come from
the government, and the Director of Posts was prevailed upon to agree to the request
only after studying the necessity for its establishment and after imposing upon the
company certain requirements intended to safeguard and protect the interest of the
government. Thus, after the company had signified its willingness to comply with the
requirement of the government that it furnish free quarters and all the essential
equipment that may be necessary for the operation of the office including the
assignment of an employee who will perform the duties of a postmaster, the Director
of Posts agreed to the opening of the post office stating that "In cases where a post
office will be opened under circumstances similar to the present, it is the policy of
this office to have the company assume direct responsibility for whatever pecuniary
loss may be suffered by the Bureau of Posts by reason of any act of dishonesty,
carelessness or negligence on the part of the employee of the company who is
assigned to take charge of the post office," and accepting this condition, the
company, thru its board of directors, adopted forthwith a resolution of the following
tenor: "That the requirement of the Bureau of Posts that the company should accept
full responsibility for all cash received by the Postmaster, be complied with, and that
a copy of this resolution be forwarded to the Bureau of Posts." On the basis of the
foregoing facts, it is evident that the company cannot now be heard to complain that
it is not liable for the irregularity committed by its employee upon the technical plea
that the resolution approved by its board of directors is ultra vires. The least that can
be said is that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company The current of modern authorities favors the rule that where the ultra vires
is an ultra vires act cannot also be entertained it appearing that the same covers a transaction has been executed by the other party and the corporation has
subject which concerns the benefit, convenience and welfare of its employees and received the benefit of it, the law interposes an estoppel, and will not permit
their families. While as a rule an ultra vires act is one committed outside the object the validity of the transaction or contract to be questioned, and this is
for which a corporation is created as defined by the law of its organization and especially true where there is nothing in the circumstances to put the other
therefore beyond the powers conferred upon it by law (19 C.J.S., Section 965, p. 419), party to the transaction on notice that the corporation has exceeded its
there are however certain corporate acts that may be performed outside of the scope powers in entering into it and has in so doing overstepped the line of
of the powers expressly conferred if they are necessary to promote the interest or corporate privileges. (19 C.J.S., Section 977, pp. 435-437, citing Williams v.
welfare of the corporation. Thus, it has been held that "although not expressly Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion
authorized to do so a corporation may become a surety where the particular Gas Light Co., 29 Ohio St. 330)
transaction is reasonably necessary or proper to the conduct of its business," 1 and Neither can we entertain the claim of appellant that its liability is only that of a
here it is undisputed that the establishment of the local post office is a reasonable guarantor. On this point, we agree with the following comment of the court a quo:
and proper adjunct to the conduct of the business of appellant company. Indeed, "A mere reading of the resolution of the Board of Directors dated August 31, 1949,
such post office is a vital improvement in the living condition of its employees and upon which the plaintiff based its claim would show that the responsibility of the
laborers who came to settle in its mining camp which is far removed from the postal defendant company is not just that of a guarantor. Notice that the phraseology and
facilities or means of communication accorded to people living in a city or the terms employed are so clear and sweeping and that the defendant assumed 'full
municipality.. responsibility for all cash received by the Postmaster.' Here the responsibility of the
Even assuming arguendo that the resolution in question constitutes an ultra defendant is not just that of a guarantor. It is clearly that of a principal."
vires act, the same however is not void for it was approved not in contravention of WHEREFORE, the decision appealed from is affirmed. No costs.
law, customs, public order or public policy. The term ultra vires should be Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon,
distinguished from an illegal act for the former is merely voidable which may be Regala and Makalintal, JJ. concur.
enforced by performance, ratification, or estoppel, while the latter is void and cannot
be validated.2 It being merely voidable, an ultra vires act can be enforced or validated
if there are equitable grounds for taking such action. Here it is fair that the resolution
be upheld at least on the ground of estoppel. On this point, the authorities are
overwhelming:
The weight of authority in the state courts is to the effect that a transaction
which is merely ultra vires and not malum in se or malum prohibitum, is, if
performed by one party, not void as between the parties to all intents and
purposes, and that an action may be brought directly on the transaction and
relief had according to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles
v. Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations,
one party cannot receive the benefits which are embraced in total
performance of a contract made with it by another party and then set up
the invalidity of the transaction as a defense." (London & Lancashire
Indemnity Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332,
112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward
stockholders, and should not be entertained where its allowance will do
greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party
may give rise to an estoppel precluding repudiation of the transaction. (19
C.J.S., Section 976, p. 433.)
 provides that PSTC shall control the conduct of any litigation pending or which may
CALTEX (PHILIPPINES), INC., G.R. No. 150711
be filed with respect to the claims in the Annexes. The Agreement further provides
Petitioner,
that LUSTEVECO shall deliver to PSTC all papers and records of the claims in the
Present:
QUISUMBING, J., Annexes. Finally, the Agreement provides that LUSTEVECO appoints and constitutes
Chairperson,
PSTC as its attorney-in-fact to demand and receive any claim out of the countersuits
CARPIO,
- versus - CARPIO MORALES, and counterclaims arising from the claims in the Annexes.
TINGA, and
VELASCO, JR., JJ.
PNOC SHIPPING AND TRANSPORT Promulgated: Among the actions enumerated in the Annexes is Caltex (Phils.), Inc. v. Luzon
CORPORATION, Stevedoring Corporation docketed as AC-G.R. CV No. 62613 which at that time was
Respondent. August 10, 2006
pending before the then Intermediate Appellate Court (IAC). The case was an appeal
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x from the Decision by the then Court of First Instance of Manila (CFI) directing
LUSTEVECO to pay Caltex P103,659.44 with legal interest from the filing of the action
DECISION until full payment. In its 12 November 1985 Decision,[5] the IAC affirmed with
modification the Decision of the CFI. The dispositive portion of the Decision reads:
CARPIO, J.:
WHEREFORE, the decision appealed from is hereby MODIFIED and
The Case judgment is rendered ordering the defendant [LUSTEVECO] to pay
plaintiff [Caltex]:

