THIRD DIVISION intra-corporate inasmuch as the respondent was a member of Matling’s
Board of Directors aside from being its Vice-President for Finance and
G.R. No. 157802 October 13, 2010
MATLING INDUSTRIAL AND COMMERCIAL CORPORATION,
RICHARD K. SPENCER, CATHERINE SPENCER, AND ALEX
MANCILLA, Petitioners,
vs.
RICARDO R. COROS, Respondent.
DECISION
BERSAMIN, J.:
This case reprises the jurisdictional conundrum of whether a complaint for
illegal dismissal is cognizable by the Labor Arbiter (LA) or by the Regional
Trial Court (RTC). The determination of whether the dismissed officer was
a regular employee or a corporate officer unravels the conundrum. In the
case of the regular employee, the LA has jurisdiction; otherwise, the RTC
exercises the legal authority to adjudicate.
In this appeal via petition for review on certiorari, the petitioners challenge
the decision dated September 13, 20021 and the resolution dated April 2,
2003,2 both promulgated in C.A.-G.R. SP No. 65714 entitled Matling
Industrial and Commercial Corporation, et al. v. Ricardo R. Coros and
National Labor Relations Commission, whereby by the Court of Appeals
(CA) sustained the ruling of the National Labor Relations Commission
(NLRC) to the effect that the LA had jurisdiction because the respondent
was not a corporate officer of petitioner Matling Industrial and Commercial
Corporation (Matling).
Antecedents
After his dismissal by Matling as its Vice President for Finance and
Administration, the respondent filed on August 10, 2000 a complaint for
illegal suspension and illegal dismissal against Matling and some of its
corporate officers (petitioners) in the NLRC, Sub-Regional Arbitration
Branch XII, Iligan City.3
The petitioners moved to dismiss the complaint, 4 raising the ground,
among others, that the complaint pertained to the jurisdiction of the
Securities and Exchange Commission (SEC) due to the controversy being
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Administration prior to his termination.
The respondent opposed the petitioners’ motion to dismiss, 5 insisting that
his status as a member of Matling’s Board of Directors was doubtful,
considering that he had not been formally elected as such; that he did not
own a single share of stock in Matling, considering that he had been made
to sign in blank an undated indorsement of the certificate of stock he had
been given in 1992; that Matling had taken back and retained the certificate
of stock in its custody; and that even assuming that he had been a Director
of Matling, he had been removed as the Vice President for Finance and
Administration, not as a Director, a fact that the notice of his termination
dated April 10, 2000 showed.
On October 16, 2000, the LA granted the petitioners’ motion to dismiss, 6
ruling that the respondent was a corporate officer because he was
occupying the position of Vice President for Finance and Administration
and at the same time was a Member of the Board of Directors of Matling;
and that, consequently, his removal was a corporate act of Matling and the
controversy resulting from such removal was under the jurisdiction of the
SEC, pursuant to Section 5, paragraph (c) of Presidential Decree No. 902.
Ruling of the NLRC
The respondent appealed to the NLRC,7 urging that:
I
THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF
DISCRETION GRANTING APPELLEE’S MOTION TO DISMISS
WITHOUT GIVING THE APPELLANT AN OPPORTUNITY TO FILE HIS
OPPOSITION THERETO THEREBY VIOLATING THE BASIC
PRINCIPLE OF DUE PROCESS.
II
THE HONORABLE LABOR ARBITER COMMITTED AN ERROR IN
DISMISSING THE CASE FOR LACK OF JURISDICTION.
On March 13, 2001, the NLRC set aside the dismissal, concluding that the
respondent’s complaint for illegal dismissal was properly cognizable by the
LA, not by the SEC, because he was not a corporate officer by virtue of his
position in Matling, albeit high ranking and managerial, not being among
the positions listed in Matling’s Constitution and By-Laws.8 The NLRC
disposed thuswise:
WHEREFORE, the Order appealed from is SET ASIDE. A new one is
entered declaring and holding that the case at bench does not involve any
intracorporate matter. Hence, jurisdiction to hear and act on said case is
vested with the Labor Arbiter, not the SEC, considering that the position of
Vice-President for Finance and Administration being held by complainant-
appellant is not listed as among respondent's corporate officers.
Accordingly, let the records of this case be REMANDED to the Arbitration
Branch of origin in order that the Labor Arbiter below could act on the case
at bench, hear both parties, receive their respective evidence and position
papers fully observing the requirements of due process, and resolve the
same with reasonable dispatch.
SO ORDERED.
The petitioners sought reconsideration,9 reiterating that the respondent,
being a member of the Board of Directors, was a corporate officer whose
removal was not within the LA’s jurisdiction.
The petitioners later submitted to the NLRC in support of the motion for
reconsideration the certified machine copies of Matling’s Amended Articles
of Incorporation and By Laws to prove that the President of Matling was
thereby granted "full power to create new offices and appoint the officers
thereto, and the minutes of special meeting held on June 7, 1999 by
Matling’s Board of Directors to prove that the respondent was, indeed, a
Member of the Board of Directors.10
Nonetheless, on April 30, 2001, the NLRC denied the petitioners’ motion
for reconsideration.11
Ruling of the CA
The petitioners elevated the issue to the CA by petition for certiorari,
docketed as C.A.-G.R. No. SP 65714, contending that the NLRC
committed grave abuse of discretion amounting to lack of jurisdiction in
reversing the correct decision of the LA.
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In its assailed decision promulgated on September 13, 2002, 12 the CA
dismissed the petition for certiorari, explaining:
For a position to be considered as a corporate office, or, for that matter, for
one to be considered as a corporate officer, the position must, if not listed
in the by-laws, have been created by the corporation's board of directors,
and the occupant thereof appointed or elected by the same board of
directors or stockholders. This is the implication of the ruling in Tabang v.
National Labor Relations Commission, which reads:
"The president, vice president, secretary and treasurer are commonly
regarded as the principal or executive officers of a corporation, and modern
corporation statutes usually designate them as the officers of the
corporation. However, other offices are sometimes created by the charter
or by-laws of a corporation, or the board of directors may be empowered
under the by-laws of a corporation to create additional offices as may be
necessary.
It has been held that an 'office' is created by the charter of the corporation
and the officer is elected by the directors or stockholders. On the other
hand, an 'employee' usually occupies no office and generally is employed
not by action of the directors or stockholders but by the managing officer
of the corporation who also determines the compensation to be paid to
such employee."
This ruling was reiterated in the subsequent cases of Ongkingco v.
National Labor Relations Commission and De Rossi v. National Labor
Relations Commission.
The position of vice-president for administration and finance, which Coros
used to hold in the corporation, was not created by the corporation’s board
of directors but only by its president or executive vice-president pursuant
to the by-laws of the corporation. Moreover, Coros’ appointment to said
position was not made through any act of the board of directors or
stockholders of the corporation. Consequently, the position to which Coros
was appointed and later on removed from, is not a corporate office despite
its nomenclature, but an ordinary office in the corporation.
Coros’ alleged illegal dismissal therefrom is, therefore, within the
jurisdiction of the labor arbiter.
WHEREFORE, the petition for certiorari is hereby DISMISSED.
SO ORDERED.
The CA denied the petitioners’ motion for reconsideration on April 2,
2003.13
Issue
Thus, the petitioners are now before the Court for a review on certiorari,
positing that the respondent was a stockholder/member of the Matling’s
Board of Directors as well as its Vice President for Finance and
Administration; and that the CA consequently erred in holding that the LA
had jurisdiction.
The decisive issue is whether the respondent was a corporate officer of
Matling or not. The resolution of the issue determines whether the LA or
the RTC had jurisdiction over his complaint for illegal dismissal.
Ruling
The appeal fails.
I
The Law on Jurisdiction in Dismissal Cases
As a rule, the illegal dismissal of an officer or other employee of a private
employer is properly cognizable by the LA. This is pursuant to Article 217
(a) 2 of the Labor Code, as amended, which provides as follows:
Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a)
Except as otherwise provided under this Code, the Labor Arbiters shall
have original and exclusive jurisdiction to hear and decide, within thirty (30)
calendar days after the submission of the case by the parties for decision
without extension, even in the absence of stenographic notes, the following
cases involving all workers, whether agricultural or non-agricultural:
1. Unfair labor practice cases;
2. Termination disputes;
3. If accompanied with a claim for reinstatement,
those cases that workers may file involving
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wages, rates of pay, hours of work and other
terms and conditions of employment;
4. Claims for actual, moral, exemplary and other
forms of damages arising from the employer-
employee relations;
5. Cases arising from any violation of Article 264
of this Code, including questions involving the
legality of strikes and lockouts; and
6. Except claims for Employees Compensation,
Social Security, Medicare and maternity benefits,
all other claims arising from employer-employee
relations, including those of persons in domestic
or household service, involving an amount
exceeding five thousand pesos (₱5,000.00)
regardless of whether accompanied with a claim
for reinstatement.
(b) The Commission shall have exclusive appellate
jurisdiction over all cases decided by Labor Arbiters.
(c) Cases arising from the interpretation or implementation
of collective bargaining agreements and those arising
from the interpretation or enforcement of company
personnel policies shall be disposed of by the Labor
Arbiter by referring the same to the grievance machinery
and voluntary arbitration as may be provided in said
agreements. (As amended by Section 9, Republic Act No.
6715, March 21, 1989).
Where the complaint for illegal dismissal concerns a corporate officer,
however, the controversy falls under the jurisdiction of the Securities and
Exchange Commission (SEC), because the controversy arises out of intra-
corporate or partnership relations between and among stockholders,
members, or associates, or between any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or
associates, respectively; and between such corporation, partnership, or
association and the State insofar as the controversy concerns their
individual franchise or right to exist as such entity; or because the
controversy involves the election or appointment of a director, trustee,
officer, or manager of such corporation, partnership, or association.14 Such
controversy, among others, is known as an intra-corporate dispute.
Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15
otherwise known as The Securities Regulation Code, the SEC’s jurisdiction
over all intra-corporate disputes was transferred to the RTC, pursuant to
Section 5.2 of RA No. 8799, to wit:
5.2. The Commission’s jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, that the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final resolution
which should be resolved within one (1) year from the enactment of this
Code. The Commission shall retain jurisdiction over pending suspension
of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed.
Considering that the respondent’s complaint for illegal dismissal was
commenced on August 10, 2000, it might come under the coverage of
Section 5.2 of RA No. 8799, supra, should it turn out that the respondent
was a corporate, not a regular, officer of Matling.
II
Was the Respondent’s Position of Vice President
for Administration and Finance a Corporate Office?
We must first resolve whether or not the respondent’s position as Vice
President for Finance and Administration was a corporate office. If it was,
his dismissal by the Board of Directors rendered the matter an intra-
corporate dispute cognizable by the RTC pursuant to RA No. 8799.
The petitioners contend that the position of Vice President for Finance and
Administration was a corporate office, having been created by Matling’s
President pursuant to By-Law No. V, as amended,16 to wit:
BY LAW NO. V
Officers
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The President shall be the executive head of the corporation; shall preside
over the meetings of the stockholders and directors; shall countersign all
certificates, contracts and other instruments of the corporation as
authorized by the Board of Directors; shall have full power to hire and
discharge any or all employees of the corporation; shall have full power to
create new offices and to appoint the officers thereto as he may deem
proper and necessary in the operations of the corporation and as the
progress of the business and welfare of the corporation may demand; shall
make reports to the directors and stockholders and perform all such other
duties and functions as are incident to his office or are properly required of
him by the Board of Directors. In case of the absence or disability of the
President, the Executive Vice President shall have the power to exercise
his functions.
The petitioners argue that the power to create corporate offices and to
appoint the individuals to assume the offices was delegated by Matling’s
Board of Directors to its President through By-Law No. V, as amended;
and that any office the President created, like the position of the
respondent, was as valid and effective a creation as that made by the
Board of Directors, making the office a corporate office. In justification, they
cite Tabang v. National Labor Relations Commission, 17 which held that
"other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-
laws of a corporation to create additional officers as may be necessary."
The respondent counters that Matling’s By-Laws did not list his position as
Vice President for Finance and Administration as one of the corporate
offices; that Matling’s By-Law No. III listed only four corporate officers,
namely: President, Executive Vice President, Secretary, and Treasurer; 18
that the corporate offices contemplated in the phrase "and such other
officers as may be provided for in the by-laws" found in Section 25 of the
Corporation Code should be clearly and expressly stated in the By-Laws;
that the fact that Matling’s By-Law No. III dealt with Directors & Officers
while its By-Law No. V dealt with Officers proved that there was a
differentiation between the officers mentioned in the two provisions, with
those classified under By-Law No. V being ordinary or non-corporate
officers; and that the officer, to be considered as a corporate officer, must
be elected by the Board of Directors or the stockholders, for the President
could only appoint an employee to a position pursuant to By-Law No. V.
We agree with respondent.
Section 25 of the Corporation Code provides:
Section 25. Corporate officers, quorum.--Immediately after their election,
the directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in the by-laws. Any
two (2) or more positions may be held concurrently by the same person,
except that no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Conformably with Section 25, a position must be expressly mentioned in
the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is
not enough to make a position a corporate office. Guerrea v. Lezama, 19
the first ruling on the matter, held that the only officers of a corporation
were those given that character either by the Corporation Code or by the
By-Laws; the rest of the corporate officers could be considered only as
employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:20
An "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders. On the other hand, an employee
occupies no office and generally is employed not by the action of the
directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee.
In this case, respondent was appointed vice president for nationwide
expansion by Malonzo, petitioner’'s general manager, not by the board of
directors of petitioner. It was also Malonzo who determined the
compensation package of respondent. Thus, respondent was an
employee, not a "corporate officer." The CA was therefore correct in ruling
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that jurisdiction over the case was properly with the NLRC, not the SEC
(now the RTC).
This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers are the
President, Secretary, Treasurer and such other officers as may be
provided for in the By-Laws. Accordingly, the corporate officers in the
context of PD No. 902-A are exclusively those who are given that character
either by the Corporation Code or by the corporation’s By-Laws.
A different interpretation can easily leave the way open for the Board of
Directors to circumvent the constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in the By-Laws of an enabling
clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of
Section 25 of the Corporation Code in its Opinion dated November 25,
1993,21 to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation
Code), whoever are the corporate officers enumerated in the by-laws are
the exclusive Officers of the corporation and the Board has no power to
create other Offices without amending first the corporate By-laws.
However, the Board may create appointive positions other than the
positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning
of Section 25 of the Corporation Code and are not empowered to
exercise the functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to be determined
by the Board of Directors/Trustees.
Moreover, the Board of Directors of Matling could not validly delegate the
power to create a corporate office to the President, in light of Section 25 of
the Corporation Code requiring the Board of Directors itself to elect the
corporate officers. Verily, the power to elect the corporate officers was a
discretionary power that the law exclusively vested in the Board of
Directors, and could not be delegated to subordinate officers or agents. 22
The office of Vice President for Finance and Administration created by
Matling’s President pursuant to By Law No. V was an ordinary, not a
corporate, office.
To emphasize, the power to create new offices and the power to appoint
the officers to occupy them vested by By-Law No. V merely allowed
Matling’s President to create non-corporate offices to be occupied by
ordinary employees of Matling. Such powers were incidental to the
President’s duties as the executive head of Matling to assist him in the
daily operations of the business.
The petitioners’ reliance on Tabang, supra, is misplaced. The statement in
Tabang, to the effect that offices not expressly mentioned in the By-Laws
but were created pursuant to a By-Law enabling provision were also
considered corporate offices, was plainly obiter dictum due to the position
subject of the controversy being mentioned in the By-Laws. Thus, the
Court held therein that the position was a corporate office, and that the
determination of the rights and liabilities arising from the ouster from the
position was an intra-corporate controversy within the SEC’s jurisdiction.
In Nacpil v. Intercontinental Broadcasting Corporation,23 which may be the
more appropriate ruling, the position subject of the controversy was not
expressly mentioned in the By-Laws, but was created pursuant to a By-
Law enabling provision authorizing the Board of Directors to create other
offices that the Board of Directors might see fit to create. The Court held
there that the position was a corporate office, relying on the obiter dictum
in Tabang.
Considering that the observations earlier made herein show that the
soundness of their dicta is not unassailable, Tabang and Nacpil should no
longer be controlling.
III
Did Respondent’s Status as Director and
Stockholder Automatically Convert his Dismissal
into an Intra-Corporate Dispute?
Yet, the petitioners insist that because the respondent was a
Director/stockholder of Matling, and relying on Paguio v. National Labor
Relations Commission24 and Ongkingko v. National Labor Relations
Commission,25 the NLRC had no jurisdiction over his complaint,
considering that any case for illegal dismissal brought by a
stockholder/officer against the corporation was an intra-corporate matter
that must fall under the jurisdiction of the SEC conformably with the context
of PD No. 902-A.
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The petitioners’ insistence is bereft of basis.
To begin with, the reliance on Paguio and Ongkingko is misplaced. In both
rulings, the complainants were undeniably corporate officers due to their
positions being expressly mentioned in the By-Laws, aside from the fact
that both of them had been duly elected by the respective Boards of
Directors. But the herein respondent’s position of Vice President for
Finance and Administration was not expressly mentioned in the By-Laws;
neither was the position of Vice President for Finance and Administration
created by Matling’s Board of Directors. Lastly, the President, not the
Board of Directors, appointed him.
True it is that the Court pronounced in Tabang as follows:
Also, an intra-corporate controversy is one which arises between a
stockholder and the corporation. There is no distinction, qualification or any
exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations.26
However, the Tabang pronouncement is not controlling because it is too
sweeping and does not accord with reason, justice, and fair play. In order
to determine whether a dispute constitutes an intra-corporate controversy
or not, the Court considers two elements instead, namely: (a) the status or
relationship of the parties; and (b) the nature of the question that is the
subject of their controversy. This was our thrust in Viray v. Court of
Appeals:27
The establishment of any of the relationships mentioned above will not
necessarily always confer jurisdiction over the dispute on the SEC to the
exclusion of regular courts. The statement made in one case that the rule
admits of no exceptions or distinctions is not that absolute. The better
policy in determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also the nature
of the question that is the subject of their controversy.
Not every conflict between a corporation and its stockholders involves
corporate matters that only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers. If, for example, a person leases an
apartment owned by a corporation of which he is a stockholder, there
should be no question that a complaint for his ejectment for non-payment
of rentals would still come under the jurisdiction of the regular courts and
not of the SEC. By the same token, if one person injures another in a
vehicular accident, the complaint for damages filed by the victim will not
come under the jurisdiction of the SEC simply because of the
happenstance that both parties are stockholders of the same corporation.
A contrary interpretation would dissipate the powers of the regular courts
and distort the meaning and intent of PD No. 902-A.
In another case, Mainland Construction Co., Inc. v. Movilla,28 the Court
reiterated these determinants thuswise:
In order that the SEC (now the regular courts) can take cognizance of a
case, the controversy must pertain to any of the following relationships:
a) between the corporation, partnership or association and
the public;
b) between the corporation, partnership or association and
its stockholders, partners, members or officers;
c) between the corporation, partnership or association and
the State as far as its franchise, permit or license to
operate is concerned; and
d) among the stockholders, partners or associates
themselves.
The fact that the parties involved in the controversy are all stockholders or
that the parties involved are the stockholders and the corporation does not
necessarily place the dispute within the ambit of the jurisdiction of SEC.
The better policy to be followed in determining jurisdiction over a case
should be to consider concurrent factors such as the status or relationship
of the parties or the nature of the question that is the subject of their
controversy. In the absence of any one of these factors, the SEC will not
have jurisdiction. Furthermore, it does not necessarily follow that every
conflict between the corporation and its stockholders would involve such
corporate matters as only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers.29
The criteria for distinguishing between corporate officers who may be
ousted from office at will, on one hand, and ordinary corporate employees
who may only be terminated for just cause, on the other hand, do not
depend on the nature of the services performed, but on the manner of
creation of the office. In the respondent’s case, he was supposedly at once
an employee, a stockholder, and a Director of Matling. The circumstances
surrounding his appointment to office must be fully considered to
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determine whether the dismissal constituted an intra-corporate
controversy or a labor termination dispute. We must also consider whether
his status as Director and stockholder had any relation at all to his
appointment and subsequent dismissal as Vice President for Finance and
Administration.
Obviously enough, the respondent was not appointed as Vice President
for Finance and Administration because of his being a stockholder or
Director of Matling. He had started working for Matling on September 8,
1966, and had been employed continuously for 33 years until his
termination on April 17, 2000, first as a bookkeeper, and his climb in 1987
to his last position as Vice President for Finance and Administration had
been gradual but steady, as the following sequence indicates:
1966 – Bookkeeper
1968 – Senior Accountant
1969 – Chief Accountant
1972 – Office Supervisor
1973 – Assistant Treasurer
1978 – Special Assistant for Finance
1980 – Assistant Comptroller
1983 – Finance and Administrative Manager
1985 – Asst. Vice President for Finance and
Administration
1987 to April 17, 2000 – Vice President for Finance and
Administration
Even though he might have become a stockholder of Matling in 1992, his
promotion to the position of Vice President for Finance and Administration
in 1987 was by virtue of the length of quality service he had rendered as
an employee of Matling. His subsequent acquisition of the status of
Director/stockholder had no relation to his promotion. Besides, his status
of Director/stockholder was unaffected by his dismissal from employment
as Vice President for Finance and Administration.1avvphi1

In Prudential Bank and Trust Company v. Reyes,30 a case involving a lady

bank manager who had risen from the ranks but was dismissed, the Court
held that her complaint for illegal dismissal was correctly brought to the
NLRC, because she was deemed a regular employee of the bank. The
Court observed thus:

It appears that private respondent was appointed Accounting Clerk by the

Bank on July 14, 1963. From that position she rose to become supervisor.
Then in 1982, she was appointed Assistant Vice-President which she
occupied until her illegal dismissal on July 19, 1991. The bank’s
contention that she merely holds an elective position and that in
effect she is not a regular employee is belied by the nature of her
work and her length of service with the Bank. As earlier stated, she
rose from the ranks and has been employed with the Bank since 1963 until
the termination of her employment in 1991. As Assistant Vice President of
the Foreign Department of the Bank, she is tasked, among others, to
collect checks drawn against overseas banks payable in foreign currency
and to ensure the collection of foreign bills or checks purchased, including
the signing of transmittal letters covering the same. It has been stated that
"the primary standard of determining regular employment is the reasonable
connection between the particular activity performed by the employee in
relation to the usual trade or business of the employer. Additionally, "an
employee is regular because of the nature of work and the length of
service, not because of the mode or even the reason for hiring them." As
Assistant Vice-President of the Foreign Department of the Bank she
performs tasks integral to the operations of the bank and her length of
service with the bank totaling 28 years speaks volumes of her status as a
regular employee of the bank. In fine, as a regular employee, she is entitled
to security of tenure; that is, her services may be terminated only for a just
or authorized cause. This being in truth a case of illegal dismissal, it is no
wonder then that the Bank endeavored to the very end to establish loss of
trust and confidence and serious misconduct on the part of private
respondent but, as will be discussed later, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm the
decision of the Court of Appeals.