Before the Court is a petition for review[1] assailing the 31 May 2001 Decision[2] and (a) P126,771.22 under the first cause of action, with legal interest
until fully paid;
9 November 2001 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 46097. The
Court of Appeals reversed the 1 June 1994 Decision [4] of the Regional Trial Court of (b) P103,659.44 under the second cause of action with legal
interest until fully paid;
Manila, Branch 51 (trial court), and dismissed the complaint filed by Caltex
(Philippines), Inc. (Caltex) against PNOC Shipping and Transport Corporation (PSTC). (c) 10% of the sums due as and for attorneys fees;

(d) costs of the suit.

The Antecedent Facts
SO ORDERED.[6]

On 6 July 1979, PSTC and Luzon Stevedoring Corporation (LUSTEVECO) entered into
The Decision of the IAC became final and executory.
an Agreement of Assumption of Obligations (Agreement). The Agreement provides
that PSTC shall assume all the obligations of LUSTEVECO with respect to the claims
enumerated in Annexes A and B (Annexes) of the Agreement. The Agreement also
 (d) Costs of suit.
The Regional Trial Court of Manila, Branch 12, issued a writ of execution in favor of
SO ORDERED.[7]
Caltex. However, the judgment was not satisfied because of the prior foreclosure of
LUSTEVECOs properties. The Manila Bank Intramuros Branch and the Traders Royal
PSTC appealed the trial courts Decision.
Bank Aduana Branch did not respond to the notices of garnishment.

Caltex subsequently learned of the Agreement between PSTC and LUSTEVECO. Caltex
The Ruling of the Court of Appeals
sent successive demands to PSTC asking for the satisfaction of the judgment
rendered by the CFI. PSTC requested for the copy of the records of AC-G.R. CV No.
In its 31 May 2001 Decision, the Court of Appeals found the appeal meritorious. The
62613. Later, PSTC informed Caltex that it was not a party to AC-G.R. CV No. 62613
Court of Appeals ruled that Caltex has no personality to sue PSTC. The Court of
and thus, PSTC would not pay LUSTEVECOs judgment debt. PSTC advised Caltex to
Appeals held that non-compliance with the Agreement could only be questioned by
demand satisfaction of the judgment directly from LUSTEVECO.
the signatories to the contract, namely, LUSTEVECO and PSTC. The Court of Appeals
stated that LUSTEVECO and PSTC are the only parties who can file an action to
Caltex continued to send several demand letters to PSTC. On 5 February 1992, Caltex
enforce the Agreement. The Court of Appeals considered fatal the omission of
filed a complaint for sum of money against PSTC. The case was docketed as Civil Case
LUSTEVECO, the real party in interest, as a party defendant in the case. The Court of
No. 91-59512.
Appeals further ruled that Caltex is not a beneficiary of a stipulation pour
autrui because there is no stipulation in the Agreement which clearly and
On 1 June 1994, the trial court rendered its Decision, the dispositive portion of which
deliberately favors Caltex.
reads:

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, in view of the foregoing, judgment is hereby

WHEREFORE, premises considered, the appealed Decision dated
rendered in favor of the plaintiff, ordering defendant to pay
June 1, 1994, rendered by the Regional Trial Court of Manila,
plaintiff the sums due the latter in the decision rendered by the
Branch 51, is hereby REVERSED and SET ASIDE and a new one
Court of Appeals in CA-G.R. No. 62613, CALTEX vs. LUSTEVECO, or
entered DISMISSING the complaint filed by appellee [Caltex],
to pay plaintiff (Exhibit C):
against appellant [PSTC], for want of cause of action.
(a) P126,771.22 under the first cause of action, with legal
SO ORDERED.[8]
interest from the date of the promulgation of the
decision on November 12, 1985 until fully paid;
Caltex filed a motion for reconsideration of the 31 May 2001 Decision. In a Resolution
(b) P103,659.44 under the second cause of action with legal interest from
promulgated on 9 November 2001, the Court of Appeals denied the motion for lack
the date of the promulgation of the decision on November 12, 1985 until
fully paid; of merit.
(c) 10% of the sums due as and for attorneys fees; and
Hence, this petition before this Court.
AGREEMENT OF ASSUMPTION
OF OBLIGATIONS

KNOW ALL MEN BY THESE PRESENTS:

The Issues
This Agreement of Assumption of Obligations made and executed
The issues in this case are: this 6th day of July 1979, in the City of Manila, by and between:

LUZON STEVEDORING CORPORATION, a

1. Whether PSTC is bound by the Agreement when it assumed all corporation duly organized and existing under
the obligations of LUSTEVECO; and and by virtue of Philippine Laws, with offices at
Tacoma and Second Streets, Port Area, Manila,
2. Whether Caltex is a real party in interest to file an action to recover from represented by GERONIMO Z. VELASCO, in his
PSTC the judgment debt against LUSTEVECO. capacity as Chairman of the Board, hereinafter
referred to as ASSIGNOR,

- and -
The Ruling of this Court PNOC SHIPPING AND TRANSPORT CORPORATION,
a corporation duly organized and existing under
and by virtue of Philippine Laws, with offices at
The petition is meritorious. Makati Avenue, Makati, Metro Manila,
represented by MARIO V. TIAOQUI, in his capacity
as Vice-President, hereinafter referred to as
ASSIGNEE,