Costs of suit to be paid by the petitioners.

SO ORDERED.
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 SECOND DIVISION
G.R. No. 171993 December 12, 2011
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
DECISION
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court,
herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the
Decision1 dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No.
76624 for reversing and setting aside the Resolution2 of the National Labor
Relations Commission (NLRC) dated 15 October 2002, thereby affirming
the Labor Arbiter’s Decision3 dated 1 October 2001 finding herein
respondent Alfredo M. Joson’s dismissal from employment as illegal. In the
questioned Decision, the Court of Appeals upheld the Labor Arbiter’s
jurisdiction over the case on the basis that respondent was not an officer
but a mere employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latter’s allegation of intra-corporate controversy.
Nonetheless, the Court of Appeals remanded the case to the NLRC for
further proceedings to determine the proper amount of monetary awards
that should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006
denying their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation
duly organized and existing under and by virtue of the laws of the
Philippines. It is primarily engaged in buying, marketing, selling and
distributing in retail or wholesale for export or import household appliances
and products and other items.5 It took over the business operations of Marc
Marketing, Inc. which was made non-operational following its incorporation
and registration with the Securities and Exchange Commission (SEC).
Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder
of petitioner corporation. She was also the former President and majority
stockholder of the defunct Marc Marketing, Inc.
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Respondent Alfredo M. Joson (Alfredo), on the other hand, was the
General Manager, incorporator, director and stockholder of petitioner
corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,6 respondent has
already been engaged by petitioner Lucila, in her capacity as President of
Marc Marketing, Inc., to work as the General Manager of petitioner
corporation. It was formalized through the execution of a Management
Contract7 dated 16 January 1994 under the letterhead of Marc Marketing,
Inc.8 as petitioner corporation is yet to be incorporated at the time of its
execution. It was explicitly provided therein that respondent shall be
entitled to 30% of its net income for his work as General Manager.
Respondent will also be granted 30% of its net profit to compensate for the
possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was
designated as the General Manager of Marc Marketing, Inc., which was
then in the process of winding up its business. For occupying the said
position, respondent was among its corporate officers by the express
provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated and
registered with the SEC. Accordingly, Marc Marketing, Inc. was made non-
operational. Respondent continued to discharge his duties as General
Manager but this time under petitioner corporation.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its
corporate officers are as follows: Chairman, President, one or more Vice-
President(s), Treasurer and Secretary. Its Board of Directors, however,
may, from time to time, appoint such other officers as it may determine to
be necessary or proper.
Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of
Directors conducted a meeting on 29 August 1994 where respondent was
appointed as one of its corporate officers with the designation or title of
General Manager to function as a managing director with other duties and
responsibilities that the Board of Directors may provide and authorized. 15
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and
cease its operations, as evidenced by an Affidavit of Non-Operation16
dated 31 August 1998, due to poor sales collection aggravated by the
inefficient management of its affairs. On the same date, it formally informed
respondent of the cessation of its business operation. Concomitantly,
respondent was apprised of the termination of his services as General
Manager since his services as such would no longer be necessary for the
winding up of its affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement and
Money Claim against petitioners before the Labor Arbiter which was
docketed as NLRC NCR Case No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed him
from his employment with petitioner corporation due to the feeling of hatred
she harbored towards his family. The same was rooted in the filing by
petitioner Lucila’s estranged husband, who happened to be respondent’s
brother, of a Petition for Declaration of Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter
required them to submit their respective position papers. Respondent
complied but petitioners opted to file a Motion to Dismiss grounded on the
Labor Arbiter’s lack of jurisdiction as the case involved an intra-corporate
controversy, which jurisdiction belongs to the SEC [now with the Regional
Trial Court (RTC)].19 Petitioners similarly raised therein the ground of
prescription of respondent’s monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order 20 deferring the
resolution of petitioners’ Motion to Dismiss until the final determination of
the case. The Labor Arbiter also reiterated his directive for petitioners to
submit position paper. Still, petitioners did not comply. Insisting that the
Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent
Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing
of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both
motions and declared final the Order dated 5 September 2000. The Labor
Arbiter then gave petitioners a period of five days from receipt thereof
within which to file position paper, otherwise, their Motion to Dismiss will
be treated as their position paper and the case will be considered
submitted for decision.
Petitioners, through counsel, moved for extension of time to submit
position paper. Despite the requested extension, petitioners still failed to
submit the same. Accordingly, the case was submitted for resolution.
10 | P a g e
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of
respondent. Its decretal portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered
declaring [respondent’s] dismissal from employment illegal. Accordingly,
[petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent
position without loss of seniority rights, benefits, and
privileges;
2. Jointly and severally liable to pay [respondent’s] unpaid
wages in the amount of ₱450,000.00 per month from [26
March 1996] up to time of dismissal in the total amount of
₱6,300,000.00;
3. Jointly and severally liable to pay [respondent’s] full
backwages in the amount of ₱450,000.00 per month from
date of dismissal until actual reinstatement which at the
time of promulgation amounted to ₱21,600,000.00;
4. Jointly and severally liable to pay moral damages in the
amount of ₱100,000.00 and attorney’s fees in the amount
of 5% of the total monetary award.22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’
Motion to Dismiss by finding the ground of lack of jurisdiction to be without
merit. The Labor Arbiter elucidated that petitioners failed to adduce
evidence to prove that the present case involved an intra-corporate
controversy. Also, respondent’s money claim did not arise from his being
a director or stockholder of petitioner corporation but from his position as
being its General Manager. The Labor Arbiter likewise held that
respondent was not a corporate officer under petitioner corporation’s by-
laws. As such, respondent’s complaint clearly arose from an employer-
employee relationship, thus, subject to the Labor Arbiter’s jurisdiction.
The Labor Arbiter then declared respondent’s dismissal from employment
as illegal. Respondent, being a regular employee of petitioner corporation,
may only be dismissed for a valid cause and upon proper compliance with
the requirements of due process. The records, though, revealed that
petitioners failed to present any evidence to justify respondent’s dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to
the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of
petitioners by giving credence to the Secretary’s Certificate, which
evidenced petitioner corporation’s Board of Directors’ meeting in which a
resolution was approved appointing respondent as its corporate officer with
designation as General Manager. Therefrom, the NLRC reversed and set
aside the Labor Arbiter’s Decision dated 1 October 2001 and dismissed
respondent’s Complaint for want of jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment and
termination from the position of General Manager was made subject to the
approval of petitioner corporation’s Board of Directors. Had respondent
been an ordinary employee, such board action would not have been
required. As such, it is clear that respondent was a corporate officer whose
dismissal involved a purely intra-corporate controversy. The NLRC went
further by stating that respondent’s claim for 30% of the net profit of the
corporation can only emanate from his right of ownership therein as
stockholder, director and/or corporate officer. Dividends or profits are paid
only to stockholders or directors of a corporation and not to any ordinary
employee in the absence of any profit sharing scheme. In addition, the
question of remuneration of a person who is not a mere employee but a
stockholder and officer of a corporation is not a simple labor problem. Such
matter comes within the ambit of corporate affairs and management and is
an intra-corporate controversy in contemplation of the Corporation Code.24
When respondent’s Motion for Reconsideration was denied in another
Resolution25 dated 23 January 2003, he filed a Petition for Certiorari with
the Court of Appeals ascribing grave abuse of discretion on the part of the
NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision
declaring that the Labor Arbiter has jurisdiction over the present
controversy. It upheld the finding of the Labor Arbiter that respondent was
a mere employee of petitioner corporation, who has been illegally
dismissed from employment without valid cause and without due process.
Nevertheless, it ordered the records of the case remanded to the NLRC for
the determination of the appropriate amount of monetary awards to be
given to respondent. The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor
Arbiter is DECLARED to have jurisdiction over the controversy. The
11 | P a g e
records are REMANDED to the NLRC for further proceedings to determine
the appropriate amount of monetary awards to be adjudged in favor of
[respondent]. Costs against the [petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment of
errors:
THE COURT OF APPEALS ERRED AND COMMITTED
GRAVE ABUSE OF DISCRETION IN DECIDING THAT
THE NLRC HAS THE JURISDICTION IN RESOLVING A
PURELY INTRA-CORPORATE MATTER WHICH IS
COGNIZABLE BY THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC
HAS JURISDICTION OVER THE CASE, STILL THE
COURT OF APPEALS SERIOUSLY ERRED IN NOT
RULING THAT THERE IS NO EMPLOYER-EMPLOYEE
RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO
M. JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC
HAS JURISDICTION OVER THE CASE, THE COURT OF
APPEALS ERRED IN NOT RULING THAT THE LABOR
ARBITER COMMITTED GRAVE ABUSE OF
DISCRETION IN AWARDING MULTI-MILLION PESOS
IN COMPENSATION AND BACKWAGES BASED ON
THE PURPORTED GROSS INCOME OF [PETITIONER
CORPORATION].
THE COURT OF APPEALS SERIOUSLY ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
MAKING ANY FINDINGS AND RULING THAT
[PETITIONER LUCILA] SHOULD NOT BE HELD
SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE
OF MALICE AND BAD FAITH ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor
Arbiter’s finding that respondent was not a corporate officer under
petitioner corporation’s by-laws. They insist that there is no need to amend
the corporate by-laws to specify who its corporate officers are. The
resolution issued by petitioner corporation’s Board of Directors appointing
respondent as General Manager, coupled with his assumption of the said
position, positively made him its corporate officer. More so, respondent’s
position, being a creation of petitioner corporation’s Board of Directors
pursuant to its by-laws, is a corporate office sanctioned by the Corporation
Code and the doctrines previously laid down by this Court. Thus,
respondent’s removal as petitioner corporation’s General Manager
involved a purely intra-corporate controversy over which the RTC has
jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the net profit
of petitioner corporation was anchored on the purported Management
Contract dated 16 January 1994. It should be noted, however, that said
Management Contract was executed at the time petitioner corporation was
still nonexistent and had no juridical personality yet. Such being the case,
respondent cannot invoke any legal right therefrom as it has no legal and
binding effect on petitioner corporation. Moreover, it is clear from the
Articles of Incorporation of petitioner corporation that respondent was its
director and stockholder. Indubitably, respondent’s claim for his share in
the profit of petitioner corporation was based on his capacity as such and
not by virtue of any employer-employee relationship.
Petitioners further avow that even if the present case does not pose an
intra-corporate controversy, still, the Labor Arbiter’s multi-million peso
awards in favor of respondent were erroneous. The same was merely
based on the latter’s self-serving computations without any supporting
documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily
liable with petitioner corporation. There was neither allegation nor iota of
evidence presented to show that she acted with malice and bad faith in her
dealings with respondent. Moreover, the Labor Arbiter, in his Decision,
simply concluded that petitioner Lucila was jointly and severally liable with
petitioner corporation without making any findings thereon. It was,
therefore, an error for the Court of Appeals to hold petitioner Lucila
solidarily liable with petitioner corporation.
From the foregoing arguments, the initial question is which between the
Labor Arbiter or the RTC, has jurisdiction over respondent’s dismissal as
General Manager of petitioner corporation. Its resolution necessarily
entails the determination of whether respondent as General Manager of
petitioner corporation is a corporate officer or a mere employee of the
latter.
12 | P a g e
While Article 217(a)229 of the Labor Code, as amended, provides that it is
the Labor Arbiter who has the original and exclusive jurisdiction over cases
involving termination or dismissal of workers when the person dismissed
or terminated is a corporate officer, the case automatically falls within the
province of the RTC. The dismissal of a corporate officer is always
regarded as a corporate act and/or an intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate or
partnership relations, between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association
and the State insofar as it concerns their individual franchise or right to
exist as such entity. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the parties
and the nature of the question that is the subject of their controversy must
be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those
officers of a corporation who are given that character either by the
Corporation Code or by the corporation’s by-laws. Section 2534 of the
Corporation Code specifically enumerated who are these corporate
officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other
officers as may be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase
"such other officers as may be provided for in the by-laws," has been
clarified and elaborated in this Court’s recent pronouncement in Matling
Industrial and Commercial Corporation v. Coros, where it held, thus:
Conformably with Section 25, a position must be expressly mentioned in
the [b]y-[l]aws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a [b]y-[l]aw enabling provision is
not enough to make a position a corporate office. [In] Guerrea v. Lezama
[citation omitted] the first ruling on the matter, held that the only officers of
a corporation were those given that character either by the Corporation
Code or by the [b]y-[l]aws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in
Easycall Communications Phils., Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders. On the other hand, an employee
occupies no office and generally is employed not by the action of the
directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee.
xxxx
This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers are the
President, Secretary, Treasurer and such other officers as may be
provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the
context of PD No. 902-A are exclusively those who are given that character
either by the Corporation Code or by the corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of
Directors to circumvent the constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in the [b]y-[l]aws of an enabling
clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of
Section 25 of the Corporation Code in its Opinion dated November 25,
1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation
Code), whoever are the corporate officers enumerated in the by-laws are
the exclusive Officers of the corporation and the Board has no power to
create other Offices without amending first the corporate [b]y-laws.
However, the Board may create appointive positions other than the
positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning
of Section 25 of the Corporation Code and are not empowered to
exercise the functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to be determined
by the Board of Directors/Trustees.36 [Emphasis supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly paragraph
1, Section 1, Article IV,37 would explicitly reveal that its corporate officers
are composed only of: (1) Chairman; (2) President; (3) one or more Vice-
13 | P a g e
President; (4) Treasurer; and (5) Secretary.38 The position of General
Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws,
empowered its Board of Directors to appoint such other officers as it may
determine necessary or proper.39 It is by virtue of this enabling provision
that petitioner corporation’s Board of Directors allegedly approved a
resolution to make the position of General Manager a corporate office, and,
thereafter, appointed respondent thereto making him one of its corporate
officers. All of these acts were done without first amending its by-laws so
as to include the General Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and
Commercial Corporation v. Coros, this Court rules that respondent was not
a corporate officer of petitioner corporation because his position as
General Manager was not specifically mentioned in the roster of corporate
officers in its corporate by-laws. The enabling clause in petitioner
corporation’s by-laws empowering its Board of Directors to create
additional officers, i.e., General Manager, and the alleged subsequent
passage of a board resolution to that effect cannot make such position a
corporate office. Matling clearly enunciated that the board of directors has
no power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created corporate
office. Though the board of directors may create appointive positions other
than the positions of corporate officers, the persons occupying such
positions cannot be viewed as corporate officers under Section 25 of the
Corporation Code.40 In view thereof, this Court holds that unless and until
petitioner corporation’s by-laws is amended for the inclusion of General
Manager in the list of its corporate officers, such position cannot be
considered as a corporate office within the realm of Section 25 of the
Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation
Code laid down in Matling safeguards the constitutionally enshrined right
of every employee to security of tenure. To allow the creation of a corporate
officer position by a simple inclusion in the corporate by-laws of an enabling
clause empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner corporation’s
General Manager, was given the functions of a managing director by its
Board of Directors. As held in Matling, the only officers of a corporation are
those given that character either by the Corporation Code or by the
corporate by-laws. It follows then that the corporate officers enumerated in
the by-laws are the exclusive officers of the corporation while the rest could
only be regarded as mere employees or subordinate officials.42
Respondent, in this case, though occupying a high ranking and vital
position in petitioner corporation but which position was not specifically
enumerated or mentioned in the latter’s by-laws, can only be regarded as
its employee or subordinate official. Noticeably, respondent’s
compensation as petitioner corporation’s General Manager was set, fixed
and determined not by the latter’s Board of Directors but simply by its
President, petitioner Lucila. The same was not subject to the approval of
petitioner corporation’s Board of Directors. This is an indication that
respondent was an employee and not a corporate officer.
To prove that respondent was petitioner corporation’s corporate officer,
petitioners presented before the NLRC an undated Secretary’s Certificate
showing that corporation’s Board of Directors approved a resolution
making respondent’s position of General Manager a corporate office. The
submission, however, of the said undated Secretary’s Certificate will not
change the fact that respondent was an employee. The certification does
not amount to an amendment of the by-laws which is needed to make the
position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board
resolution mentioned in that undated Secretary’s Certificate and the latter
itself were obvious fabrications, a mere afterthought. Here we quote with
conformity the Court of Appeals findings on this matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in
existence since [29 August 1994], why did not [herein petitioners] attach it
to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have
been the best evidence that [herein respondent] was a corporate officer?
Secondly, why did they report the [respondent] instead as [herein petitioner
corporation’s] employee to the Social Security System [(SSS)] on [11
October 1994] or a later date than their [29 August 1994] board resolution?
Thirdly, why is there no indication that the [respondent], the person
concerned himself, and the [SEC] were furnished with copies of said board
resolution? And, lastly, why is the corporate [S]ecretary’s [C]ertificate not
notarized in keeping with the customary procedure? That is why we called
it manipulative evidence as it was a shameless sham meant to be thrown
in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end
that it be overturned as the latter had firmly pointed out that [respondent]
is not a corporate officer under [petitioner corporation’s by-laws].
Regrettably, the [NLRC] swallowed the bait hook-line-and sinker. It failed
to see through its nature as a belatedly manufactured evidence. And even
on the assumption that it were an authentic board resolution, it did not
14 | P a g e
make [respondent] a corporate officer as the board did not first and
properly create the position of a [G]eneral [M]anager by amending its by-
laws.
(2) The scope of the term "officer" in the phrase "and such
other officers as may be provided for in the by-laws["]
(Sec. 25, par. 1), would naturally depend much on the
provisions of the by-laws of the corporation. (SEC
Opinion, [4 December 1991.]) If the by-laws enumerate
the officers to be elected by the board, the provision is
conclusive, and the board is without power to create new
offices without amending the by-laws. (SEC Opinion, [19
October 1971.])
(3) If, for example, the general manager of a corporation
is not listed as an officer, he is to be classified as an
employee although he has always been considered as
one of the principal officers of a corporation [citing De
Leon, H. S., The Corporation Code of the Philippines
Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner
corporation will not automatically make the case fall within the ambit of
intra-corporate controversy and be subjected to RTC’s jurisdiction. To
reiterate, not all conflicts between the stockholders and the corporation are
classified as intra-corporate. Other factors such as the status or
relationship of the parties and the nature of the question that is the subject
of the controversy44 must be considered in determining whether the dispute
involves corporate matters so as to regard them as intra-corporate
controversies.45 As previously discussed, respondent was not a corporate
officer of petitioner corporation but a mere employee thereof so there was
no intra-corporate relationship between them. With regard to the subject of
the controversy or issue involved herein, i.e., respondent’s dismissal as
petitioner corporation’s General Manager, the same did not present or
relate to an intra-corporate dispute. To note, there was no evidence
submitted to show that respondent’s removal as petitioner corporation’s
General Manager carried with it his removal as its director and stockholder.
Also, petitioners’ allegation that respondent’s claim of 30% share of
petitioner corporation’s net profit was by reason of his being its director and
stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners’ failure to substantiate the
same.
In addition, it was not shown by petitioners that the position of General
Manager was offered to respondent on account of his being petitioner
corporation’s director and stockholder. Also, in contrast to NLRC’s findings,
neither petitioner corporation’s by-laws nor the Management Contract
stated that respondent’s appointment and termination from the position of
General Manager was subject to the approval of petitioner corporation’s
Board of Directors. If, indeed, respondent was a corporate officer whose
termination was subject to the approval of its Board of Directors, why is it
that his termination was effected only by petitioner Lucila, President of
petitioner corporation? The records are bereft of any evidence to show that
respondent’s dismissal was done with the conformity of petitioner
corporation’s Board of Directors or that the latter had a hand on
respondent’s dismissal. No board resolution whatsoever was ever
presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed,
respondent, though occupying the General Manager position, was not a
corporate officer of petitioner corporation rather he was merely its
employee occupying a high-ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s General
Manager did not amount to an intra-corporate controversy. Jurisdiction
therefor properly belongs with the Labor Arbiter and not with the RTC.
Having established that respondent was not petitioner corporation’s
corporate officer but merely its employee, and that, consequently,
jurisdiction belongs to the Labor Arbiter, this Court will now determine if
respondent’s dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner corporation’s
General Manager from its incorporation on 15 August 1994 until he was
dismissed on 30 June 1997. The cause of his dismissal was petitioner
corporation’s cessation of business operations due to poor sales collection
aggravated by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for
dismissing an employee from his employment rests upon the employer.
The latter's failure to discharge that burden would necessarily result in a
finding that the dismissal is unjustified.46
Under Article 283 of the Labor Code, as amended, one of the authorized
causes in terminating the employment of an employee is the closing or
15 | P a g e
cessation of operation of the establishment or undertaking. Article 283 of
the Labor Code, as amended, reads, thus:
ART. 283. Closure of establishment and reduction of personnel. – The
employer may also terminate the employment of any employee due to the
installation of labor saving-devices, redundancy, retrenchment to prevent
losses or the closing or cessation of operation of the establishment or
undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the
Department of Labor and Employment at least one (1) month before the
intended date thereof. x x x 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 to 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.
[Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of
establishment or undertaking may either be due to serious business losses
or financial reverses or otherwise. If the closure or cessation was due to
serious business losses or financial reverses, it is incumbent upon the
employer to sufficiently and convincingly prove the same. If it is otherwise,
the employer can lawfully close shop anytime as long as it was bona fide
in character and not impelled by a motive to defeat or circumvent the
tenurial rights of employees and as long as the terminated employees were
paid in the amount corresponding to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are
three requisites for a valid cessation of business operations: (a) service of
a written notice to the employees and to the Department of Labor and
Employment (DOLE) at least one month before the intended date thereof;
(b) the cessation of business must be bona fide in character; and (c)
payment to the employees of termination pay amounting to one month pay
or at least one-half month pay for every year of service, whichever is
higher.
In this case, it is obvious that petitioner corporation’s cessation of business
operations was not due to serious business losses. Mere poor sales
collection, coupled with mismanagement of its affairs does not amount to
serious business losses. Nonetheless, petitioner corporation can still
validly cease or close its business operations because such right is legally
allowed, so long as it was not done for the purpose of circumventing the
provisions on termination of employment embodied in the Labor Code. 48
As has been stressed by this Court in Industrial Timber Corporation v.
Ababon, thus:
Just as no law forces anyone to go into business, no law can compel
anybody to continue the same. It would be stretching the intent and spirit
of the law if a court interferes with management's prerogative to close or
cease its business operations just because the business is not suffering
from any loss or because of the desire to provide the workers continued
employment.49
A careful perusal of the records revealed that, indeed, petitioner
corporation has stopped and ceased business operations beginning 30
June 1997. This was evidenced by a notarized Affidavit of Non-Operation
dated 31 August 1998. There was also no showing that the cessation of its
business operations was done in bad faith or to circumvent the Labor
Code. Nevertheless, in doing so, petitioner corporation failed to comply
with the one-month prior written notice rule. The records disclosed that
respondent, being petitioner corporation’s employee, and the DOLE were
not given a written notice at least one month before petitioner corporation
ceased its business operations. Moreover, the records clearly show that
respondent’s dismissal was effected on the same date that petitioner
corporation decided to stop and cease its operation. Similarly, respondent
was not paid separation pay upon termination of his employment.
As respondent’s dismissal was not due to serious business losses,
respondent is entitled to payment of separation pay equivalent to one
month pay or at least one-half month pay for every year of service,
whichever is higher. The rationale for this was laid down in Reahs
Corporation v. National Labor Relations Commission,50 thus:
The grant of separation pay, as an incidence of termination of employment
under Article 283, is a statutory obligation on the part of the employer and
a demandable right on the part of the employee, except only where the
closure or cessation of operations was due to serious business losses or
financial reverses and there is sufficient proof of this fact or condition. In
the absence of such proof of serious business losses or financial reverses,
the employer closing his business is obligated to pay his employees and
workers their separation pay.
The rule, therefore, is that in all cases of business closure or cessation of
operation or undertaking of the employer, the affected employee is entitled
to separation pay. This is consistent with the state policy of treating labor
as a primary social economic force, affording full protection to its rights as
16 | P a g e
well as its welfare. The exception is when the closure of business or
cessation of operations is due to serious business losses or financial
reverses duly proved, in which case, the right of affected employees to
separation pay is lost for obvious reasons.51 [Emphasis supplied.]
As previously discussed, respondent’s dismissal was due to an authorized
cause, however, petitioner corporation failed to observe procedural due
process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc.,52 this Court made the following
pronouncements, thus:
x x x there are two aspects which characterize the concept of due process
under the Labor Code: one is substantive — whether the termination of
employment was based on the provision of the Labor Code or in
accordance with the prevailing jurisprudence; the other is procedural —
the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code
provides:
(d) In all cases of termination of employment, the following standards of
due process shall be substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor Code,
the requirement of due process shall be deemed complied with upon
service of a written notice to the employee and the appropriate Regional
Office of the Department of Labor and Employment at least thirty days
before effectivity of the termination, specifying the ground or grounds for
termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:
The requirement of law mandating the giving of notices was intended not
only to enable the employees to look for another employment and therefore
ease the impact of the loss of their jobs and the corresponding income, but
more importantly, to give the Department of Labor and Employment
(DOLE) the opportunity to ascertain the verity of the alleged authorized
cause of termination.53 [Emphasis supplied].
The records of this case disclosed that there was absolutely no written
notice given by petitioner corporation to the respondent and to the DOLE
prior to the cessation of its business operations. This is evident from the
fact that petitioner corporation effected respondent’s dismissal on the
same date that it decided to stop and cease its business operations. The
necessary consequence of such failure to comply with the one-month prior
written notice rule, which constitutes a violation of an employee’s right to
statutory due process, is the payment of indemnity in the form of nominal
damages.54 In Culili v. Eastern Telecommunications Philippines, Inc., this
Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we
noted that "a job is more than the salary that it carries." There is a
psychological effect or a stigma in immediately finding one’s self laid off
from work. This is exactly why our labor laws have provided for mandating
procedural due process clauses. Our laws, while recognizing the right of
employers to terminate employees it cannot sustain, also recognize the
employee’s right to be properly informed of the impending severance of his
ties with the company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the
sanctions imposed upon employers who fail to comply with the procedural
due process requirements in terminating its employees. In Agabon v.
National Labor Relations Commission [citation omitted], this Court reverted
back to the doctrine in Wenphil Corporation v. National Labor Relations
Commission [citation omitted] and held that where the dismissal is due to
a just or authorized cause, but without observance of the due process
requirements, the dismissal may be upheld but the employer must pay an
indemnity to the employee. The sanctions to be imposed however, must
be stiffer than those imposed in Wenphil to achieve a result fair to both the
employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court,
taking a cue from Agabon, held that since there is a clear-cut distinction
between a dismissal due to a just cause and a dismissal due to an
authorized cause, the legal implications for employers who fail to comply
with the notice requirements must also be treated differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just
cause under Article 282 but the employer failed to comply with the notice
requirement, the sanction to be imposed upon him should be tempered
because the dismissal process was, in effect, initiated by an act imputable
to the employee; and (2) if the dismissal is based on an authorized cause
under Article 283 but the employer failed to comply with the notice
17 | P a g e
requirement, the sanction should be stiffer because the dismissal process
was initiated by the employer's exercise of his management prerogative. 55
[Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award
of nominal damages. In conformity with this Court’s ruling in Culili v.
Eastern Telecommunications Philippines, Inc. and Shimizu Phils.
Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation
v. Pacot,56 this Court fixed the amount of nominal damages to ₱50,000.00.
With respect to petitioners’ contention that the Management Contract
executed between respondent and petitioner Lucila has no binding effect
on petitioner corporation for having been executed way before its
incorporation, this Court finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate
existence and juridical personality and is deemed incorporated from the
date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. [Emphasis
supplied.]
Logically, there is no corporation to speak of prior to an entity’s
incorporation. And no contract entered into before incorporation can bind
the corporation.
As can be gleaned from the records, the Management Contract dated 16
January 1994 was executed between respondent and petitioner Lucila
months before petitioner corporation’s incorporation on 15 August 1994.
Similarly, it was done when petitioner Lucila was still the President of Marc
Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that
petitioner corporation adopted, ratified or confirmed the Management
Contract. It is for the same reason that petitioner corporation cannot be
considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it be
enforced against petitioner corporation, much less, its provisions fixing
respondent’s compensation as General Manager to 30% of petitioner
corporation’s net profit. Consequently, such percentage cannot be the
basis for the computation of respondent’s separation pay. This finding,
however, will not affect the undisputed fact that respondent was, indeed,
the General Manager of petitioner corporation from its incorporation up to
the time of his dismissal.
observance of due process. Accordingly, petitioner corporation, jointly and
solidarily liable with petitioner Lucila, is hereby ordered to pay respondent
the following; (1) separation pay equivalent to one month pay or at least
one-half month pay for every year of service, whichever is higher, to be
computed from the commencement of employment until termination; and
(2) nominal damages in the amount of ₱50,000.00.