Caltex May Recover from PSTC Under the Terms of the Agreement

Caltex may recover the judgment debt from PSTC not because of a stipulation in
Caltexs favor but because the Agreement provides that PSTC shall assume all the
obligations of LUSTEVECO.
In this case, LUSTEVECO transferred, conveyed and assigned to PSTC all of
LUSTEVECOs business, properties and assets pertaining to its tanker and bulk
business together with all the obligations relating to the said business, properties and
assets. The Agreement, reproduced here in full, provides:
WITNESSETH : T h a t -
WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration,
executed an Agreement of Transfer with ASSIGNEE
whereby ASSIGNOR transferred, conveyed and assigned unto
ASSIGNEE all of ASSIGNORs business, properties and assets
appertaining to its tanker and bulk all (sic) departments, together
with all the obligations relating to said business, properties and
assets;
WHEREAS, relative to the conduct, operation and management of
the business, properties and assets transferred, conveyed and
assigned by ASSIGNOR to ASSIGNEE certain actions and claims
particularly described in Annex A consisting of four (4) pages and
Annex B, consisting of one (1) page, attached hereto and made
integral parts hereof, have been filed, either with ASSIGNOR or with
appropriate courts and administrative tribunals.
WHEREAS, under the terms and conditions hereinafter mentioned,
ASSIGNEE agree[s] to assume the obligations incident and relative
to the actions and claims enumerated and described in Annexes A
and B hereof.
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties hereto have agreed as follows:
1. ASSIGNEE shall assume, as it hereby assumes all the
obligations of ASSIGNOR in respect to the actions and
claims and described in Annexes A and B;
2. ASSIGNEE shall have complete control in the conduct of
any and all litigations now pending or may be filed with
respect to the actions and claims enumerated and
described in Annexes A and B;
3. ASSIGNOR shall deliver and convey unto ASSIGNEE all
papers, documents, files and any other records
appertaining to the actions and claims enumerated and
described in Annexes A and B;
4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its
successors and assigns, the true and lawful attorney of
ASSIGNOR, with full power of substitution, for it and in its
name, place and stead or otherwise, but on behalf and for
the benefit of ASSIGNEE, its successors and assigns, to
demand and receive any and all claim[s] out of
countersuits or counterclaims arising from the actions and
claims enumerated and described in Annexes A and
B.[9] (Emphasis supplied)
When PSTC assumed all the properties, business and assets of LUSTEVECO pertaining
to LUSTEVECOs tanker and bulk business, PSTC also assumed all of LUSTEVECOs
obligations pertaining to such business. The assumption of obligations was stipulated
not only in the Agreement of Assumption of Obligations but also in the Agreement of
Transfer. The Agreement specifically mentions the case between LUSTEVECO and
Caltex, docketed as AC-G.R. CV No. 62613, then pending before the IAC. The
Agreement provides that PSTC may demand and receive any claim out of counter-
suits or counterclaims arising from the actions enumerated in the Annexes.
PSTC is bound by the Agreement. PSTC cannot accept the benefits without assuming
the obligations under the same Agreement. PSTC cannot repudiate its commitment
to assume the obligations after taking over the assets for that will amount to
defrauding the creditors of LUSTEVECO. It will also result in failure of consideration
since the assumption of obligations is part of the consideration for the transfer of the
assets from LUSTEVECO to PSTC. Failure of consideration will revert the assets to
LUSTEVECO for the benefit of the creditors of LUSTEVECO. Thus, PSTC cannot escape
from its undertaking to assume the obligations of LUSTEVECO as stated in the
Agreement.
Disposition of Assets should not Prejudice Creditors
Even without the Agreement, PSTC is still liable to Caltex.
The disposition of all or substantially all of the assets of a corporation is allowed under
Section 40 of Batas Pambansa Blg. 68, otherwise known as The Corporation Code of
the Philippines (Corporation Code). Section 40 provides:
SEC. 40. Sale or other disposition of assets. ─ Subject to the
provisions of existing laws on illegal combinations and monopolies,
a corporation may, by a majority vote of its board of directors, or
trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including
 its goodwill, upon such terms and conditions and for such
foreclosed by lienholders. In addition, all of LUSTEVECOs business, properties and
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or assets pertaining to its tanker and bulk business had been assigned to PSTC without
consideration, as its board of directors or trustees may deem
the knowledge of its creditors. Caltex now has no other means of enforcing the
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital judgment debt except against PSTC.
stock; or in case of non-stock corporation, by the vote of at least
two-thirds (2/3) of the members, in a stockholders or
members meeting duly called for the purpose. Written notice of If PSTC refuses to honor its written commitment to assume the obligations of
the proposed action and of the time and place of the meeting shall LUSTEVECO, there will be fraud on the creditors of LUSTEVECO. PSTC agreed to take
be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited over, and in fact took over, all the assets of LUSTEVECO upon its express written
to the addressee in the post office with postage prepaid, or served commitment to pay all obligations of LUSTEVECO pertaining to those assets, including
personally: Provided, That any dissenting stockholder may exercise
his appraisal right under the conditions provided in this Code. specifically the claim of Caltex. LUSTEVECO no longer informed its creditors of the
transfer of all of its assets presumably because PSTC committed to pay all such
A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets, if thereby the corporation creditors. Such transfer, leaving the claims of creditors unenforceable against the
would be rendered incapable of continuing the business or debtor, is fraudulent and rescissible.[12] To allow PSTC now to welsh on its
accomplishing the purposes for which it was incorporated.
commitment is to sanction a fraud on LUSTEVECOs creditors.[13]
xxxx
In Oria v. McMicking, the Court enumerated the badges of fraud as follows:
While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice the creditors 1. The fact that the consideration of the conveyance is
of the assignor.The only way the transfer can proceed without prejudice to the fictitious or is inadequate.

creditors is to hold the assignee liable for the obligations of the assignor. The 2. A transfer made by a debtor after suit has been begun
acquisition by the assignee of all or substantially all of the assets of the assignor and while it is pending against him.

necessarily includes the assumption of the assignors liabilities,[10] unless the creditors 3. A sale upon credit by an insolvent debtor.
who did not consent to the transfer choose to rescind the transfer on the ground of
4. Evidence of large indebtedness or complete insolvency.
fraud.[11] To allow an assignor to transfer all its business, properties and assets
without the consent of its creditors and without requiring the assignee to assume the
5. The transfer of all or nearly all of his property by a
assignors obligations will defraud the creditors. The assignment will place the debtor, especially when he is insolvent or greatly
assignors assets beyond the reach of its creditors. embarrassed financially.

6. The fact that the transfer is made between father and

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of son, when there are present other of the above
circumstances.
execution could not be satisfied because LUSTEVECOs remaining properties had been
 7. The failure of the vendee to take exclusive possession of
all the property.[14] (Emphasis supplied)
In Pepsi-Cola Bottling Co. v. NLRC,[15] which involved the illegal dismissal of the
employees of Pepsi-Cola Distributors of the Philippines (PCD), the Court has ruled
that Pepsi-Cola Products Philippines, Inc. (PCPPI) which acquired the franchise of PCD
is liable for the reinstatement of PCDs employees. The Court rejected PCPPIs
argument that it is a company separate and distinct from PCD. The Court ruled that
the complaint was filed when PCD was still in existence. Further, there was no
evidence that PCPPI, as the new entity or purchasing company, was free from any
liabilities incurred by PCD.
In this case, PSTC was aware of the pendency of the case between Caltex and
LUSTEVECO. PSTC assumed LUSTEVECOs obligations, including specifically any
obligation that might arise from Caltexs suit against LUSTEVECO. The Agreement
transferred the unencumbered assets of LUSTEVECO to PSTC, making any money
judgment in favor of Caltex unenforceable against LUSTEVECO. To allow PSTC to
renege on its obligation under the Agreement will allow PSTC to defraud Caltex. This
militates against the statutory policy of protecting creditors from fraudulent
contracts.
Article 1313 of the Civil Code provides that [c]reditors are protected in cases of
contracts intended to defraud them. Further, Article 1381 of the Civil Code provides
that contracts entered into in fraud of creditors may be rescinded when the creditors
cannot in any manner collect the claims due them.[16] Article 1381 applies to
contracts where the creditors are not parties, for such contracts are usually made
without their knowledge. Thus, a creditor who is not a party to a contract can sue to
rescind the contract to prevent fraud upon him. Or, the same creditor can instead
choose to enforce the contract if a specific provision in the contract allows him to
collect his claim, and thus protect him from fraud.
If PSTC does not assume the obligations of LUSTEVECO as PSTC had committed under
the Agreement, the creditors of LUSTEVECO could no longer collect the debts of
LUSTEVECO. The assignment becomes a fraud on the part of PSTC, because PSTC
would then have inveigled LUSTEVECO to transfer the assets on the promise to pay
LUSTEVECOs creditors. However, after taking over the assets, PSTC would now turn
around and renege on its promise.
The Agreement, under Article 1291 of the Civil Code, [17] is also a novation of
LUSTEVECOs obligations by substituting the person of the debtor. Under Article 1293
of the Civil Code, a novation which consists in substituting a new debtor in place of
the original debtor cannot be made without the consent of the creditor.[18] Here,
since the Agreement novated the debt without the knowledge and consent of Caltex,
the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred
to PSTC in consideration, among others, of the novation, or the value of such assets,
remain even in the hands of PSTC subject to execution to satisfy the judgment claim
of Caltex.
Caltex is a Real Party in Interest
Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:
SEC. 2. Parties in interest. ─ A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. Unless otherwise authorized
by law or these Rules, every action must be prosecuted or defended
in the name of the real party in interest.
 46097. We AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila,
Ordinarily, one who is not a privy to a contract may not bring an action to enforce Branch 51, in Civil Case No. 91-59512. Costs against respondent.
it. However, this case falls under the exception. In Oco v. Limbaring, we ruled:
SO ORDERED.
The parties to a contract are the real parties in interest in an action
upon it, as consistently held by the Court. Only the contracting
parties are bound by the stipulation in the contract; they are the
ones who would benefit from and could violate it. Thus, one who is
not a party to a contract, and for whose benefit it was not expressly
made, cannot maintain an action on it. One cannot do so, even if
the contract performed by the contracting parties would
incidentally inure to ones benefit.