Accordingly, this Court finds it necessary to still remand the present case
to the Labor Arbiter to conduct further proceedings for the sole purpose of
determining the compensation that respondent was actually receiving
during the period that he was the General Manager of petitioner
corporation, this, for the proper computation of his separation pay.
This Court, however, finds it proper to still remand the records to the Labor
Arbiter to conduct further proceedings for the sole purpose of determining
the compensation that respondent was actually receiving during the period
that he was the General Manager of petitioner corporation for the proper
computation of his separation pay.

As regards petitioner Lucila’s solidary liability, this Court affirms the same. Costs against petitioners.

As a rule, corporation has a personality separate and distinct from its SO ORDERED.
officers, stockholders and members such that corporate officers are not
personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when
the notion of the legal entity is used as a means to perpetrate fraud, an
illegal act, as a vehicle for the evasion of an existing obligation, and to
confuse legitimate issues. Under the Labor Code, for instance, when a
corporation violates a provision declared to be penal in nature, the penalty
shall be imposed upon the guilty officer or officers of the corporation. 57

Based on the prevailing circumstances in this case, petitioner Lucila, being

the President of petitioner corporation, acted in bad faith and with malice
in effecting respondent’s dismissal from employment. Although petitioner
corporation has a valid cause for dismissing respondent due to cessation
of business operations, however, the latter’s dismissal therefrom was done
abruptly by its President, petitioner Lucila. Respondent was not given the
required one-month prior written notice that petitioner corporation will
already cease its business operations. As can be gleaned from the
records, respondent was dismissed outright by petitioner Lucila on the
same day that petitioner corporation decided to stop and cease its
business operations. Worse, respondent was not given separation pay
considering that petitioner corporation’s cessation of business was not due
to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution dated