As an exception, parties who have not taken part in a contract may

show that they have a real interest affected by its performance or
annulment. In other words, those who are not principally or
subsidiarily obligated in a contract, in which they had no
intervention, may show their detriment that could result from it. x
x x[19] (Emphasis supplied)

Caltex may enforce its cause of action against PSTC because PSTC expressly assumed
all the obligations of LUSVETECO pertaining to its tanker and bulk business and
specifically, those relating to AC-G.R. CV No. 62613. While Caltex is not a party to the
Agreement, it has a real interest in the performance of PSTCs obligations under the
Agreement because the non-performance of PSTCs obligations will defraud Caltex.

Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO, PSTC would
still be liable to Caltex up to the value of the assets transferred. The transfer of all or
substantially all of the unencumbered assets of LUSTEVECO to PSTC cannot work to
defraud the creditors of LUSTEVECO. A creditor has a real interest to go after any
person to whom the debtor fraudulently transferred its assets.

WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9
November 2001 Resolution of the Court of Appeals in CA-G.R. CV No.
G.R. No. L-30460 March 12, 1929
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation.
The defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as
vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as
director of Trading Company, at a meeting of the board of directors held on July 24,
1922, approved and authorized various lawful purchases already made of a large
portion of the capital stock of the company from its various stockholders, thereby
diverting its funds to the injury, damage and in fraud of the creditors of the
corporation. That pursuant to such resolution and on March 31, 1922, the
corporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock
of the par value of P10, and on June 29, 1922, it purchased from the defendant Felix
D. Mendaros 100 shares of the par value of P10, and on July 16, 1922, it purchased
from the defendant Felix D. Mendaros 100 shares of the par value of P10, each, and
on April 5, 1922, it purchased from the defendant Dionisio Saavedra 10 shares of the
same par value, and on June 29, 1922, it purchased from the defendant Valentin
Matias 20 shares of like value. That the total amount of the capital stock unlawfully
purchased was P3,300. That at the time of such purchase, the corporation had
accounts payable amounting to P13,807.50, most of which were unpaid at the time
petition for the dissolution of the corporation was financial condition, in
contemplation of an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and
directors of the corporation approved a resolution for the payment of P3,000 as
dividends to its stockholders, which was wrongfully done and in bad faith, and to the
injury and fraud of its creditors. That at the time the petition for the dissolution of
the corporation was presented it had accounts payable in the sum of P9,241.19, "and
practically worthless accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco,
Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as members of the
Board of Directors, or for the recovery from the defendants S. R. Ganzon, of the sum
of P1,000, from the defendant Felix D. Mendaros, P2,000, and from the defendant
Dionisio Saavedra, P100, and under his second cause of action, he prays judgment for
the sum of P3,000, with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio
Saavedra and Valentin Matias made a general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and
3 of each cause of action of the complaint, and that the shares mentioned in
paragraph 4 of the first cause of action were purchased, but alleges that they were
purchased by virtue of a resolution of the board of directors of the corporation "when
the business of the company was going on very well." That the defendant is one of
the principal shareholders, and that about the same time, he purchase other shares
for his own account, because he thought they would bring profits. As to the second
cause of action, he admits that the dividends described in paragraph 4 of the
complaint were distributed, but alleges that such distribution was authorized by the
board of directors, "and that the amount represented by said dividends really
constitutes a surplus profit of the corporation," and as counterclaim, he asks for
judgment against the receiver for P12,512.47 for and on account of his negligence in
failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The
defendant Navallo was not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon
which the lower court dismissed plaintiff's complaint, and rendered judgment for the
defendants, with costs against the plaintiff, and absolved him from the cross-
complaint of the defendant Velasco, and on appeal, the plaintiff assigns the following
errors:
1. In holding that the Sibuguey Trading Company, Incorporated, could legally
purchase its own stock.
2. In holding that the Board of Directors of the said Corporation could legally
declared a dividend of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation approved the
purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase was
made on June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares for the
corporation for P130; Felix del Castillo — 42 shares for P420; Andres Navallo — 15
shares for P150; and the defendant Mendaros — 10 shares for P100. That during the
time these various purchases were made, the total amount of subscribed and paid
up capital stock of the corporation was P10,030, out of the authorized capital stock
2,000 shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases there was a
surplus profit of the corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of the said
capital stock were made, the said corporation had Accounts Payable in the
total amount of P13,807.50 as shown by the statement of the corporation,
dated June 30, 1922, and the Accounts Receivable in the sum of P19,126.02
 according to the books, and that the intention of the Board of Directors was
to resell the stocks purchased by the corporations at a sum above par for
each stock, this expectation being justified by the then satisfactory and
sound financial condition of the business of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the dissolution
of the corporation was presented to the court, according to a statement made June
30, 1923, it has accounts payable aggregating P9,41.19, and accounts receivable for
P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this stipulation of
facts and in the same capacity, on the same date of July 24, 1922, and at the
said meeting of the said Board of Directors, approved and authorized by
resolution the payment of dividends to its stockholders, in the sum of three
thousand pesos (P3,000), Philippine currency, which payments were made
at different dates, between September 30, 1922, and May 12, 1923, both
dates inclusive, at a time when the corporation had accounts less in amount
than the accounts receivable, which resolution was based upon the balance
sheet made as June 30, 1922, said balance sheet showing that the
corporation had a surplus of P1,069.41, and a profit on the same date of
P2,656.08, or a total surplus amount of P3,725.49, and a reserve fund of
P2,889.23 for bad and doubtful accounts and depreciation of equipment,
thereby leaving a balance of P3,314.72 of net surplus profit after paying this
dividend.
It is also stipulated at a meeting of the board of directors held on July 24, 1922, as
follows:
6. The president and manager submitted to the Board of Directors his
statement and balance sheet for the first semester ending June 30, 1922 and
recommended that P3,000 — out of the surplus account be set aside for
dividends payable, and that payments be made in installments so as not to
effect the financial condition of the corporation. That stockholders having
outstanding account with the corporation should settle first their accounts
before payments of their dividends could be made. Mr. Castillo moved that
the statement and balance sheet be approved as submitted, and also the
recommendations of the president. Seconded by Mr. Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June 30, 1923,
it had accounts receivable in the sum of P12,512.47, due from various
contractor and laborers of the National Coal Company, and also employees
of the herein corporation, which the herein receiver, after his appointment
on February 28, 1924, although he made due efforts by personally visiting
the location of the corporation, and of National Coal Company, at its offices,
at Malangas, Mindanao, and by writing numerous letters of demand to the
debtors of the corporation, in order to collect these accounts receivable, he
was unable to do so as most of them were without goods or property, and
he could not file any suit against them that might have any property, for the
reason that he had no funds on hand with which to pay the filing and sheriff
fees to Malangas, and other places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of the
corporation authorized the purchase of, purchased and paid for, 330 shares of the
capital stock of the corporation at the agreed price of P3,300, and that at the time
the purchase was made, the corporation was indebted in the sum of P13,807.50, and
that according to its books, it had accounts receivable in the sum of P19,126.02. That
on September 11, 1923, when the petition was filed for its dissolution upon the
ground that it was insolvent, its accounts payable amounted to P9,241.19, and its
accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above
its liabilities. But it will be noted that there is no stipulation or finding of facts as to
what was the actual cash value of its accounts receivable. Neither is there any
stipulation that those accounts or any part of them ever have been or will be
collected, and it does appear that after his appointment on February 28, 1924, the
receiver made a diligent effort to collect them, and that he was unable to do so, and
it also appears from the minutes of the board of directors that the president and
manager "recommended that P3,000 — out of the surplus account to be set aside for
dividends payable, and that payments be made in installments so as not to effect the
financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over