20 June 2005 and 7 March 2006, respectively, of the Court of Appeals in
CA-G.R. SP No. 76624 are hereby AFFIRMED with the MODIFICATION
finding respondent’s dismissal from employment legal but without proper
18 | P a g e
 FIRST DIVISION
G.R. No. 182397 September 14, 2011
ALERT SECURITY AND INVESTIGATION AGENCY, INC. AND/OR
MANUEL D. DASIG, Petitioners,
vs.
SAIDALI PASAWILAN, WILFREDO VERCELES AND MELCHOR
BULUSAN, Respondents.
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari assails the Decision 1 dated February
1, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99861. The
appellate court reversed and set aside the January 31, 2007 Decision 2 and
March 15, 2007 Resolution3 of the National Labor Relations Commission
(NLRC) and reinstated the Labor Arbiter’s Decision4 finding petitioners
guilty of illegal dismissal.
The facts follow.
Respondents Saidali Pasawilan, Wilfredo Verceles and Melchor Bulusan
were all employed by petitioner Alert Security and Investigation Agency,
Inc. (Alert Security) as security guards beginning March 31, 1996, January
14, 1997, and January 24, 1997, respectively. They were paid 165.00
pesos a day as regular employees, and assigned at the Department of
Science and Technology (DOST) pursuant to a security service contract
between the DOST and Alert Security.
Respondents aver that because they were underpaid, they filed a
complaint for money claims against Alert Security and its president and
general manager, petitioner Manuel D. Dasig, before Labor Arbiter Ariel C.
Santos. As a result of their complaint, they were relieved from their posts
in the DOST and were not given new assignments despite the lapse of six
months. On January 26, 1999, they filed a joint complaint for illegal
dismissal against petitioners.
Petitioners, on the other hand, deny that they dismissed the respondents.
They claimed that from the DOST, respondents were merely detailed at
the Metro Rail Transit, Inc. at the Light Rail Transit Authority (LRTA)
19 | P a g e
Compound in Aurora Blvd. because the wages therein were already
adjusted to the latest minimum wage. Petitioners presented "Duty Detail
Orders"5 that Alert Security issued to show that respondents were in fact
assigned to LRTA. Respondents, however, failed to report at the LRTA and
instead kept loitering at the DOST and tried to convince other security
guards to file complaints against Alert Security. Thus, on August 3, 1998,
Alert Security filed a "termination report"6 with the Department of Labor and
Employment relative to the termination of the respondents.
Upon motion of the respondents, the joint complaint for illegal dismissal
was ordered consolidated with respondents’ earlier complaint for money
claims. The records of the illegal dismissal case were sent to Labor Arbiter
Ariel C. Santos, but later returned to the Office of the Labor Arbiter hearing
the illegal dismissal complaint because a Decision7 has already been
rendered in the complaint for money claims on July 14, 1999. In that
decision, the complaint for money claims was dismissed for lack of merit
but petitioners were ordered to pay respondents their latest salary
differentials.
On July 28, 2000, Labor Arbiter Melquiades Sol D. Del Rosario rendered
a Decision8 on the complaint for illegal dismissal. The Labor Arbiter ruled:
CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered
finding complainants to have been illegally dismissed. Consequently, each
complainant should be paid in solidum by the respondents the individual
awards computed in the body of the decision, which is hereto adopted as
part of this disposition.
SO ORDERED.9
Aggrieved, petitioners appealed the decision to the NLRC claiming that the
Labor Arbiter erred in deciding a re-filed case when it was filed in violation
of the prohibitions against litis pendencia and forum shopping. Further,
petitioners argued that complainants were not illegally dismissed but were
only transferred. They claimed that it was the respondents who refused to
report for work in their new assignment.
On January 31, 2007, the NLRC rendered a Decision 10 ruling that Labor
Arbiter Del Rosario did not err in taking cognizance of respondents’
complaint for illegal dismissal because the July 14, 1999 Decision of Labor
Arbiter Santos on the complaint for money claims did not at all pass upon
the issue of illegal dismissal. The NLRC, however, dismissed the complaint
for illegal dismissal after ruling that the fact of dismissal or termination of
employment was not sufficiently established. According to the NLRC, "[the]
sweeping generalization that the complainants were constructively
dismissed is not sufficient to establish the existence of illegal dismissal." 11
The dispositive portion of the NLRC decision reads:
WHEREFORE, premises considered, the respondents’ appeal is hereby
given due course and the decision dated July 28, 2000 is hereby
REVERSED and SET-ASIDE and a new one entered DISMISSING the
complaint for illegal dismissal for lack of merit.
SO ORDERED.12
Unfazed, respondents filed a petition for certiorari with the CA questioning
the NLRC decision and alleging grave abuse of discretion.
On February 1, 2008, the CA rendered the assailed Decision 13 reversing
and setting aside the NLRC decision and reinstating the July 28, 2000
Decision of Labor Arbiter Del Rosario. The CA ruled that Alert Security, as
an employer, failed to discharge its burden to show that the employee’s
separation from employment was not motivated by discrimination, made in
bad faith, or effected as a form of punishment or demotion without sufficient
cause. The CA also found that respondents were never informed of the
"Duty Detail Orders" transferring them to a new post, thereby making the
alleged transfer ineffective. The dispositive portion of the CA decision
states:
WHEREFORE, premises considered, the January 31, 2007 decision of the
NLRC is hereby REVERSED and SET ASIDE and the July 28, 2000
decision of the Labor Arbiter is hereby REVIVED.
SO ORDERED.14
Petitioners filed a motion for reconsideration, but the motion was denied in
a Resolution15 dated March 31, 2008.
Petitioners are now before this Court to seek relief by way of a petition for
review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended.
Petitioners argue that the CA erred when it held that the NLRC committed
grave abuse of discretion. According to petitioners, the NLRC was correct
when it ruled that there was no sufficient basis to rule that respondents
20 | P a g e
were terminated from their employment while there was proof that they
were merely transferred from DOST to LRTA as shown in the "Duty Detail
Orders". Verily, petitioners claim that there was no termination at all;
instead, respondents abandoned their employment by refusing to report
for duty at the LRTA Compound.
Further, petitioners argue that the CA erred when it reinstated the July 28,
2000 Decision of Labor Arbiter Del Rosario in its entirety. The dispositive
portion of said decision ruled that respondents should be paid their
monetary awards in solidum by Alert Security and Manuel D. Dasig, its
President and General Manager. They argue that Alert Security is a duly
organized domestic corporation which has a legal personality separate and
distinct from its members or owners. Hence, liability for whatever
compensation or money claims owed to employees must be borne solely
by Alert Security and not by any of its individual stockholders or officers.
On the other hand, respondents claim that the NLRC committed a serious
error in ruling that they failed to provide factual substantiation of their claim
of constructive dismissal. Respondents aver that their Complaint Form 16
sufficiently constitutes the basis of their claim of illegal dismissal. Also,
respondents aver that Alert Security itself admitted that respondents were
relieved from their posts as security guards in DOST, albeit raising the
defense that it was a mere transfer as shown by "Duty Detail Orders",
which, however, were never received by respondents, as observed by the
Labor Arbiter.
Essentially, the issue for resolution is whether respondents were illegally
dismissed.
We rule in the affirmative.
As a rule, employment cannot be terminated by an employer without any
just or authorized cause. No less than the 1987 Constitution in Section 3,
Article 13 guarantees security of tenure for workers and because of this,
an employee may only be terminated for just17 or authorized18 causes that
must comply with the due process requirements mandated19 by law.
Hence, employers are barred from arbitrarily removing their workers
whenever and however they want. The law sets the valid grounds for
termination as well as the proper procedure to take when terminating the
services of an employee.
In De Guzman, Jr. v. Commission on Elections,20 the Court, speaking of
the Constitutional guarantee of security of tenure to all workers, ruled:
x x x It only means that an employee cannot be dismissed (or transferred)
from the service for causes other than those provided by law and after due
process is accorded the employee. What it seeks to prevent is capricious
exercise of the power to dismiss. x x x (Emphasis supplied.)
Although we recognize the right of employers to shape their own work
force, this management prerogative must not curtail the basic right of
employees to security of tenure. There must be a valid and lawful reason
for terminating the employment of a worker. Otherwise, it is illegal and
would be dealt with by the courts accordingly.
As stated in Bascon v. Court of Appeals:21
x x x The employer’s power to dismiss must be tempered with the
employee’s right to security of tenure. Time and again we have said that
the preservation of the lifeblood of the toiling laborer comes before concern
for business profits. Employers must be reminded to exercise the power to
dismiss with great caution, for the State will not hesitate to come to the
succor of workers wrongly dismissed by capricious employers.
In the case at bar, respondents were relieved from their posts because
they filed with the Labor Arbiter a complaint against their employer for
money claims due to underpayment of wages. This reason is unacceptable
and illegal. Nowhere in the law providing for the just and authorized causes
of termination of employment is there any direct or indirect reference to
filing a legitimate complaint for money claims against the employer as a
valid ground for termination.
The Labor Code, as amended, enumerates several just and authorized
causes for a valid termination of employment. An employee asserting his
right and asking for minimum wage is not among those causes. Dismissing
an employee on this ground amounts to retaliation by management for an
employee’s legitimate grievance without due process. Such stroke of
retribution has no place in Philippine Labor Laws.
Petitioners aver that respondents were merely transferred to a new post
wherein the wages are adjusted to the current minimum wage standards.
They maintain that the respondents voluntarily abandoned their jobs when
they failed to report for duty in the new location.
21 | P a g e
Assuming this is true, we still cannot hold that the respondents abandoned
their posts. For abandonment of work to fall under Article 282 (b) of the
Labor Code, as amended, as gross and habitual neglect of duties there
must be the concurrence of two elements. First, there should be a failure
of the employee to report for work without a valid or justifiable reason, and
second, there should be a showing that the employee intended to sever
the employer-employee relationship, the second element being the more
determinative factor as manifested by overt acts.22
As regards the second element of intent to sever the employer-employee
relationship, the CA correctly ruled that:
x x x the fact that petitioners filed a complaint for illegal dismissal is
indicative of their intention to remain employed with private respondent
considering that one of their prayers in the complaint is for re-instatement.
As declared by the Supreme Court, a complaint for illegal dismissal is
inconsistent with the charge of abandonment, because when an employee
takes steps to protect himself against a dismissal, this cannot, by logic, be
said to be abandonment by him of his right to be able to work.23
Further, according to Alert Security itself, respondents continued to report
for work and loiter in the DOST after the alleged transfer order was issued.
Such circumstance makes it unlikely that respondents have clear intention
of leaving their respective jobs. In any case, there is no dispute that in
cases of abandonment of work, notice shall be served at the worker’s last
known address.24 This petitioners failed to do.
On the element of the failure of the employee to report for work, we also
cannot accept the allegations of petitioners that respondents unjustifiably
refused to report for duty in their new posts. A careful review of the records
reveals that there is no showing that respondents were notified of their new
assignments. Granting that the "Duty Detail Orders" were indeed issued,
they served no purpose unless the intended recipients of the orders are
informed of such.
The employer cannot simply conclude that an employee is ipso facto
notified of a transfer when there is no evidence to indicate that the
employee had knowledge of the transfer order. Hence, the failure of an
employee to report for work at the new location cannot be taken against
him as an element of abandonment.
We acknowledge and recognize the right of an employer to transfer
employees in the interest of the service. This exercise is a management
prerogative which is a lawful right of an employer. However, like all rights,
there are limitations to the right to transfer employees. As ruled in the case
of Blue Dairy Corporation v. NLRC:25
x x x The managerial prerogative to transfer personnel must be exercised
without grave abuse of discretion, bearing in mind the basic elements of
justice and fair play. Having the right should not be confused with the
manner in which that right is exercised. Thus, it cannot be used as a
subterfuge by the employer to rid himself of an undesirable worker. In
particular, the employer must be able to show that the transfer is not
unreasonable, inconvenient or prejudicial to the employee; nor does it
involve a demotion in rank or a diminution of his salaries, privileges and
other benefits. x x x
In addition to these tests for a valid transfer, there should be proper and
effective notice to the employee concerned. It is the employer’s burden to
show that the employee was duly notified of the transfer. Verily, an
employer cannot reasonably expect an employee to report for work in a
new location without first informing said employee of the transfer.
Petitioners’ insistence on the sufficiency of mere issuance of the transfer
order is indicative of bad faith on their part.
Besides, according to petitioners, the reason for the transfer to LRTA of
the respondents was that the wages in LRTA were already adjusted to
comply with the minimum wage rates. Now it is hard to believe that after
being ordered to transfer to LRTA where the wages are better, the
respondents would still refuse the transfer. That would mean that the
respondents refused better wages and instead chose to remain in DOST,
underpaid, and go through the lengthy process of claiming and asking for
minimum wage. This proposed scenario of petitioners simply does not jibe
with human logic and experience.
On the question of the propriety of holding petitioner Manuel D. Dasig,
president and general manager of Alert Security, solidarily liable with Alert
Security for the payment of the money awards in favor of respondents, we
find petitioners’ arguments meritorious.
Basic is the rule that a corporation has a separate and distinct personality
apart from its directors, officers, or owners. In exceptional cases, courts
find it proper to breach this corporate personality in order to make directors,
officers, or owners solidarily liable for the companies’ acts. Section 31,
Paragraph 1 of the Corporation Code26 provides:
22 | P a g e
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors, or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.
xxxx
Jurisprudence has been consistent in defining the instances when the
separate and distinct personality of a corporation may be disregarded in
order to hold the directors, officers, or owners of the corporation liable for
corporate debts. In McLeod v. National Labor Relations Commission,27 the
Court ruled:
Thus, the rule is still that the doctrine of piercing the corporate veil applies
only when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. In the absence of malice, bad faith,
or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities.
xxx
Further, in Carag v. National Labor Relations Commission,28 the Court
clarified the McLeod doctrine as regards labor laws, to wit:
We have already ruled in McLeod v. NLRC29 and Spouses Santos v.
NLRC30 that Article 212(e)31 of the Labor Code, by itself, does not make
a corporate officer personally liable for the debts of the
corporation.1awphi1 The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation Code. x x
x
In the present case, there is no evidence to indicate that Manuel D. Dasig, as president and
general manager of Alert Security, is using the veil of corporate fiction to defeat public
convenience, justify wrong, protect fraud, or defend crime. Further, there is no showing that
Alert Security has folded up its business or is reneging in its obligations. In the final analysis,
it is Alert Security that respondents are after and it is also Alert Security who should take
responsibility for their illegal dismissal.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No. 99861 and the Decision dated July 28, 2000 of the Labor Arbiter
are MODIFIED. Petitioner Manuel D. Dasig is held not solidarily liable with petitioner Alert
Security and Investigation, Inc. for the payment of the monetary awards in favor of
respondents. Said Decision of the Court of Appeals in all other aspects is AFFIRMED.
 FIRST DIVISION
G.R. No. 141994 January 17, 2005
FILIPINAS BROADCASTING NETWORK, INC., petitioner,
vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO,
respondents.
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999 Decision2 and 26
January 2000 Resolution of the Court of Appeals in CA-G.R. CV No.
40151. The Court of Appeals affirmed with modification the 14 December
1992 Decision3 of the Regional Trial Court of Legazpi City, Branch 10, in
Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting
Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and
Educational Center-Bicol Christian College of Medicine moral damages,
attorney’s fees and costs of suit.
The Antecedents
"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima
("Rima") and Hermogenes ‘Jun’ Alegre ("Alegre"). 5 Exposé is aired every
morning over DZRC-AM which is owned by Filipinas Broadcasting
Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi City, the Albay
municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed
various alleged complaints from students, teachers and parents against
Ago Medical and Educational Center-Bicol Christian College of Medicine
("AMEC") and its administrators. Claiming that the broadcasts were
defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMEC’s College
of Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre
on 27 February 1990. Quoted are portions of the allegedly libelous
broadcasts:
23 | P a g e
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking
medical course at AMEC-BCCM, advise them to pass all subjects
because if they fail in any subject they will repeat their year level,
taking up all subjects including those they have passed already.
Several students had approached me stating that they had consulted with
the DECS which told them that there is no such regulation. If [there] is no
such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained
that the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the
subject does not have an instructor - such greed for money on the
part of AMEC’s administration. Take the subject Anatomy: students
would pay for the subject upon enrolment because it is offered by the
school. However there would be no instructor for such subject. Students
would be informed that course would be moved to a later date because the
school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has
survived and has been surviving for the past few years since its inception
because of funds support from foreign foundations. If you will take a look
at the AMEC premises you’ll find out that the names of the buildings there
are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or
Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isn’t it? With the
report which is the basis of the expose in DZRC today, it would be very
easy for detractors and enemies of the Ago family to stop the flow of
support of foreign foundations who assist the medical school on the basis
of the latter’s purpose. But if the purpose of the institution (AMEC) is to
deceive students at cross purpose with its reason for being it is possible
for these foreign foundations to lift or suspend their donations temporarily. 8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass Communication
in their effort to minimize expenses in terms of salary are absorbing
or continues to accept "rejects". For example how many teachers in
AMEC are former teachers of Aquinas University but were removed
because of immorality? Does it mean that the present administration of
AMEC have the total definite moral foundation from catholic administrator
of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits.
Probably they only qualify in terms of intellect. The Dean of Student Affairs
of AMEC is Justita Lola, as the family name implies. She is too old to work,
being an old woman. Is the AMEC administration exploiting the very
[e]nterprising or compromising and undemanding Lola? Could it be that
AMEC is just patiently making use of Dean Justita Lola were if she is very
old. As in atmospheric situation – zero visibility – the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean Justita Lola is
also the chairman of the committee on scholarship in AMEC. She had
retired from Bicol University a long time ago but AMEC has patiently made
use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral
and physically misfit people. What does this mean? Immoral and physically
misfits as teachers.
May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth is
this, that your are no longer fit to teach. You are too old. As an aviation,
your case is zero visibility. Don’t insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of
the scholarship committee at that. The reason is practical cost saving in
salaries, because an old person is not fastidious, so long as she has money
to buy the ingredient of beetle juice. The elderly can get by – that’s why
she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely
that the students would be influenced by evil. When they become
members of society outside of campus will be liabilities rather than
assets. What do you expect from a doctor who while studying at AMEC is
so much burdened with unreasonable imposition? What do you expect
24 | P a g e
from a student who aside from peculiar problems – because not all
students are rich – in their struggle to improve their social status are even
more burdened with false regulations. xxx9 (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution.
With the supposed exposés, FBNI, Rima and Alegre "transmitted malicious
imputations, and as such, destroyed plaintiffs’ (AMEC and Ago)
reputation." AMEC and Ago included FBNI as defendant for allegedly
failing to exercise due diligence in the selection and supervision of its
employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares,
filed an Answer10 alleging that the broadcasts against AMEC were fair and
true. FBNI, Rima and Alegre claimed that they were plainly impelled by a
sense of public duty to report the "goings-on in AMEC, [which is] an
institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the
defense, Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed
a Motion to Dismiss11 on FBNI’s behalf. The trial court denied the motion
to dismiss. Consequently, FBNI filed a separate Answer claiming that it
exercised due diligence in the selection and supervision of Rima and
Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster
should (1) file an application; (2) be interviewed; and (3) undergo an
apprenticeship and training program after passing the interview. FBNI
likewise claimed that it always reminds its broadcasters to "observe truth,
fairness and objectivity in their broadcasts and to refrain from using
libelous and indecent language." Moreover, FBNI requires all broadcasters
to pass the Kapisanan ng mga Brodkaster sa Pilipinas ("KBP")
accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision 12 finding FBNI
and Alegre liable for libel except Rima. The trial court held that the
broadcasts are libelous per se. The trial court rejected the broadcasters’
claim that their utterances were the result of straight reporting because it
had no factual basis. The broadcasters did not even verify their reports
before airing them to show good faith. In holding FBNI liable for libel, the
trial court found that FBNI failed to exercise diligence in the selection and
supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rima’s only
participation was when he agreed with Alegre’s exposé. The trial court
found Rima’s statement within the "bounds of freedom of speech,
expression, and of the press." The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff.
Considering the degree of damages caused by the controversial
utterances, which are not found by this court to be really very serious
and damaging, and there being no showing that indeed the
enrollment of plaintiff school dropped, defendants Hermogenes "Jun"
Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station
DZRC), are hereby jointly and severally ordered to pay plaintiff Ago
Medical and Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM) the amount of ₱300,000.00 moral damages, plus
₱30,000.00 reimbursement of attorney’s fees, and to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC
and Ago, on the other, appealed the decision to the Court of Appeals. The
Court of Appeals affirmed the trial court’s judgment with modification. The
appellate court made Rima solidarily liable with FBNI and Alegre. The
appellate court denied Ago’s claim for damages and attorney’s fees
because the broadcasts were directed against AMEC, and not against her.
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject
to the modification that broadcaster Mel Rima is SOLIDARILY
ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which the Court
of Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial court’s ruling that the questioned
broadcasts are libelous per se and that FBNI, Rima and Alegre failed to
overcome the legal presumption of malice. The Court of Appeals found
Rima and Alegre’s claim that they were actuated by their moral and social
25 | P a g e
duty to inform the public of the students’ gripes as insufficient to justify the
utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMEC’s
administrators, the Court of Appeals ruled that the broadcasts were made
"with reckless disregard as to whether they were true or false." The
appellate court pointed out that FBNI, Rima and Alegre failed to present in
court any of the students who allegedly complained against AMEC. Rima
and Alegre merely gave a single name when asked to identify the students.
According to the Court of Appeals, these circumstances cast doubt on the
veracity of the broadcasters’ claim that they were "impelled by their moral
and social duty to inform the public about the students’ gripes."
The Court of Appeals found Rima also liable for libel since he remarked
that "(1) AMEC-BCCM is a dumping ground for morally and physically
misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to
minimize expenses on its employees’ salaries; and (3) AMEC burdened
the students with unreasonable imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the
selection and supervision of its employees for allowing Rima and Alegre to
make the radio broadcasts without the proper KBP accreditation. The
Court of Appeals denied Ago’s claim for damages and attorney’s fees
because the libelous remarks were directed against AMEC, and not
against her. The Court of Appeals adjudged FBNI, Rima and Alegre
solidarily liable to pay AMEC moral damages, attorney’s fees and costs of
suit.1awphi1.nét
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL
DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY’S FEES IS
PROPER; and
 IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA
AND ALEGRE FOR PAYMENT OF MORAL DAMAGES,
ATTORNEY’S FEES AND COSTS OF SUIT.
The Court’s Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory
remarks of Rima and Alegre against AMEC.17 While AMEC did not point
out clearly the legal basis for its complaint, a reading of the complaint
reveals that AMEC’s cause of action is based on Articles 30 and 33 of the
Civil Code. Article 3018 authorizes a separate civil action to recover civil
liability arising from a criminal offense. On the other hand, Article 33 19
particularly provides that the injured party may bring a separate civil action
for damages in cases of defamation, fraud, and physical injuries. AMEC
also invokes Article 1920 of the Civil Code to justify its claim for damages.
AMEC cites Articles 217621 and 218022 of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or
defect, real or imaginary, or any act or omission, condition, status, or
circumstance tending to cause the dishonor, discredit, or contempt of a
natural or juridical person, or to blacken the memory of one who is dead.24
There is no question that the broadcasts were made public and imputed to
AMEC defects or circumstances tending to cause it dishonor, discredit and
contempt. Rima and Alegre’s remarks such as "greed for money on the
part of AMEC’s administrators"; "AMEC is a dumping ground, garbage of
xxx moral and physical misfits"; and AMEC students who graduate "will be
liabilities rather than assets" of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution
where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI
claims that Rima and Alegre were plainly impelled by their civic duty to air
the students’ gripes. FBNI alleges that there is no evidence that ill will or
spite motivated Rima and Alegre in making the broadcasts. FBNI further
points out that Rima and Alegre exerted efforts to obtain AMEC’s side and
26 | P a g e
gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNI’s contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre
failed to show adequately their good intention and justifiable motive in
airing the supposed gripes of the students. As hosts of a documentary or
public affairs program, Rima and Alegre should have presented the public
issues "free from inaccurate and misleading information."26 Hearing the
students’ alleged complaints a month before the exposé,27 they had
sufficient time to verify their sources and information. However, Rima and
Alegre hardly made a thorough investigation of the students’ alleged
gripes. Neither did they inquire about nor confirm the purported
irregularities in AMEC from the Department of Education, Culture and
Sports. Alegre testified that he merely went to AMEC to verify his report
from an alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students "because they were many
and not because there is proof that what they are saying is true." 28 This
plainly shows Rima and Alegre’s reckless disregard of whether their report
was true or not.
Contrary to FBNI’s claim, the broadcasts were not "the result of straight
reporting." Significantly, some courts in the United States apply the
privilege of "neutral reportage" in libel cases involving matters of public
interest or public figures. Under this privilege, a republisher who accurately
and disinterestedly reports certain defamatory statements made against
public figures is shielded from liability, regardless of the republisher’s
subjective awareness of the truth or falsity of the accusation. 29 Rima and
Alegre cannot invoke the privilege of neutral reportage because unfounded
comments abound in the broadcasts. Moreover, there is no existing
controversy involving AMEC when the broadcasts were made. The
privilege of neutral reportage applies where the defamed person is a public
figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.30
However, FBNI argues vigorously that malice in law does not apply to this
case. Citing Borjal v. Court of Appeals,31 FBNI contends that the
broadcasts "fall within the coverage of qualifiedly privileged
communications" for being commentaries on matters of public interest.
Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated on
the "doctrine of fair comment," thus:
[F]air commentaries on matters of public interest are privileged and
constitute a valid defense in an action for libel or slander. The doctrine of
fair comment means that while in general every discreditable imputation
publicly made is deemed false, because every man is presumed innocent
until his guilt is judicially proved, and every false imputation is deemed
malicious, nevertheless, when the discreditable imputation is directed
against a public person in his public capacity, it is not necessarily
actionable. In order that such discreditable imputation to a public
official may be actionable, it must either be a false allegation of fact
or a comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is immaterial
that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.32 (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating
students is "genuinely imbued with public interest." The welfare of the
youth in general and AMEC’s students in particular is a matter which the
public has the right to know. Thus, similar to the newspaper articles in
Borjal, the subject broadcasts dealt with matters of public interest.
However, unlike in Borjal, the questioned broadcasts are not based on
established facts. The record supports the following findings of the trial
court:
xxx Although defendants claim that they were motivated by consistent
reports of students and parents against plaintiff, yet, defendants have not
presented in court, nor even gave name of a single student who made the
complaint to them, much less present written complaint or petition to that
effect. To accept this defense of defendants is too dangerous because it
could easily give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although they
could not satisfactorily establish it. Such laxity would encourage careless
and irresponsible broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters,
contrary to the mandates of their duties, did not verify and analyze the truth
of the reports before they aired it, in order to prove that they are in good
faith.
Alegre contended that plaintiff school had no permit and is not accredited
to offer Physical Therapy courses. Yet, plaintiff produced a certificate
27 | P a g e
coming from DECS that as of Sept. 22, 1987 or more than 2 years before
the controversial broadcast, accreditation to offer Physical Therapy course
had already been given the plaintiff, which certificate is signed by no less
than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this
were they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the erroneous report
that plaintiff had no permit to offer Physical Therapy courses which they
were offering.
The allegation that plaintiff was getting tremendous aids from foreign
foundations like Mcdonald Foundation prove not to be true also. The truth
is there is no Mcdonald Foundation existing. Although a big building of
plaintiff school was given the name Mcdonald building, that was only in
order to honor the first missionary in Bicol of plaintiffs’ religion, as explained
by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a
single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by
Dra. Ago, that when medical students fail in one subject, they are made to
repeat all the other subject[s], even those they have already passed, nor
their claim that the school charges laboratory fees even if there are no
laboratories in the school. No evidence was presented to prove the bases
for these claims, at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and
immoral teachers, defendant[s] singled out Dean Justita Lola who is said
to be so old, with zero visibility already. Dean Lola testified in court last
Jan. 21, 1991, and was found to be 75 years old. xxx Even older people
prove to be effective teachers like Supreme Court Justices who are still
very much in demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very sharp and
effective.l^vvphi1.net So is plaintiffs’ counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor
mentally infirmed, but is still alert and docile.
The contention that plaintiffs’ graduates become liabilities rather than
assets of our society is a mere conclusion. Being from the place himself,
this court is aware that majority of the medical graduates of plaintiffs pass
the board examination easily and become prosperous and responsible
professionals.33
Had the comments been an expression of opinion based on established
facts, it is immaterial that the opinion happens to be mistaken, as long as
it might reasonably be inferred from the facts.34 However, the comments of
Rima and Alegre were not backed up by facts. Therefore, the broadcasts
are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga
Brodkaster sa Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code
provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues
free from personal bias, prejudice and inaccurate and
misleading information. x x x Furthermore, the station
shall strive to present balanced discussion of issues. x x
x.
xxx
7. The station shall be responsible at all times in the
supervision of public affairs, public issues and
commentary programs so that they conform to the
provisions and standards of this code.
8. It shall be the responsibility of the newscaster,
commentator, host and announcer to protect public
interest, general welfare and good order in the
presentation of public affairs and public issues.36
(Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code,
which lays down the code of ethical conduct governing practitioners in the
radio broadcast industry. The Radio Code is a voluntary code of conduct
imposed by the radio broadcast industry on its own members. The Radio
Code is a public warranty by the radio broadcast industry that radio
broadcast practitioners are subject to a code by which their conduct are
measured for lapses, liability and sanctions.
28 | P a g e
The public has a right to expect and demand that radio broadcast
practitioners live up to the code of conduct of their profession, just like other
professionals. A professional code of conduct provides the standards for
determining whether a person has acted justly, honestly and with good
faith in the exercise of his rights and performance of his duties as required
by Article 1937 of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully
causes loss or injury to another has acted in a manner contrary to morals
or good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a
corporation.39
A juridical person is generally not entitled to moral damages because,
unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or moral
shock.40 The Court of Appeals cites Mambulao Lumber Co. v. PNB, et
al.41 to justify the award of moral damages. However, the Court’s statement
in Mambulao that "a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages" is an
obiter dictum.42
Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article
221943 of the Civil Code. This provision expressly authorizes the recovery
of moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral
damages.44
Moreover, where the broadcast is libelous per se, the law implies
damages.45 In such a case, evidence of an honest mistake or the want of
character or reputation of the party libeled goes only in mitigation of
damages.46 Neither in such a case is the plaintiff required to introduce
evidence of actual damages as a condition precedent to the recovery of
some damages.47 In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.
However, we find the award of ₱300,000 moral damages unreasonable.
The record shows that even though the broadcasts were libelous per se,
AMEC has not suffered any substantial or material damage to its
reputation. Therefore, we reduce the award of moral damages from
₱300,000 to ₱150,000.
III.
Whether the award of attorney’s fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is
no basis for the award of attorney’s fees. FBNI adds that the instant case
does not fall under the enumeration in Article 220848 of the Civil Code.
The award of attorney’s fees is not proper because AMEC failed to justify
satisfactorily its claim for attorney’s fees. AMEC did not adduce evidence
to warrant the award of attorney’s fees. Moreover, both the trial and
appellate courts failed to explicitly state in their respective decisions the
rationale for the award of attorney’s fees.49 In Inter-Asia Investment
Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages
is the exception rather than the rule, and counsel’s fees are not to be
awarded every time a party wins a suit. The power of the court to award
attorney’s fees under Article 2208 of the Civil Code demands factual,
legal and equitable justification, without which the award is a
conclusion without a premise, its basis being improperly left to
speculation and conjecture. In all events, the court must explicitly state
in the text of the decision, and not only in the decretal portion thereof, the
legal reason for the award of attorney’s fees.51 (Emphasis supplied)
While it mentioned about the award of attorney’s fees by stating that it "lies
within the discretion of the court and depends upon the circumstances of
each case," the Court of Appeals failed to point out any circumstance to
justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages,
attorney’s fees and costs of suit
29 | P a g e
FBNI contends that it is not solidarily liable with Rima and Alegre for the
payment of damages and attorney’s fees because it exercised due
diligence in the selection and supervision of its employees, particularly
Rima and Alegre. FBNI maintains that its broadcasters, including Rima and
Alegre, undergo a "very regimented process" before they are allowed to go
on air. "Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program."
FBNI further argues that Alegre’s age and lack of training are irrelevant to
his competence as a broadcaster. FBNI points out that the "minor
deficiencies in the KBP accreditation of Rima and Alegre do not in any way
prove that FBNI did not exercise the diligence of a good father of a family
in selecting and supervising them." Rima’s accreditation lapsed due to his
non-payment of the KBP annual fees while Alegre’s accreditation card was
delayed allegedly for reasons attributable to the KBP Manila Office. FBNI
claims that membership in the KBP is merely voluntary and not required
by any law or government regulation.
FBNI’s arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and
severally liable for the tort which they commit.52 Joint tort feasors are all
the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit.53 Thus, AMEC
correctly anchored its cause of action against FBNI on Articles 2176 and
2180 of the Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is
solidarily liable to pay for damages arising from the libelous broadcasts. As
stated by the Court of Appeals, "recovery for defamatory statements
published by radio or television may be had from the owner of the station,
a licensee, the operator of the station, or a person who procures, or
participates in, the making of the defamatory statements."54 An employer
and employee are solidarily liable for a defamatory statement by the
employee within the course and scope of his or her employment, at least
when the employer authorizes or ratifies the defamation.55 In this case,
Rima and Alegre were clearly performing their official duties as hosts of
FBNI’s radio program Exposé when they aired the broadcasts. FBNI
neither alleged nor proved that Rima and Alegre went beyond the scope of
their work at that time. There was likewise no showing that FBNI did not
authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due
diligence in the selection and supervision of its employees, particularly
Rima and Alegre. FBNI merely showed that it exercised diligence in the
selection of its broadcasters without introducing any evidence to prove
that it observed the same diligence in the supervision of Rima and Alegre.
FBNI did not show how it exercised diligence in supervising its
broadcasters. FBNI’s alleged constant reminder to its broadcasters to
"observe truth, fairness and objectivity and to refrain from using libelous
and indecent language" is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the broadcasters on
the industry’s code of conduct, sufficient information on libel laws, and
continuous evaluation of the broadcasters’ performance are but a few of
the many ways of showing diligence in the supervision of broadcasters.

FBNI claims that it "has taken all the precaution in the selection of Rima
and Alegre as broadcasters, bearing in mind their qualifications." However,
no clear and convincing evidence shows that Rima and Alegre underwent
FBNI’s "regimented process" of application. Furthermore, FBNI admits that
Rima and Alegre had deficiencies in their KBP accreditation,56 which is one
of FBNI’s requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcaster’s strong
commitment to observe the broadcast industry’s rules and regulations.
Clearly, these circumstances show FBNI’s lack of diligence in selecting
and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay
damages together with Rima and Alegre.

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of

4 January 1999 and Resolution of 26 January 2000 of the Court of Appeals
in CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral
damages is reduced from ₱300,000 to ₱150,000 and the award of
attorney’s fees is deleted. Costs against petitioner.

SO ORDERED.

30 | P a g e
 EN BANC
G.R. No. 176579 June 28, 2011
WILSON P. GAMBOA, Petitioner,
vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN 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 EXCHANGE COMMISSION, and PRESIDENT FRANCIS
LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-
Intervention.
DECISION
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief and
declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of
Philippine Long Distance Telephone Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act No. 3436
which granted PLDT a franchise and the right to engage in
31 | P a g e
telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT
stockholder, sold 26 percent of the outstanding common shares of 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 by PTIC stockholders Ramon
Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of
PTIC held by PHI were sequestered by the Presidential Commission on
Good Government (PCGG). The 111,415 PTIC shares, which represent
about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines. 2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment
firm, acquired the remaining 54 percent of the outstanding capital stock of
PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC)
of the Philippine Government announced that it would sell the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
through a public bidding to be conducted on 4 December 2006.
Subsequently, the public bidding was reset to 8 December 2006, and only
two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or
US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first
refusal as a PTIC stockholder and buy the 111,415 PTIC shares by
matching the bid price of Parallax. However, First Pacific failed to do so by
the 1 February 2007 deadline set by IPC and instead, yielded its right to
PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC
shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH,
entered into a Conditional Sale and Purchase Agreement of the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of ₱25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125 percent of PTIC shares is actually an indirect sale
of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT. With the sale, First Pacific’s common shareholdings
in PLDT increased from 30.7 percent to 37 percent, thereby
increasing the common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility
to not more than 40 percent.3
On the other hand, public respondents Finance Secretary Margarito B.
Teves, Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo
Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in
the business of investment holdings. PTIC held 26,034,263 PLDT common
shares, or 13.847 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 Court’s 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 ₱25,217,556,000. 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 PTIC’s Articles of Incorporation.
First Pacific announced its intention to match Parallax’s 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
government’s 111,415 PTIC shares bore due diligence, transparency and
conformity with existing legal procedures; and (b) First Pacific’s intended
acquisition of the government’s 111,415 PTIC shares resulting in First
Pacific’s 100% ownership of PTIC will not violate the 40 percent
constitutional limit on foreign ownership of a public utility since PTIC
32 | P a g e
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 ₱25,217,556,000; (c)
pursuant to the right of first refusal in favor of PTIC and its shareholders
granted in PTIC’s 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 ₱25,217,556,000 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 Pacific’s common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined
with Japanese NTT DoCoMo’s 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 Pacific’s 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 Japan’s NTT DoCoMo, which is the
world’s 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 PLDT’s 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 x"7
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 Court’s 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
33 | P a g e
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
₱25,217,556,000 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 tourist’s 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
34 | P a g e
Court’s Decision of 21 February 2003 via a petition for review under Rule
45. The Court’s 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 PLDT’s franchise could be revoked, a dire consequence
directly affecting petitioner’s 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 Tañada 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 Tañada, 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 petitioner’s 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
35 | P a g e
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 patrimony"28 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 PLDT’s non-voting preferred shares are
held mostly by Filipino citizens.30 This arose from Presidential Decree No.
36 | P a g e
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 petitioner’s arguments and
adopt petitioner’s 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 Nazareno’s 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 petitioner’s
allegation of foreigners’ dominating the common shareholdings of PLDT.
Nazareno stressed 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 petitioner’s 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
petitioner’s claim of foreigners holding more than 40 percent of PLDT’s
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 Court’s jurisdiction over the petition;
(2) petitioner’s 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 person’s property (the shareholder’s stock in the utility
company) on the basis of another party’s alleged failure to satisfy a
requirement that is a condition only for that other party’s 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 PLDT’s 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,
37 | P a g e
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 Court’s 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 Court’s 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 SEC’s 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
corporation’s "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, petitioner’s suggestion to reckon PLDT’s foreign equity only
on the basis of PLDT’s outstanding common shares is without legal basis.
38 | P a g e
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 petitioner’s view that only common
shares should form the basis for computing a public utility’s 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 Constitution’s 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 (₱5.00) 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;
39 | P a g e
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.
40 | P a g e
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.
41 | P a g e
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
laws reserving 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 (₱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. 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. PLDT’s 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. PLDT’s Articles of Incorporation52
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
42 | P a g e
election of directors, do not have any control over PLDT. In fact, under
PLDT’s 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 PLDT’s 2010
General Information Sheet (GIS),54 which 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 PLDT’s 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 ₱70.00 per share, while the declared dividends
for the preferred shares amounted to a measly ₱1.00 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 PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of
PLDT common shares is ₱5.00 per share, whereas the par value of
preferred shares is ₱10.00 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 State’s 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 x corporations 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 PLDT’s 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 ₱5.00
have a current stock market value of ₱2,328.00 per share,64 while PLDT
preferred shares with a par value of ₱10.00 per share have a current stock
market value ranging from only ₱10.92 to ₱11.06 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 State’s 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
43 | P a g e
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.
44 | P a g e
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.1awphi1
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 PLDT’s voting shares, as
admitted by respondents and as stated in PLDT’s 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.
 EN BANC
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,6 declaring 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.
45 | P a g e
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
46 | P a g e
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.
47 | P a g e
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 opinions that have the effect of SEC rules or regulations is ultra
vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc
can "issue opinions" that have the force and effect of rules or regulations.
Section 4.6 of the Code bars the SEC en banc from delegating to any
individual Commissioner or staff the power to adopt rules or regulations. In
short, any opinion of individual Commissioners or SEC legal officers
does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc,
and not any of its individual commissioners or legal staff, is empowered to
issue opinions which have the same binding effect as SEC rules and
regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc
that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
 That’s correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this
function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the
General Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by
the Commission En Banc to a commissioner or an
individual employee of the Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En
Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the
power to adopt or amend rules and regulations,
correct?
COMMISSIONER GAITE:
That’s correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer,
if delegated that power, can issue an opinion
but that opinion does not constitute a rule or
regulation, correct?
COMMISSIONER GAITE:
48 | P a g e
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned
they are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply
only to that particular situation and will not
constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily
empowered to issue rules and opinions on behalf of the SEC, has adopted
even the Grandfather Rule in 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.,15 to wit:
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 practiced via the 1967 SEC
Rules, has favored foreigners contrary to the command of the Constitution.
Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized
activities must be determined by ascertaining if 60% of the investing
corporation’s outstanding capital stock is owned by "Filipino citizens", or
as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing
corporation, the same process must be observed. One must not stop until
the citizenships of the individual or natural stockholders of layer after layer
of investing corporations have been established, the very essence of the
Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to
adopt the Grandfather Rule. In one of the discussions on what is now
Article XII of the present Constitution, the framers made the following
exchange:
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 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?
49 | P a g e
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
50 | P a g e
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.
51 | P a g e
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
52 | P a g e
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. 518630
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
53 | P a g e
"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: JUSTICE CARPIO:

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?
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:
COMMISSIONER GAITE:

Correct, Your Honor.

Yes, Your Honor.

JUSTICE CARPIO:
JUSTICE CARPIO:

And even prior to that, under [the]1967

And the same Foreign Investments Act of 1991
Investments Incentives Act and the Foreign
defines a "Philippine national" either as a citizen
Company Act of 1968, the same rules applied,
of the Philippines, or if it is a corporation at least
correct?
sixty percent (60%) of the voting stock is owned
by citizens of the Philippines, correct?
COMMISSIONER GAITE:
COMMISSIONER GAITE:
Correct, Your Honor.
Correct, Your Honor.
JUSTICE CARPIO:
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law
has been very consistent – only a Philippine
And, you are also aware that under the
national can own and operate a public utility,
predecessor law of the Foreign Investments Act
and a Philippine national, if it is a corporation,
of 1991, the Omnibus Investments Act of 1987,
x x x at least sixty percent (60%) of the voting
the same provisions apply: x x x only Philippine
stock must be owned by citizens of the
nationals can own and operate a public utility and
Philippines, correct?
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 COMMISSIONER GAITE:
Philippines, correct?
Correct, Your Honor.33 (Emphasis supplied)
COMMISSIONER GAITE:
Government agencies like the SEC cannot simply ignore Sections 3(a) and
Correct, Your Honor. 8 of the FIA which categorically prescribe that certain economic activities,
like the ownership and operation of public utilities, are reserved to
54 | P a g e
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
55 | P a g e
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
56 | P a g e
of a corporation. Under the Corporation Code, capital stock 35 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.
57 | P a g e
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
58 | P a g e
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.
59 | P a g e
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.
60 | P a g e
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
61 | P a g e
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;
62 | P a g e
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 manifested54 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
63 | P a g e
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
64 | P a g e
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 of stocks,
translates to effective control of a corporation.
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.
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.

Filipinos have only to remind themselves of how this country was exploited SO ORDERED.
under the Parity Amendment, which gave Americans the same rights as
Filipinos in the exploitation of natural resources, and in the ownership and ANTONIO T. CARPIO
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

65 | P a g e
 THIRD DIVISION
G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF
APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM
OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF
TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES,
LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC.,
respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for
petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law
Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF
PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR
TO THAT OF ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE
APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". —
The Articles of Incorporation of a corporation must, among other things,
set out the name of the corporation. Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned:
"Section 18. Corporate name. — No corporate name may be allowed by
the Securities an Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the
prohibition in Section 18 against the registration of a corporate name which
is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or
"contrary to existing laws," is the avoidance of fraud upon the public which
66 | P a g e
would have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration
and supervision over corporations. We do not consider that the corporate
names of private respondent institutions are "identical with, or deceptively
or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum"
but confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum
of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD
"LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is claimed,
however, by petitioner that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that word, although
originally a generic, has become appropriable by petitioner to the exclusion
of other institutions like private respondents herein. The doctrine of
secondary meaning originated in the field of trademark law. Its application
has, however, been extended to corporate names sine the right to use a
corporate name to the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or tradename. In
Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of
secondary meaning was elaborated in the following terms: " . . . a word or
phrase originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch
of the purchasing public, the word or phrase has come to mean that the
article was his product." The question which arises, therefore, is whether
or not the use by petitioner of "Lyceum" in its corporate name has been for
such length of time and with such exclusivity as to have become associated
or identified with the petitioner institution in the mind of the general public
(or at least that portion of the general public which has to do with schools).
The Court of Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an article
in the market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one producer
with reference to this article that, in that trade and to that group of the
purchasing public, the word or phrase has come to mean that the article
was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into which the
name or phrase has evolved through the substantial and exclusive use of
the same for a considerable period of time. . . . No evidence was ever on 21 September 1950, it used the corporate name Lyceum of the
presented in the hearing before the Commission which sufficiently proved Philippines, Inc. and has used that name ever since.
that the word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove only that On 24 February 1984, petitioner instituted proceedings before the SEC to
the appellant had been using the disputed word for a long period of time. . compel the private respondents, which are also educational institutions, to
. . In other words, while the appellant may have proved that it had been delete the word "Lyceum" from their corporate names and permanently to
using the word 'Lyceum' for a long period of time, this fact alone did not enjoin them from using "Lyceum" as part of their respective names.
amount to mean that the said word had acquired secondary meaning in its
favor because the appellant failed to prove that it had been using the same Some of the private respondents actively participated in the proceedings
word all by itself to the exclusion of others. More so, there was no evidence
before the SEC. These are the following, the dates of their original SEC
presented to prove that confusion will surely arise if the same word were
registration being set out below opposite their respective names:
to be used by other educational institutions. Consequently, the allegations
of the appellant in its first two assigned errors must necessarily fail." We
agree with the Court of Appeals. The number alone of the private Western Pangasinan Lyceum — 27 October 1950
respondents in the case at bar suggests strongly that petitioner's use of
the word "Lyceum" has not been attended with the exclusivity essential for Lyceum of Cabagan — 31 October 1962
applicability of the doctrine of secondary meaning. Petitioner's use of the
word "Lyceum" was not exclusive but was in truth shared with the Western Lyceum of Lallo, Inc. — 26 March 1972
Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of their Lyceum of Aparri — 28 March 1972
corporation names. There may well be other schools using Lyceum or
Liceo in their names, but not registered with the SEC because they have
Lyceum of Tuao, Inc. — 28 March 1972
not adopted the corporate form of organization.