and above all of its debt and liabilities, the payment of the P3,000 in dividends would
not in the least impair the financial condition of the corporation or prejudice the
interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on assumption
that, because it appeared from the books of the corporation that it had accounts
receivable of the face value of P19,126.02, therefore it had a surplus over and above
its debts and liabilities. But as stated there is no stipulation as to the actual cash value
of those accounts, and it does appear from the stipulation that on February 28, 1924,
P12,512.47 of those accounts had but little, if any, value, and it must be conceded
that, in the purchase of its own stock to the amount of P3,300 and in declaring the
dividends to the amount of P3,000, the real assets of the corporation were
diminished P6,300. It also appears from paragraph 4 of the stipulation that the
corporation had a "surplus profit" of P3,314.72 only. It is further stipulated that the
dividends should "be made in installments so as not to effect financial condition of
the corporation." In other words, that the corporation did not then have an
actual bona fide surplus from which the dividends could be paid, and that the
payment of them in full at the time would "affect the financial condition of the
corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the
corporation and in declaring the dividends on the stock was all done at the same
meeting of the board of directors, and it appears in those minutes that the both
Ganzon and Mendaros were formerly directors and resigned before the board
approved the purchase and declared the dividends, and that out of the whole 330
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out The judgment of the lower court is reversed, and (a), as to the first cause of action,
of the 330, which were purchased by the corporation, and for which it paid P3,300. one will be entered for the plaintiff and against the defendant S. R. Ganzon for the
In other words, that the directors were permitted to resign so that they could sell sum of P1,000, with legal interest from the 10th of February, 1926, and against the
their stock to the corporation. As stated, the authorized capital stock was P20,000 defendant Felix D. Medaros for P2,000, with like interests, and against the defendant
divided into 2,000 shares of the par value of P10 each, which only P10,030 was Dionisio Saavedra for P100, with like interest, and against each of them for costs,
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there each on their primary liability as purchasers of stock, and (b) against the defendants
would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the
there would be left P4,000 only. In this situation and upon this state of facts, it is very board of directors of the Sibuguey Trading Company, Incorporated, as secondarily
apparent that the directors did not act in good faith or that they were grossly ignorant liable for the whole amount of such stock sold and purchased as above stated, and
of their duties. on the second cause of action, judgment will be entered (c) for the plaintiff and jointly
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, and severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino
section 454 where it is said: Manuel, personally, as members of the board of directors of the Sibuguey Trading
General Duty to Exercise Reasonable Care. — The directors of a corporation Company, Incorporated, for P3,000, with interest thereon from February 10, 1926, at
are bound to care for its property and manage its affairs in good faith, and the rate of 6 per cent per annum, and costs. So ordered.
for a violation of these duties resulting in waste of its assets or injury to the Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.
property they are liable to account the same as other trustees. Are there
can be no doubt that if they do acts clearly beyond their power, whereby
loss ensues to the corporation, or dispose of its property or pay away its
money without authority, they will be required to make good the loss out of
their private estates. This is the rule where the disposition made of money
or property of the corporation is one either not within the lawful power of
the corporation, or, if within the authority of the particular officer or
officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has been said that directors
are not liable for losses resulting to the corporation from want of knowledge
on their part; or for mistake of judgment, provided they were honest, and
provided they are fairly within the scope of the powers and discretion
confided to the managing body. But the acceptance of the office of a
director of a corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on the ground of their
ignorance or inexperience; and if they commit an error of judgment through
mere recklessness or want of ordinary prudence or skill, they may be held
liable for the consequences. Like a mandatory, to whom he has been
likened, a director is bound not only to exercise proper care and diligence,
but ordinary skill and judgment. As he is bound to exercise ordinary skill and
judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are important,
and we have given them the consideration which they deserve.