Lyceum of Camalaniugan — 28 March 1972

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE
WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO
ANOTHER CORPORATE ENTITY'S NAME. — petitioner institution is not The following private respondents were declared in default for failure to file
entitled to a legally enforceable exclusive right to use the word "Lyceum" an answer despite service of summons:
in its corporate name and that other institutions may use "Lyceum" as part
of their corporate names. To determine whether a given corporate name is Buhi Lyceum;
"identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or Central Lyceum of Catanduanes;
"Liceo" in both names. One must evaluate corporate names in their entirety
and when the name of petitioner is juxtaposed with the names of private Lyceum of Eastern Mindanao, Inc.; and
respondents, they are not reasonably regarded as "identical" or
"confusingly or deceptively similar" with each other.
Lyceum of Southern Philippines
DECISION
Petitioner's original complaint before the SEC had included three (3) other
entities:
FELICIANO, J p:
1. The Lyceum of Malacanay;
Petitioner is an educational institution duly registered with the Securities
and Exchange Commission ("SEC"). When it first registered with the SEC
2. The Lyceum of Marbel; and
67 | P a g e
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of
Malacanay and the Lyceum of Marbel, for failure to serve summons upon
these two (2) entities. The case against the Liceum of Araullo was
dismissed when that school motu proprio change its corporate name to
"Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had
sometime before commenced in the SEC a proceeding (SEC-Case No.
1241) against the Lyceum of Baguio, Inc. to require it to change its
corporate name and to adopt another name not "similar [to] or identical"
with that of petitioner. In an Order dated 20 April 1977, Associate
Commissioner Julio Sulit held that the corporate name of petitioner and
that of the Lyceum of Baguio, Inc. were substantially identical because of
the presence of a "dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word which
distinguished one from the other corporate name. The SEC also noted that
petitioner had registered as a corporation ahead of the Lyceum of Baguio,
Inc. in point of time, 1 and ordered the latter to change its name to another
name "not similar or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the
Supreme Court in a case docketed as G.R. No. L-46595. In a Minute
Resolution dated 14 September 1977, the Court denied the Petition for
Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner
then wrote all the educational institutions it could find using the word
"Lyceum" as part of their corporate name, and advised them to discontinue
such use of "Lyceum." When, with the passage of time, it became clear
that this recourse had failed, petitioner instituted before the SEC SEC-
Case No. 2579 to enforce what petitioner claims as its proprietary right to
the word "Lyceum." The SEC hearing officer rendered a decision
sustaining petitioner's claim to an exclusive right to use the word "Lyceum."
The hearing officer relied upon the SEC ruling in the Lyceum of Baguio,
Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was
capable of appropriation and that petitioner had acquired an enforceable
exclusive right to the use of that word.
68 | P a g e
On appeal, however, by private respondents to the SEC En Banc, the
decision of the hearing officer was reversed and set aside. The SEC En
Banc did not consider the word "Lyceum" to have become so identified with
petitioner as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the
general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently
to distinguish the schools from one another, especially in view of the fact
that the campuses of petitioner and those of the private respondents were
physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision
dated 28 June 1991, however, the Court of Appeals affirmed the
questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed
the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme
Court in G.R. No. L-46595 did not constitute stare decisis as to apply to
this case and in not holding that said Resolution bound subsequent
determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western
Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not
acquired a secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word
cannot be appropriated by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily
seriatim. We begin by noting that the Resolution of the Court in G.R. No.
L-46595 does not, of course, constitute res adjudicata in respect of the
case at bar, since there is no identity of parties. Neither is stare decisis
pertinent, if only because the SEC En Banc itself has re-examined
Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The
Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned
adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things,
set out the name of the corporation. 6 Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned:
"SECTION 18. Corporate name. — No corporate name may be allowed by
the Securities an Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration
of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive"
or "patently confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction
of difficulties of administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that
of the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names
to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri"
can be mistaken by the general public for the Lyceum of the Philippines,
or that the "Lyceum of Camalaniugan" would be confused with the Lyceum
of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion
which in turn referred to a locality on the river Ilissius in ancient Athens
"comprising an enclosure dedicated to Apollo and adorned with fountains
and buildings erected by Pisistratus, Pericles and Lycurgus frequented by
the youth for exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated with schools
and other institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a school
or an institution of learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found in Spanish
(liceo) and in French (lycee). As the Court of Appeals noted in its Decision,
Roman Catholic schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de
Albay." 9 "Lyceum" is in fact as generic in character as the word
69 | P a g e
"university." In the name of the petitioner, "Lyceum" appears to be a
substitute for "university;" in other places, however, "Lyceum," or "Liceo"
or "Lycee" frequently denotes a secondary school or a college. It may be
(though this is a question of fact which we need not resolve) that the use
of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of their corporate
names. Since "Lyceum" or "Liceo" denotes a school or institution of
learning, it is not unnatural to use this word to designate an entity which is
organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired
a secondary meaning in relation to petitioner with the result that that word,
although originally a generic, has become appropriable by petitioner to the
exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law.
Its application has, however, been extended to corporate names sine the
right to use a corporate name to the exclusion of others is based upon the
same principle which underlies the right to use a particular trademark or
tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11
the doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to mean that
the article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner
of "Lyceum" in its corporate name has been for such length of time and
with such exclusivity as to have become associated or identified with the
petitioner institution in the mind of the general public (or at least that portion
of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive might nevertheless
have been used so long and so exclusively by one producer with reference
to this article that, in that trade and to that group of the purchasing public,
the word or phrase has come to mean that the article was his produce (Ana
Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred
to as the distinctiveness into which the name or phrase has evolved
through the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot be
made to apply where the evidence did not prove that the business (of the
plaintiff) has continued for so long a time that it has become of
consequence and acquired a good will of considerable value such that its
articles and produce have acquired a well-known reputation, and confusion
will result by the use of the disputed name (by the defendant) (Ang Si Heng
vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy
the aforementioned requisites. No evidence was ever presented in the
hearing before the Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of the appellant.
If there was any of this kind, the same tend to prove only that the appellant
had been using the disputed word for a long period of time. Nevertheless,
its (appellant) exclusive use of the word (Lyceum) was never established
or proven as in fact the evidence tend to convey that the cross-claimant
was already using the word 'Lyceum' seventeen (17) years prior to the date
the appellant started using the same word in its corporate name.
Furthermore, educational institutions of the Roman Catholic Church had
been using the same or similar word like 'Liceo de Manila,' 'Liceo de
Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long
before appellant started using the word 'Lyceum'. The appellant also failed
to prove that the word 'Lyceum' has become so identified with its
educational institution that confusion will surely arise in the minds of the
public if the same word were to be used by other educational institutions.
In other words, while the appellant may have proved that it had been using
the word 'Lyceum' for a long period of time, this fact alone did not amount
to mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same word
all by itself to the exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise if the same word were
to be used by other educational institutions. Consequently, the allegations
of the appellant in its first two assigned errors must necessarily fail." 13
(Underscoring partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use of
the word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan
70 | P a g e
Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the
petitioner registered its own corporate name with the SEC and began using
the word "Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have been the
Western Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan
Lyceum, Inc. failed to reconstruct its records before the SEC in accordance
with the provisions of R.A. No. 62, which records had been destroyed
during World War II, Western Pangasinan Lyceum should be deemed to
have lost all rights it may have acquired by virtue of its past registration. It
might be noted that the Western Pangasinan Lyceum, Inc. registered with
the SEC soon after petitioner had filed its own registration on 21
September 1950. Whether or not Western Pangasinan Lyceum, Inc. must
be deemed to have lost its rights under its original 1933 registration,
appears to us to be quite secondary in importance; we refer to this earlier
registration simply to underscore the fact that petitioner's use of the word
"Lyceum" was neither the first use of that term in the Philippines nor an
exclusive use thereof. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan Lyceum
and a little later with other private respondent institutions which registered
with the SEC using "Lyceum" as part of their corporation names. There
may well be other schools using Lyceum or Liceo in their names, but not
registered with the SEC because they have not adopted the corporate form
of organization.
We conclude and so hold that petitioner institution is not entitled to a legally
enforceable exclusive right to use the word "Lyceum" in its corporate name
and that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate name, it
is not enough to ascertain the presence of "Lyceum" or "Liceo" in both
names. One must evaluate corporate names in their entirety and when the
name of petitioner is juxtaposed with the names of private respondents,
they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on
the part of the public respondent Court of Appeals, the Petition for Review
is DENIED for lack of merit, and the Decision of the Court of Appeals dated
28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
 FIRST DIVISION
G.R. No. 137592 December 12, 2001
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS,
H.S.K. SA BANSANG PILIPINAS, INC., petitioner,
vs.
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 1997 1
and the Resolution dated February 16, 19992 of the Court of Appeals in
CA-G.R. SP No. 40933, which affirmed the Decision of the Securities and
Exchange and Commission (SEC) in SEC-AC No. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of
Truth),4 is a non-stock religious society or corporation registered in 1936.
Sometime in 1976, one Eliseo Soriano and several other members of
respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious
society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to
compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name, which petition was docketed
as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi
at Saligan ng Katotohanan to change its corporate name to another name
that is not similar or identical to any name already used by a corporation,
partnership or association registered with the Commission. 5 No appeal
was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al.,
caused the registration on April 25, 1980 of petitioner corporation, Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas.
The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan.6
On March 2, 1994, respondent corporation filed before the SEC a petition,
docketed as SEC Case No. 03-94-4704, praying that petitioner be
71 | P a g e
compelled to change its corporate name and be barred from using the
same or similar name on the ground that the same causes confusion
among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action.
The motion to dismiss was denied. Thereafter, for failure to file an answer,
petitioner was declared in default and respondent was allowed to present
its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner
to change its corporate name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered
in favor of the petitioner (respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo
Jesus (sic), H.S.K. sa Bansang Pilipinas (petitioner
herein) is hereby MANDATED to change its corporate
name to another not deceptively similar or identical to the
same already used by the Petitioner, any corporation,
association, and/or partnership presently registered with
the Commission.
Let a copy of this Decision be furnished the Records
Division and the Corporate and Legal Department [CLD]
of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their
end.
SO ORDERED.7
Petitioner appealed to the SEC En Banc, where its appeal was docketed
as SEC-AC No. 539. In a decision dated March 4, 1996, the SEC En Banc
affirmed the above decision, upon a finding that petitioner's corporate
name was identical or confusingly or deceptively similar to that of
respondent's corporate name.8
Petitioner filed a petition for review with the Court of Appeals. On October
7, 1997, the Court of Appeals rendered the assailed decision affirming the
decision of the SEC En Banc. Petitioner's motion for reconsideration was
denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of
errors:
I law. 12 Said exception, however, does not obtain in the present case.
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING
THAT PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO
PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF
APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO
THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY
INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS
INTERPRETATION OF THE CIVIL CODE PROVISIONS ON EXTINCTIVE
PRESCRIPTION, THEREBY RESULTING IN ITS FAILURE TO FIND
THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE
SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND
PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY
JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF THE
CORPORATION CODE TO THE INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY
APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE
ON RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME
TO PROTECT PETITIONER'S RIGHTS.9
Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that
the decision of the Court of Appeals and the SEC should be set aside
because the negligence of its former counsel of record, Atty. Joaquin
Garaygay, in failing to file an answer after its motion to dismiss was denied
by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of
counsel binds the client. This is based on the rule that any act performed
72 | P a g e
by a lawyer within the scope of his general or implied authority is regarded
as an act of his client.11 An exception to the foregoing is where the reckless
or gross negligence of the counsel deprives the client of due process of
In Legarda v. Court of Appeals, the effort of the counsel in defending his
client's cause consisted in filing a motion for extension of time to file answer
before the trial court. When his client was declared in default, the counsel
did nothing and allowed the judgment by default to become final and
executory. Upon the insistence of his client, the counsel filed a petition to
annul the judgment with the Court of Appeals, which denied the petition,
and again the counsel allowed the denial to become final and executory.
This Court found the counsel grossly negligent and consequently declared
as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay
filed before the SEC a motion to dismiss on the ground of lack of cause of
action. When his client was declared in default for failure to file an answer,
Atty. Garaygay moved for reconsideration and lifting of the order of
default.13 After judgment by default was rendered against petitioner
corporation, Atty. Garaygay filed a motion for extension of time to
appeal/motion for reconsideration, and thereafter a motion to set aside the
decision.14
Evidently, Atty. Garaygay was only guilty of simple negligence. Although
he failed to file an answer that led to the rendition of a judgment by default
against petitioner, his efforts were palpably real, albeit bereft of zeal. 15
Likewise, the issue of prescription, which petitioner raised for the first time
on appeal to the Court of Appeals, is untenable. Its failure to raise
prescription before the SEC can only be construed as a waiver of that
defense.16 At any rate, the SEC has the authority to de-register at all times
and under all circumstances corporate names which in its estimation are
likely to spawn confusion. It is the duty of the SEC to prevent confusion in
the use of corporate names not only for the protection of the corporations
involved but more so for the protection of the public.17
Section 18 of the Corporation Code provides:
Corporate Name. — No corporate name may be allowed
by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other
 name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change
in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the
amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate
Names states:
(d) If the proposed name contains a word similar to a word
already used as part of the firm name or style of a
registered company, the proposed name must contain two
other words different from the name of the company
already registered;
Parties organizing a corporation must choose a name at their peril; and the
use of a name similar to one adopted by another corporation, whether a
business or a nonprofit organization, if misleading or likely to injure in the
exercise of its corporate functions, regardless of intent, may be prevented
by the corporation having a prior right, by a suit for injunction against the
new corporation to prevent the use of the name.18
Petitioner claims that it complied with the aforecited SEC guideline by
adding not only two but eight words to their registered name, to wit: "Ang
Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner argues,
effectively distinguished it from respondent corporation.
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc."
in petitioner's name are, as correctly observed by the SEC, merely
descriptive of and also referring to the members, or kaanib, of respondent
who are likewise residing in the Philippines. These words can hardly serve
as an effective differentiating medium necessary to avoid confusion or
difficulty in distinguishing petitioner from respondent. This is especially so,
since both petitioner and respondent corporations are using the same
acronym — H.S.K.;19 not to mention the fact that both are espousing
religious beliefs and operating in the same place. Parenthetically, it is well
to mention that the acronym H.S.K. used by petitioner stands for "Haligi at
Saligan ng Katotohanan."20
Then, too, the records reveal that in holding out their corporate name to
the public, petitioner highlights the dominant words "IGLESIA NG DIOS
KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," which
is strikingly similar to respondent's corporate name, thus making it even
73 | P a g e
more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc.", are merely descriptive of and pertaining to the members of
respondent corporation.21
Significantly, the only difference between the corporate names of petitioner
and respondent are the words SALIGAN and SUHAY. These words are
synonymous — both mean ground, foundation or support. Hence, this case
is on all fours with Universal Mills Corporation v. Universal Textile Mills,
Inc.,22 where the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so similar
that even under the test of "reasonable care and observation" confusion
may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's
corporate name cannot find justification under the generic word rule. We
agree with the Court of Appeals' conclusion that a contrary ruling would
encourage other corporations to adopt verbatim and register an existing
and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations
using the names Church of the Living God, Inc., Church of God Jesus
Christ the Son of God the Head, Church of God in Christ & By the Holy
Spirit, and other similar names, is of no consequence. It does not authorize
the use by petitioner of the essential and distinguishing feature of
respondent's registered and protected corporate name.23
We need not belabor the fourth issue raised by petitioner. Certainly,
ordering petitioner to change its corporate name is not a violation of its
constitutionally guaranteed right to religious freedom. In so doing, the SEC
merely compelled petitioner to abide by one of the SEC guidelines in the
approval of partnership and corporate names, namely its undertaking to
manifest its willingness to change its corporate name in the event another
person, firm, or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is
DENIED. The appealed decision of the Court of Appeals is AFFIRMED in
toto.
SO ORDERED.
 SECOND DIVISION
G.R. No. 150416 July 21, 2006
SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN
PHILIPPINES, INC., and/or represented by MANASSEH C.
ARRANGUEZ, BRIGIDO P. GULAY, FRANCISCO M. LUCENARA,
DIONICES O. TIPGOS, LORESTO C. MURILLON, ISRAEL C. NINAL,
GEORGE G. SOMOSOT, JESSIE T. ORBISO, LORETO PAEL and
JOEL BACUBAS, petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY
ADVENTIST, INC., and/or represented by JOSUE A. LAYON,
WENDELL M. SERRANO, FLORANTE P. TY and JETHRO CALAHAT
and/or SEVENTH DAY ADVENTIST CHURCH [OF] NORTHEASTERN
MINDANAO MISSION,* Respondents.
DECISION
CORONA, J.:
[Union] Mission of Seventh Day Adventist Church of Bayugan, Esperanza,
Agusan, all the rights, title, interest, claim and demand both at law and as
well in possession as in expectancy of in and to all the place of land and
portion situated in the Barrio of Bayugan, Municipality of Esperanza,
Province of Agusan, Philippines, more particularly and bounded as follows,
to wit:
1. a parcel of land for Church Site purposes only.
2. situated [in Barrio Bayugan, Esperanza].
3. Area: 30 meters wide and 30 meters length or 900 square meters.
4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-
285.
5. Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio
Abijaron and West by Feliz Cosio xxx. 4

This petition for review on certiorari assails the Court of Appeals (CA) The donation was allegedly accepted by one Liberato Rayos, an elder of
decision1 and resolution2 in CA-G.R. CV No. 41966 affirming, with
the Seventh Day Adventist Church, on behalf of the donee.
modification, the decision of the Regional Trial Court (RTC) of Bayugan,
Agusan del Sur, Branch 7 in Civil Case No. 63.
Twenty-one years later, however, on February 28, 1980, the same parcel
of land was sold by the spouses Cosio to the Seventh Day Adventist
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Church of Northeastern Mindanao Mission (SDA-NEMM).5 TCT No. 4468
Title (TCT) No. 4468 in Bayugan, Agusan del Sur originally owned by Felix
was thereafter issued in the name of SDA-NEMM.6
Cosio and his wife, Felisa Cuysona.
Claiming to be the alleged donee’s successors-in-interest, petitioners
On April 21, 1959, the spouses Cosio donated the land to the South asserted ownership over the property. This was opposed by respondents
Philippine Union Mission of Seventh Day Adventist Church of Bayugan
who argued that at the time of the donation, SPUM-SDA Bayugan could
Esperanza, Agusan (SPUM-SDA Bayugan).3 Part of the deed of donation
not legally be a donee
read:
because, not having been incorporated yet, it had no juridical personality.
KNOW ALL MEN BY THESE PRESENTS: Neither were petitioners members of the local church then, hence, the
donation could not have been made particularly to them.
That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of
age, [h]usband and wife, both are citizen[s] of the Philippines, and
On September 28, 1987, petitioners filed a case, docketed as Civil Case
resident[s] with post office address in the Barrio of Bayugan, Municipality No. 63 (a suit for cancellation of title, quieting of ownership and possession,
of Esperanza, Province of Agusan, Philippines, do hereby grant, convey declaratory relief and reconveyance with prayer for preliminary injunction
and forever quit claim by way of Donation or gift unto the South Philippine
and damages), in the RTC of Bayugan, Agusan del Sur. After trial, the trial
74 | P a g e
court rendered a decision7 on November 20, 1992 upholding the sale in
favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the award of
moral damages and attorney’s fees.8 Petitioners’ motion for
reconsideration was likewise denied. Thus, this petition.
The issue in this petition is simple: should SDA-NEMM’s ownership of the
lot covered by TCT No. 4468 be upheld?9 We answer in the affirmative.
The controversy between petitioners and respondents involves two
supposed transfers of the lot previously owned by the spouses Cosio: (1)
a donation to petitioners’ alleged predecessors-in-interest in 1959 and (2)
a sale to respondents in 1980.
Donation is undeniably one of the modes of acquiring ownership of real
property. Likewise, ownership of a property may be transferred by tradition
as a consequence of a sale.
Petitioners contend that the appellate court should not have ruled on the
validity of the donation since it was not among the issues raised on appeal.
This is not correct because an appeal generally opens the entire case for
review.
We agree with the appellate court that the alleged donation to petitioners
was void.
Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another person who accepts it. The donation could
not have been made in favor of an entity yet inexistent at the time it was
made. Nor could it have been accepted as there was yet no one to accept
it.
The deed of donation was not in favor of any informal group of SDA
members but a supposed SPUM-SDA Bayugan (the local church) which,
at the time, had neither juridical personality nor capacity to accept such
gift.
Declaring themselves a de facto corporation, petitioners allege that they
should benefit from the donation.
75 | P a g e
But there are stringent requirements before one can qualify as a de facto
corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.10
While there existed the old Corporation Law (Act 1459), 11 a law under
which SPUM-SDA Bayugan could have been organized, there is no proof
that there was an attempt to incorporate at that time.
The filing of articles of incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de facto corporation.12 We
have held that an organization not registered with the Securities and
Exchange Commission (SEC) cannot be considered a corporation in any
concept, not even as a corporation de facto.13 Petitioners themselves
admitted that at the time of the donation, they were not registered with the
SEC, nor did they even attempt to organize14 to comply with legal
requirements.
Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to petitioners
or their supposed predecessor-in-interest at the time of the donation.
Petitioners obviously could not have claimed succession to an entity that
never came to exist. Neither could the principle of separate juridical
personality apply since there was never any corporation15 to speak of. And,
as already stated, some of the representatives of petitioner Seventh Day
Adventist Conference Church of Southern Philippines, Inc. were not even
members of the local church then, thus, they could not even claim that the
donation was particularly for them.16
"The de facto doctrine thus effects a compromise between two conflicting
public interest[s]—the one opposed to an unauthorized assumption of
corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with
corporations."17
Generally, the doctrine exists to protect the public dealing with supposed
corporate entities, not to favor the defective or non-existent corporation.18
In view of the foregoing, petitioners’ arguments anchored on their
supposed de facto status hold no water. We are convinced that there was
no donation to petitioners or their supposed predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM.
The factual findings of the trial court in this regard were not convincingly
disputed. This Court is not a trier of facts. Only questions of law are the
proper subject of a petition for review on certiorari.19
and solid presumption that titles were legally issued and that they are valid.
It is irrevocable and indefeasible and the duty of the Court is to see to it
that the title is maintained and respected unless challenged in a direct
proceeding. xxx The title shall be received as evidence in all the Courts
and shall be conclusive as to all matters contained therein.
[This action was instituted almost seven years after the certificate of title in
respondents’ name was issued in 1980.]20

Sustaining the validity of respondents’ title as well as their right of
ownership over the property, the trial court stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the
hearing xxx he acknowledged that the same was his xxx but that it was not
his intention to sell the controverted property because he had previously
donated the same lot to the South Philippine Union Mission of SDA Church
of Bayugan-Esperanza. Cosio avouched that had it been his intendment to
sell, he would not have disposed of it for a mere P2,000.00 in two
installments but for P50,000.00 or P60,000.00. According to him, the
P2,000.00 was not a consideration of the sale but only a form of help
extended.
According to Art. 1477 of the Civil Code, the ownership of the thing sold
shall be transferred to the vendee upon the actual or constructive delivery
thereof. On this, the noted author Arturo Tolentino had this to say:
The execution of [a] public instrument xxx transfers the ownership from the
vendor to the vendee who may thereafter exercise the rights of an owner
over the same21
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was
made upon constructive delivery of the property on February 28, 1980
when the sale was made through a public instrument.22 TCT No. 4468 was
thereafter issued and it remains in the name of SDA-NEMM.

A thorough analysis and perusal, nonetheless, of the Deed of WHEREFORE, the petition is hereby DENIED.
Absolute Sale disclosed that it has the essential requisites of
contracts pursuant to xxx Article 1318 of the Civil Code, except that
Costs against petitioners.
the consideration of P2,000.00 is somewhat insufficient for a [1,069-square
meter] land. Would then this inadequacy of the consideration render the
contract invalid? SO ORDERED.

Article 1355 of the Civil Code provides:

Except in cases specified by law, lesion or inadequacy of cause shall not

invalidate a contract, unless there has been fraud, mistake or undue
influence.

No evidence [of fraud, mistake or undue influence] was adduced by

[petitioners].

xxx

Well-entrenched is the rule that a Certificate of Title is generally a

conclusive evidence of [ownership] of the land. There is that strong

76 | P a g e
 EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte,
FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his
capacity as receiver of the Far Eastern Lumber and Commercial Co.,
Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of
the Court of First Instance of Leyte and to enjoin the respondent judge from
further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P.
Hall, and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman
and Ceferino S. Abella, signed and acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and Commercial Co., Inc.,
organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an
affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the
corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and the
election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in
the office of the Securities and Exchange Commissioner, for the issuance
of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by
the aforesaid governmental office, the respondents Fred Brown, Emma
Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court
of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown
77 | P a g e
et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership;
that they wished to have it dissolved because of bitter dissension among
the members, mismanagement and fraud by the managers and heavy
financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall,
filed a motion to dismiss, contesting the court's jurisdiction and the
sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs, appointed of
the properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-
bond for the discharge of the receiver, but the respondent judge refused to
accept the offer and to discharge the receiver. Whereupon, the present
special civil action was instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being a de facto corporation,
dissolution thereof may only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed
the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the
parties are informed that the Securities and Exchange Commission has
not, so far, issued the corresponding certificate of incorporation. All of them
know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec.
11, Corporation Law). The complaining associates have not represented
to the others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not
apply. Obviously this is not an instance requiring the enforcement of
contracts with the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch
as the Far Eastern Lumber and Commercial Co., is a de facto corporation,
section 19 of the Corporation Law applies, and therefore the court had not
jurisdiction to take cognizance of said civil case number 381. Section 19
reads as follows:
. . . The due incorporation of any corporations claiming in
good faith to be a corporation under this Act and its right
to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may
be a party, but such inquiry may be had at the suit of the
Insular Government on information of the Attorney-
General.
There is a secondary issue in connection with the appointment of a
receiver. But it must be admitted that receivership is proper in proceedings
for dissolution of a company or corporation, and it was no error to reject
the counter-bond, the court having declared the dissolution. As to the
amount of the bond to be demanded of the receiver, much depends upon
the discretion of the trial court, which in this instance we do not believe has
been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.

There are least two reasons why this section does not govern the situation. Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
Not having obtained the certificate of incorporation, the Far Eastern
Lumber and Commercial Co. — even its stockholders — may not probably
claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec.

11) that it is the issuance of a certificate of incorporation
by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if
collateral attack is granted to corporations "claiming in
good faith to be a corporation under this act." Such a claim
is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard
of the law. Unless there has been an evident attempt to
comply with the law the claim to be a corporation "under
this act" could not be made "in good faith." (Fisher on the
Philippine Law of Stock Corporations, p. 75. See also
Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a

litigation between stockholders of the alleged corporation, for the purpose
of obtaining its dissolution. Even the existence of a de jure corporation may
be terminated in a private suit for its dissolution between stockholders,
without the intervention of the state.

There might be room for argument on the right of minority stockholders to

sue for dissolution;1 but that question does not affect the court's
jurisdiction, and is a matter for decision by the judge, subject to review on
appeal. Whkch brings us to one principal reason why this petition may not
prosper, namely: the petitioners have their remedy by appealing the order
of dissolution at the proper time.

78 | P a g e
 FIRST DIVISION
[ G.R. No. 188769, August 03, 2016 ]
JOSEPH OMAR O. ANDAY A, Petitioner, vs. RURAL BANK OF
CABADBARAN, INC., DEMOSTHENES P. ORAIZ and RICARDO D.
GONZALEZ, Respondents.
RESOLUTION
SERENO, C.J.:
This case concerns the dismissal[1] of an action for mandamus that sought
to compel respondents Rural Bank of Cabadbaran, Inc., Demosthenes P.
Oraiz, and Ricardo D. Gonzalez to register the transfer of shares of stock
and issue the corresponding stock certificates in favor of petitioner Joseph
Omar O. Andaya. The Cabadbaran City Regional Trial Court (RTC) ifuled
that petitioner Andaya was not entitled to the remedy of mandamus, s|ince
the transfer of the subject shares of stock had not yet been recorded in the
corporation's stock and transfer book, and the registered owner,
Conception O. Chute, had not given him a special power of attorney to
makq the transfer. Andaya has filed a Rule 45 petition directly before this
Court, insisting that he has a cause of action to institute the suit.
FACTS
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of
Cabadbaran for P220,000.[2] The transaction was evidenced by a
notarized document denominated as Sale of Shares of Stocks. [3] Chute
duly endorsed and delivered the certificates of stock to Andaya and,
subsequently, requested the bank to register the transfer and issue new
stock certificates in favor of the latter.[4] Andaya also separately
communicated[5] with the bank's corporate secretary, respondent Oraiz,
reiterating Chute's request for the issuance of new stock certificates in
petitioner's favor.
A few days later, the bank's corporate secretary wrote[6] Chute to inform
her that he could not register the transfer. He explained that under a
previous stockholders' Resolution, existing stockholders were given
priority to buy the shares of others in the event that the latter offered those
shares for sale (i.e., a right of first refusal). He then asked Chute if she,
instead, wished to have her shares offered to existing stockholders. He told
her that if no other stockholder would buy them, she could then proceed to
sell her shares to outsiders.
79 | P a g e
Meanwhile, the bank's legal counsel, respondent Gonzalez,
informed[7] Andaya that the latter's request had been referred to the bank's
board of directors for evaluation. Gonzalez also furnished him a copy of
the bank's previous reply to Chute concerning a similar request from her.
Andaya responded[8] by reiterating his earlier request for the registration of
the transfer and the issuance of new certificates of stock in his favor. Citing
Section 98 of the Corporation Code, he claimed that the purported
restriction on the transfer of shares of stock agreed upon during the 2001
stockholders' meeting could not deprive him of his right as a transferee. He
pointed out that the restriction did not appear in the bank's articles of
incorporation, bylaws, or certificates of stock.
The bank eventually denied the request of Andaya.[9] It reasoned that he
had a conflict of interest, as he was then president and chief executive
officer of the Green Bank of Caraga, a competitor bank. Respondent bank
concluded that the purchase of shares was not in good faith, and that the
purchase "could be the beginning of a hostile bid to take-over control of the
[Rural Bank of Cabadbaran]."[10] Citing Gokongwei v. Securities and
Exchange Commission,[11] respondent insisted that it may refuse to accept
a competitor as one of its stockholders. It also maintained that Chute
should have first offered her shares to the other stockholders, as agreed
upon during the 2001 stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and damages [12]
against the Rural Bank of Cabadbaran; its corporate secretary, Oraiz; and
its legal counsel, Gonzalez. Petitioner sought to compel them to record the
transfer in the bank's stock and transfer book and to issue new certificates
of stock in his name.
The RTC issued a Decision dismissing the complaint. Citing Porice v.
Alsons Cement Corporation[13] the trial court ruled that Andaya had no
standing to compel the bank to register the transfer and issue stock
certificates in his name.[14] It explained that he had failed "[to show] that the
transfer of subject shares of stock [was] recorded in the stock and transfer
book of [the] bank or that [he was] authorized by [Chute] to make the
transfer."[15] According to the trial court, Ponce requires that a person
seeking to transfer shares must appear to have an express instruction and
a specific authority from the registered stockholder, such as a special
power of attorney, to cause the disposition of stocks registered in the
stockholder's name. It ruled that "[w]ithout the sale first registered or an
authority from the transferor, it [was] therefore unmistakably clear that
[Andaya had] no cause of action for mandamus against [the] bank."
Consequently, Andaya directly filed with this Court a Rule 45 petition for
review on certiorari assailing the RTC Decision on pure questions of law.
ISSUES
The Court culls the issues raised by petitioner as follows:
1. Whether Andaya, as a transferee of shares of stock, may initiate
an action for mandamus compelling the Rural Bank of
Cabadbaran to record the transfer of shares in its stock and
transfer book, as well as issue new stock certificates in his name
2. Whether a writ of mandamus should issue in favor of petitioner
OUR RULING
The petition is partly meritorious.
It is already settled jurisprudence[16] that the registration of a transfer of
shares of stock is a ministerial duty on the part of the corporation.
Aggrieved parties may then resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the transfer or
to issue new certificates of stock. This remedy is available even upon the
instance of a bona fide transferee[17] who is able to establish a clear legal
right to the registration of the transfer.[18] This legal right inherently flows
from the transferee's established ownership of the stocks, a right that has
been recognized by this Court as early as in Price v. Martin:[19]
A person who has purchased stock, and who desires to be recognized
as a stockholder, for the purpose of voting, must secure a standing by
having the transfer recorded upon the books. If the transfer is not duly
made upon request, he has, as his remedy, to compel it to be made. [20]
(Emphases supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and
Minerals Corp.,[21]this Court stressed that the registration of a transfer
of shares is ministerial on the part of the corporation:
Clearly, the right of a transferee/assignee to have stocks transferred
to his name is an inherent right flowing from his ownership of the
stocks. The Court had ruled in Rural Bank of Salinas, Inc. v. Court of
Appeals that the corporation's obligation to register is ministerial,
citing Fletcher, to wit:
In transferring stock, the secretary of a corporation acts in purely ministerial
capacity, and does not try to decide the question of ownership.
80 | P a g e
The duty of the corporation to transfer is a ministerial one and if it refuses
to make such transaction without good cause, it may be compelled to do
so by mandamus.
The Court further held in Rural Bank of Salinas that the only limitation
imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended to be
transferred.[22] (Emphasis supplied; citations omitted)
Consequently, transferees of shares of stock are real parties in interest
having a cause of action for mandamus to compel the registration of the
transfer and the corresponding issuance of stock certificates.
We also rule that Andaya has been able to establish that he is a bona fide
transferee of the shares of stock of Chute. In proving this fact, he presented
to the RTC the following documents evidencing the sale: (1) a notarized
Sale of Shares of Stocks[23] showing Chute's sale of 2,200 shares of stock
to petitioner; (2) a Documentary Stamp Tax Declaration/Return[24] (3)
Capital Gains Tax Return;[25] and (4) stock certificates[26] covering the
subject shares duly endorsed
by Chute. The existence, genuineness, and due execution of these
documents have been admitted[27] and remain undisputed. There is no
doubt that Andaya had the standing to initiate an action for mandamus to
compel the Rural Bank of Cabadbaran to record the transfer of shares in
its stock and transfer book and to issue new stock certificates in his name.
As the transferee of the shares, petitioner stands to be benefited or injured
by the judgment in the instant petition, a judgment that will either order the
bank to recognize the legitimacy of the transfer and petitioner's status as
stockholder or to deny the legitimacy thereof.
This Court further finds that the reliance of the RTC on Ponce in finding
that petitioner had no cause of action for mandamus against the defendant
bank was misplaced. In Ponce, the issue resolved by this Court was
whether the petitioner therein had a cause of action for mandamus to
compel the issuance of stock certificates, not the registration of the
transfer. Ruling in the negative, the Court said in that case that without any
record of the transfer of shares in the stock and transfer book of the
corporation, there would be no clear basis to compel that corporation to
issue a stock certificate. By the import of Section 63 of the Corporation
Code, the stock and transfer book would be the main reference book in
ascertaining a person's entitlement to the rights of a stockholder.
Consequently, without the registration of the transfer, the alleged
transferee could not yet be recognized as a stockholder who is entitled to
be given a stock certificate.
In contrast, at the crux of this petition are the registration of the transfer
and the issuance of the corresponding stock certificates. Requiring
petitioner to register the transaction before he could institute a mandamus
suit in supposed abidance by the ruling in Ponce was a palpable error. It
led to an absurd, circuitous situation in which Andaya was prevented from
causing the registration of the transfer, ironically because the shares had
not been registered. With the logic resorted to by the RTC, transferees of
shares of stock would never be able to compel the registration of the
transfer and the issuance of new stock certificates in their favor. They
would first be required to show the registration of the transfer in their names
— the ministerial act that is the subject of the mandamus suit in the first
place. The trial court confuses the application of the dicta in Ponce, which
is pertinent only to the issuance of new stock certificates, and not to the
registration of a transfer of shares. As Ponce itself provides, these two are
entirely different events. The RTC's anomalous reasoning cannot be given
legal imprimatur by this Court.
With regard to the requisite authorization from the transferor, the Court
stresses that the concern in Ponce was rooted in whether or not the alleged
right of the petitioner therein to compel the issuance of new stock
certificates was clearly established. Reiterating the ruling in Rivera v.
FIorendo[28] and Eager v. Bryan,[29] the Court therein maintained that a
mere endorsement of stock certificates by the supposed owners of the
stock could not be the basis of an action for mandamus in the absence of
express instructions from them. According to the Court, the reason behind
this ruling was that the corporation's duty and legal obligation therein were
not so clear and indisputable as to justify the issuance of the writ. The
ambiguity of the alleged transferee's deed of undertaking with
endorsement led the Court in Ponce to rule that mandamus would have
issued had the registered owner himself requested the registration of the
transfer, or had the person requesting the registration secured a special
power of attorney from the registered owner.
In the instant case, however, the submitted documents did not merely
consist of an endorsement. Rather, petitioner presented several
undisputed documents,[30] among which was respondent Oraiz's letter to
Chute denying her request to transfer the stock standing in her name in
favor of Andaya. This letter clearly indicated that the registered owner
herself had requested the registration of the transfer of shares of stock.
There was therefore no sensible reason for the RTC to perfunctorily extract
the pronouncement in Ponce and then disregard it in the face of admitted
facts in addition to the duly endorsed stock certificates.
On whether the writ of mandamus should issue, Section 3, Rule 65 of the
81 | P a g e
Rules of Court, provides for the rules governing a petition for mandamus,
viz:
SECTION 3. Petition for mandamus. — When any tribunal, corporation,
board, officer or person unlawfully neglects the performance of an act
which the law specifically enjoins as a duty resulting
from an office, trust, or station, or unlawfully excludes another from the
use and enjoyment of a right or office to which such other is entitled, and
there is no other plain, speedy and adequate remedy in the ordinary course
of law, the person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying that judgment be
rendered commanding the respondent, immediately or at some other time
to be specified by the court, to do the act required to be done to protect the
rights of the petitioner, and to pay the damages sustained by the petitioner
by reason of the wrongful acts of the respondent.
The petition shall also contain a sworn certification of non-forum shopping
as provided in the third paragraph of Section 3, Rule 46. (Emphases
supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may issue only
when petitioner is able to establish the presence of the following: (1) right
clearly founded in law and is not doubtful; (2) a legal duty to perform the
act; (3) unlawful neglect in performing the duty enjoined by law; (4) the
ministerial nature of the act to be performed; and (5) the absence of other
plain, speedy, and adequate remedy in the ordinary course of law. [31]
Respondents primarily challenge the mandamus suit on the grounds that
the transfer violated the bank stockholders' right of first refusal and that
petitioner was a buyer in bad faith. Both parties refer to Section 98 of the
Corporation Code to support their arguments, which reads as follows:
SECTION 98. Validity of restrictions on transfer of shares. — Restrictions
on the right to transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be more than onerous than
granting the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with such reasonable
terms, conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any
third person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations. Hence,
before the Court can allow the operation of this section in the case at bar,
there must first be a factual determination that respondent Rural Bank of
Cabadbaran is indeed a close corporation. There needs to be a
presentation of evidence on the relevant restrictions in the articles of
incorporation j and bylaws of the said bank. From the records or the RTC
Decision, there is apparently no such determination or even allegation that
would assist this Court in ruling on these two major factual matters. With
the foregoing, the validity of the transfer cannot yet be tested using that
provision. These are the factual matters that the parties must first thresh
out before the RTC.

After finding that petitioner has legal standing to initiate an action for
mandamus, the Court now reinstates the action he filed and remands the
case to the RTC to resolve the propriety of issuing a writ of mandamus.
The resolution of the case must include the determination of all relevant
factual matters in connection with the issues at bar. The RTC must also
resolve petitioner's prayer for the payment of attorney's fees, litigation
expenses, moral damages, and exemplary damages.

WHEREFORE, premises considered, the instant petition I is GRANTED.

The Decision dated 17 April 2009 and the Order dated 15 July 2009 of the
Regional Trial Court, Branch 34, Cabadbaran City, which dismissed
petitioner's action for mandamus, are SET ASIDE. The action is hereby
REINSTATED and the case REMANDED to the court of origin for further
proceedings. The trial court is further enjoined to proceed with [the
resolution of this case with dispatch.

SO ORDERED.

82 | P a g e
THIRD DIVISION
G.R. Nos. 188642 & 189425, October 17, 2016
AGDAO RESIDENTS INC., THE DIRECTORS LANDLESS LANDLESS
ASSOCIATION, BOARD OF OF AGDAO ASSOCIATION, INC., IN
THEIR PERSONAL CAPACITY NAMELY: ARMANDO JAVONILLO,
MA. ACELITA ARMENTANO, ALEX JOSOL, ANTONIA AMORADA,
JULIUS ALINSUB, POMPENIANO ESPINOSA, JR., SALCEDO DE LA
CRUZ, CLAUDIO LAO, CONSORCIO DELGADO, ROMEO CABILLO,
RICARDO BACONG, RODOLFO GALENZOGA, BENJAMIN LAMIGO,
AND ASUNCION A. ALCANTARA, Petitioners, v. ROLANDO
MARAMION, LEONIDAS JAMISOLA, VIRGINIA CANOY, ELIZABETH
GONZALES, CRISPINIANO QUIRE-QUIRE, ERNESTINO DUNLAO,
ELLA DEMANDANTE, ELLA RIA DEMANDANTE, ELGIN
DEMANDANTE, SATURNINA WITARA, VIRGILIO DAYONDON,
MELENCIA MARAMION, ANGELICA PENKIAN, PRESENTACION
TAN, HERNANI GREGORY, RUDY GIMARINO, VALENTIN CAMEROS,
RODEL CAMEROS, ZOLLO JABONETE, LUISITO TAN, JOSEPH
QUIRE-QUIRE, ERNESTO DUNLAO, JR., FRED DUNLAO, LIZA
MARAMION, CLARITA ROBILLA, RENATO DUNLAO AND
PRUDENCIO JUARIZA, JR., Respondents.
G.R. NOS. 188888-89
ROLANDO MARAMION, LEONIDAS JAMISOLA, VIRGINIA CANOY,
ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA RIA
DEMANDANTE, ELGIN DEMANDANTE, SATURNINA WITARA,
MELENCIA MARAMION, LIZA MARAMION, ANGELICA PENKIAN,
PRESENTACION TAN, AS SUBSTITUTED BY HIS LEGAL HEIRS:
HERNANI GREGORY, RUDY GIMARINO, RODEL CAMEROS,
VALENTIN CAMEROS, VIRGILIO DAYONDON, PRUDENCIO
JUARIZA, JR., ZOILO JABONETE, LUISITO TAN, ERNESTINO
DUNLAO, JR., FRED DUNLAO, CLARITA ROBILLA, AND RENATO
DUNLAO, Petitioners, v. AGDAO LANDLESS RESIDENTS
ASSOCIATION, INC., THE DIRECTORS LANDLESS BOARD OF OF
AGDAO RESIDENTS ASSOCIATION, INC., IN THEIR PERSONAL
CAPACITY, NAMELY: ARMANDO JAVONILLO, MA. ACELITA
ARMENTANO, ALEX JOSOL, ANTONIA AMORADA, JULIUS
ALINSUB, POMPENIANO ESPINOSA, JR. JACINTO BO-OC,
HERMENIGILDO DUMAPIAS, SALCEDO DE LA CRUZ, CLAUDIO
LAO, CONSORCIO DELGADO, ROMEO CABILLO, RICARDO
83 | P a g e
BACONG, RODOLFO GALENZOGA, BENJAMIN LAMIGO, ROMEO
DE LA CRUZ, ASUNCION ALCANTARA AND LILY LOY, Respondents.
DECISION
JARDELEZA, J.:
These are consolidated petitions for review on certiorari assailing the
Court of Appeals' (CA) Decision1 and Resolution2 dated November 24,
2008 and June 19, 2009, respectively, in CA-G.R. SP No. 01858-MIN
and CA-G.R. SP No. 01861-MIN. The CA affirmed with modification the
Decision3 of the Regional Trial Court (court a quo) dated July 11, 2007
which ruled in favor of respondents.
The Parties
Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a
non-stock, non-profit corporation duly organized and existing under and
by virtue of the laws of the Republic of the Philippines, 4 and its board of
directors,5 namely, Armando Javonillo (Javonillo), Ma. Acelita Armentano
(Armentano), Alex Josol, Salcedo de la Cruz, Jr., Claudio Lao, Antonia
Amorada, Julius Alinsub, Pompeniano Espinosa, Consorcio Delgado,
Romeo Cabillo, Benjamin Lamigo, Ricardo Bacong, Rodolfo Galenzoga,
and Asuncion Alcantara (Alcantara).6 Respondents are allegedly ousted
members of ALRAI, namely, Rolando Maramion, Leonidas Jamisola,
Virginia Canoy (Canoy), Elizabeth Gonzales, Crispiniano Quire-Quire,
Emestino Dunlao, Ella Demandante, Ella Ria Demandante, Elgin
Demandante, Satumina Witara (Witara), Virgilio Dayondon (Dayondon),
Melencia Maramion, Angelica Penkian (Penkian), Presentacion Tan,
Hemani Gregory (Gregory), Rudy Gimarino (Gimarino), Valentin
Cameros, Radel Cameros (Cameros), Zoilo Jabonete, Luisito Tan (Tan),
Joseph Quire Quire, Emestino Dunlao, Jr., Fred Dunlao, Liza Maramion,
Clarita Robilla (Robilla), Renata Dunlao and Prudencio Juariza, Jr.
(Juariza).7chanrobleslaw
The Antecedents
Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation8 in
favor of ALRAI covering 46 titled lots (donated lots).9 One Deed of
Donation10 prohibits ALRAI, as donee, from partitioning or distributing
individual certificates of title of the donated lots to its members, within a
period of five years from execution, unless a written authority is secured
from Dakudao.11 A violation of the prohibition will render the donation
void, and title to and possession of the donated lot will revert to
Dakudao.12 The other five Deeds of Donation do not provide for the five-
year restriction.
In the board of directors and stockholders meetings held on January 5,
2000 and January 9, 2000, respectively, members of ALRAI resolved to
directly transfer 10 of the donated lots to individual members and non
members of ALRAI.13 Transfer Certificate of Title (TCT) Nos. T-62124
(now T-322968), T-297811 (now TCT No. T-322966), T-297813 (now
TCT No. T-322967) and T-62126 (now TCT No. T-322969) were
transferred to Romeo Dela Cruz (Dela Cruz). TCT Nos. T-41374 (now
TCT No. T-322963) and T-41361 (now TCT No. T-322962) were
transferred to petitioner Javonillo, the president of ALRAI. TCT Nos. T-
41365 (now TCT No. T-322964) and T-41370 (now TCT No. T-322964)
were transferred to petitioner Armentano, the secretary of ALRAI. TCT
Nos. T-41367 (now TCT No. T-322971) and T-41366 were transferred to
petitioner Alcantara, the widow of the fanner legal counsel of ALRAI. The
donated lot covered by TCT No. T-41366 (replaced by TCT No. T-
322970) was sold to Lily Loy (Loy) and now covered by TCT No. T-
338403.14chanrobleslaw
Respondents filed a Complaint15 against petitioners. Respondents
alleged that petitioners expelled them as members of ALRAI, and that
petitioners are abusing their powers as officers.16 Respondents further
alleged that petitioners were engaged in the following anomalous and
illegal acts: (1) requiring ALRAI's members to pay exorbitant arrear fees
when ALRAI's By-Laws only set membership dues at P1.00 per month;17
(2) partially distributing the lands donated by Dakudao to some officers of
ALRAI and to some non-members in violation of the Deeds of Donation;18
(3) illegally expelling them as members of ALRAI without due process; 19
and (4) being unable to show the books of accounts of ALRAI.20 They
also alleged that Loy (who bought one of the donated lots from Alcantara)
was a buyer in bad faith, having been aware of the status of the land
when she bought it.21chanrobleslaw
Thus, respondents prayed for: (1) the restoration of their membership to
ALRAI; (2) petitioners to stop selling the donated lands and to annul the
titles transferred to Javonillo, Armentano, Dela Cruz, Alcantara and Loy;
(3) the production of the accounting books of ALRAI and receipts of
payments from ALRAI's members; (4) the accounting of the fees paid by
84 | P a g e
ALRAI's members; and (5) damages.22chanrobleslaw
In their Answer,23 petitioners alleged that ALRAI transferred lots to
Alcantara as attorney's fees ALRAI owed to her late husband, who was
the legal counsel of ALRAI.24 On the other hand, Javonillo and
Armentano, as president and secretary of ALRAI, respectively, made a lot
of sacrifices for ALRAI, while Dela Cruz provided financial assistance to
ALRAI.25cralawredchanrobleslaw
Petitioners also alleged that respondents who are non-members of
ALRAI have no personality to sue. They also claimed that the members
who were removed were legally ousted due to their absences in
meetings.26chanrobleslaw
The Ruling of the RTC
On July 11, 2007, the court a quo promulgated its Decision,27 the decretal
portion of which reads:
chanRoblesvirtualLawlibrary
After weighing the documentary and testimonial evidence presented, as
well as the arguments propounded by the counsels, this Court tilts the
scale of justice in favor of complainants and hereby grants the
following:ChanRoblesVirtualawlibrary
Defendants are enjoined from disposing or selling further the donated
lands to the detriment of the beneficiary-members of the Association;
The Complainants and/or the ousted members are hereby restored to
their membership with ALRAI, and a complete list of all bona fide
members should be made and submitted before this Court;
The Register of Deeds of the City of Davao is directed to annul the Land
Titles transferred to Armando Javonillo, Ma. Acelita Armentano, Romeo
dela Cruz, Asuncion Alcantara and Lily Loy with TCT Nos. T-322962, T-
322963, T-322964, T-322965, T-322966, T-322967, T-322968, T-
322969, T-322971 and T-338403 (formerly T-322970), respectively; and
to register said titles to the appropriate donee provided in the Deeds of
Donation; and cralawlawlibrary
Defendants are further directed to produce all the Accounting Books of
the Association, receipts of the payments made by all the members, and
for an accounting of the fees paid by the members from the time of its
incorporation up to the present;
Moral, exemplary and attorney's fees being unsubstantiated, the same
cannot be given due course; and cralawlawlibrary
Defendants are ordered to shoulder the costs of suit.
SO ORDERED.28
The court a quo treated the case as an intra-corporate dispute.29 It found
respondents to be bona fide members of ALRAI.30 Being bona fide
members, they are entitled to notices of meetings held for the purpose of
suspending or expelling them from ALRAI.31 The court a quo however
found that respondents were expelled without due process.32 It also
annulled all transfers of the donated lots because these violated the five-
year prohibition under the Deeds of Donation. 33 It also found Loy a
purchaser in bad faith.34chanrobleslaw
Both Loy and petitioners filed separate appeals with the CA. Loy's appeal
was docketed as CA-G.R. SP No. 01858;35 while petitioners' appeal was
docketed as CA-G.R. SP No. 1861.36 In its Resolution37 dated October
19, 2007, the CA ordered the consolidation of the appeals.
The Ruling of the Court of Appeals
The CA affirmed with modification the court a quo's Decision. The
decretal portion of the CA Decision38 dated November 24, 2008 reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the consolidated petitions are PARTLY GRANTED. The
assailed Decision dated July 11,2007 of the Regional Trial Court (RTC),
Eleventh (11th)Judicial Region, Branch No. 10 of Davao City in Civil Case
No. 29,047-02 is hereby AFFIRMED with MODIFICATION.
The following Transfer Certificates of Title are declared VALID:
TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the name of
petitioner Romeo C. DelaCruz; and
85 | P a g e
TCT No. T-338403 in the name of petitioner Lily Loy.
The following Transfer Certificates of Title are declared VOID:
TCT Nos. T-322963 and T-322962 in the name of Petitioner Armando
Javonillo;
TCT Nos. T-322964 and T-322965 in the name of petitioner Ma. Acelita
Armentano; and
TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara.
Petitioners who are members of ALRAI may inspect all the records and
books of accounts of ALRAI and demand accounting of its funds in
accordance with Section 1, Article VII and Section 6, Article V of ALRAI's
Constitution and By-Laws.
SO ORDERED.39
Under Section 2, Article III of ALRAI's Amended Constitution and By-
Laws (ALRAI Constitution), the corporate secretary should give written
notice of all meetings to all members at least three days before the date
of the meeting.40 The CA found that respondents were not given notices
of the meetings held for the purpose of their termination from ALRAI at
least three days before the date of the meeting.41 Being existing
members of ALRAI, respondents are entitled to inspect corporate books
and demand accounting of corporate funds in accordance with Section 1,
Article VII and Section 6, Article V ofthe ALRAI
Constitution.42chanrobleslaw
The CA also noted that among the donated lots transferred, only one
[under TCT No. T-41367 (now TCT No. 322971) and transferred to
Alcantara] was covered by the five-year prohibition.43 Although petitioners
attached to their Memorandum 44 dated November 19, 2007 a Secretary's
Certificate45 of Dakudao resolving to remove the restriction from the land
covered by TCT No. T-41367, the CA did not take this certificate into
consideration because petitioners never mentioned its existence in any of
their pleadings before the court a quo. Thus, without the required written
authority from the donor, the CA held that the disposition of the land
covered by TCT No. T-41367 is prohibited and the land's subsequent
registration under TCT No. T-322971 is void.46chanrobleslaw
However, the CA nullified the transfers made to Javonillo and Armentano
because these transfers violated Section 6 of Article IV of the ALRAI
Constitution. Section 6 prohibits directors from receiving any
compensation, except for per diems, for their services to ALRAI.47 The
CA upheld the validity of the transfers to Dela Cruz and Alcantara48
because the ALRAI Constitution does not prohibit the same. The CA held
that as a consequence, the subsequent transfer of the lot covered by
TCT No. T-41366 to Loy from Alcantara was also valid.49chanrobleslaw
Both parties filed separate motions for reconsideration with the CA but
these were denied in a Resolution50 dated June 19, 2009.
Thus, the parties filed separate petitions for review on certiorari under
Rule 45 of the Rules of Court with this Court. In a Resolution51 dated
September 30, 2009, we resolved to consolidate the petitions considering
they assail the same CA Decision and Resolution dated November 24,
2008 and June 19, 2009, respectively. The petitions also involve the
same parties and raise interrelated issues.
The Issues
Petitioners raise the following issues for resolution of the Court, to wit:
Whether respondents should be reinstated as members of ALRAI; and
Whether the transfers of the donated lots are valid.
Our Ruling
We find the petition partly meritorious.
I. Legality of respondents' termination
Petitioners argue that respondents were validly dismissed for violation of
the ALRAI Constitution particularly for non-payment of membership dues
and absences in the meetings.52chanrobleslaw
Petitioners' argument is without merit. We agree with the CA's finding that
86 | P a g e
respondents were illegally dismissed from ALRAI.
We stress that only questions of law may be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court, since "the Supreme
Court is not a trier of facts."53 It is not our function to review, examine and
evaluate or weigh the probative value of the evidence presented.
When supported by substantial evidence, the findings of fact of the CA
are conclusive and binding on the parties and are not reviewable by this
Court, unless the case falls under any of the recognized exceptions in
Jurisprudence.54chanrobleslaw
The court a quo held that respondents are bona fide members of
ALRAL55 This finding was not disturbed by the CA because it was not
raised as an issue before it and thus, is binding and conclusive on the
parties and upon this Court.56 In addition, both the court a quo and the
CA found that respondents were illegally removed as members of ALRAI.
Both courts found that in terminating respondents from ALRAI, petitioners
deprived them of due process.57chanrobleslaw
Section 9158 of the Corporation Code of the Philippines (Corporation
Code)59 provides that membership in a non-stock, non-profit corporation
(as in petitioner ALRAI in this case) shall be terminated in the manner
and for the cases provided in its articles of incorporation or the by-laws.
In tum, Section 5, Article II of the ALRAI Constitution60 states:
Sec. 5. - Termination of Membership - Membership may be lost in any of
the following: a) Delinquent in the payment of monthly dues; b) failure
to [attend] any annual or special meeting of the association for three
consecutive times without justifiable cause, and c) expulsion may be
exacted by majority vote of the entire members, on causes which herein
enumerated: 1) Act and utterances which are derogatory and harmful to
the best interest of the association; 2) Failure to attend any annual or
special meeting of the association for six (6) consecutive months, which
shall be construed as lack of interest to continue his membership, and 3)
any act to conduct which are contrary to the objectives, purpose and aims
of the association as embodied in the charter[.]61

Petitioners allege that the membership of respondents in ALRAI was
terminated due to (a) non-payment of membership dues and (b) failure to
consecutively attend meetings.62 However, petitioners failed to
substantiate these allegations. In fact, the court a quo found that
respondents submitted several receipts showing their compliance with
the payment of monthly dues.63 Petitioners likewise failed to prove that
respondents' absences from meetings were without any justifiable
grounds to result in the loss of their membership in ALRAI.
Even assuming that petitioners were able to prove these allegations, the
automatic termination of respondents' membership in ALRAI is still not
warranted. As shown above, Section 5 of the ALRAI Constitution does
not state that the grounds relied upon by petitioners will cause the
automatic termination of respondents' membership. Neither can
petitioners argue that respondents' memberships in ALRAI were
terminated under letter (c) of Section 5, to wit:
x x x c) expulsion may be exacted by majority vote of the entire members,
on causes which herein enumerated: 1) Act and utterances which are
derogatory and harmful to the best interest of the association; 2) Failure
to attend any annual or special meeting of the association for six (6)
consecutive months, which shall be construed as lack of interest to
continue his membership, and 3) any act to conduct which are contrary to
the objectives, purpose and aims of the association as embodied in the
charter; x x x64chanroblesvirtuallawlibrary
Although termination of membership from ALRAI may be made by a
majority of the members, the court a quo found that the "guideline
(referring to Section 2, Article III of the ALRAI Constitution) was not
followed, hence, complainants' ouster from the association was illegally
done."65 The court a quo cited Section 2, Article III of the ALRAI
Constitution which provides, thus:
Sec. 2. -Notice- The Secretary shall give or cause to be given written
notice of all meetings, regular or special to all members of the association
at least three (3) days before the date of each meetings either by mail or
87 | P a g e
personally. Notice for special meetings shall specify the time and the
purposes or purpose for which it was called; x x x 66
The CA concurred with the finding of the court a quo.67 The CA noted that
the evidence presented revealed that the General Meeting for the
termination of membership was to be held on July 29, 2001, at 2 o'clock
in the afternoon; but the Notice to all officers and members of ALRAI
informing them about the General Meeting appeared to have been signed
by ALRAI's President only on July 27, 2001.68 Thus, the CA held that the
"notice for the July 29, [2001] meeting where the general membership of
ALRAI approved the expulsion of some of the respondents was short of
the three (3)-day notice requirement. More importantly, the petitioners
have failed to adduce evidence showing that the expelled members were
indeed notified of any meeting or investigation proceeding where they are
given the opportunity to be heard prior to the termination of their
membership."69chanrobleslaw
The requirement of due notice becomes more essential especially so
since the ALRAI Constitution provides for the penalties to be imposed in
cases where any member is found to be in arrears in payment of
contributions, or is found to be absent from any meeting without any
justifiable cause. Section 3, Article II and Section 3, Article III of the
ALRAI Constitution provide, to wit:
chanRoblesvirtualLawlibrary
Article II
xxx
Sec. 3. - Suspension of members Any member who shall be six (6)
months in arrears in the payment of monthly dues or additional
contributions or assessments shall be automatically suspended and may
be reinstated only upon payment of the corresponding dues in arrears or
additional contributions and after approval of the board of
Directors.70chanrobleslaw
xxx
Article III
xxx

Sec. 3. - Any member who shall be absent from any meeting without
justifiable causes shall be liable to a fine of Two Pesos (P 2.00); 71
Clearly, members proved to be in arrears in the payment of monthly
dues, contributions, or assessments shall only be automatically
suspended; while members who shall be absent from any meeting
without any justifiable cause shall only be liable for a fine. Nowhere in the
ALRAI Constitution does it say that the foregoing actions shall cause the
automatic termination of membership. Thus, the CA correctly ruled that
"respondents' expulsion constitutes an infringement of their constitutional
right to due process of law and is not in accord with the principles
established in Article 19 of the Civil Code, x x x."72chanrobleslaw
There being no valid termination of respondents' membership m ALRAI,
respondents remain as its existing members.73 It follows that as
members, respondents are entitled to inspect the records and books of
accounts of ALRAI subject to Section 1, Article VII74 of ALRAI's
Constitution, and they can demand the accounting of its funds in
accordance with Section 6, Article V of the ALRAI Constitution.75 In
addition, Sections 7476 and 7577 of the Corporation Code also sanction
the right of respondents to inspect the records and books of accounts of
ALRAI and demand the accounting of its funds.
II. On the validity of the donated lots
We modify the decision of the CA.
At the onset, we find that the cause of action and the reliefs sought in the
complaint pertaining to the donated lands (ALRAI's corporate property)
strictly call for the filing of a derivative suit, and not an individual suit
which respondents filed.
Individual suits are filed when the cause of action belongs to the
stockholder personally, and not to the stockholders as a group, or to the
corporation, e.g. denial of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders,
such as when the rights violated belong to preferred stockholders, a class
or representative suit may be filed to protect the stockholders in the
group.78chanrobleslaw
88 | P a g e
A derivative suit, on the other hand, is one which is instituted by a
shareholder or a member of a corporation, for and in behalf of the
corporation for its protection from acts committed by directors, trustees,
corporate officers, and even third persons.79 The whole purpose of the
law authorizing a derivative suit is to allow the stockholders/members to
enforce rights which are derivative (secondary) in nature, i.e., to enforce
a corporate cause of action.80chanrobleslaw
The nature of the action, as well as which court or body has jurisdiction
over it, is determined based on the allegations contained in the complaint
of the plaintiff, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein.81chanrobleslaw
In this case, the complaint alleged, thus:
FIRST CAUSE OF ACTION
9. Sometime in 2001, Complainants accidentally discovered that portions
of the aforementioned donated lands were partially distributed by the
Officers of said association, AMONG THEMSELVES, without knowledge
of its members.
xxx
11. Then there was illegal partial distribution of the donated lands. Not
only the President and Secretary of the Association, but also some
personalities who are not members of the association and who
themselves own big tracts of land, are the recipients of the donated
lands, which acts are contrary to the clear intents as indicated in the deed
of donation. x x x82
In the same complaint, respondents prayed .for the following reliefs,
among others, to wit:
chanRoblesvirtualLawlibrary
a) An Order for a writ of PRELIMINARY PROHIBITORY MANDATORY
INJUNCTION to stop the Defendants from disposing the donated lands to
the detriment of the beneficiary-members of the Association[.]
xxx
c) To cease and desist from selling donated lands subject of this case
and to annul the titles transferred x x x.
d) To annul the Land Titles fraudulently and directly transferred from the
Dacudao in the names of Defendants Javonillo, Armentano, Romeo de la
Cruz and Alcantara, and subsequently to defendant Lily Loy in the name
of Agdao Landless Associatidn.83
In a strict sense, the first cause of action, and:the reliefs sought, should
have been brought through a derivative suit. The first cause of action
pertains to the corporate right of ALRAI involving its corporate properties
which it owned by virtue of the Deeds of Donation. In derivative suits, the
real party-in-interest is the corporation, and the suing stockholder is a
mere nominal party.84 A derivative suit, therefore, concerns "a wrong to
the corporation itself."85chanrobleslaw
However, we liberally treat this case (in relation to the cause of action
pertaining to ALRAI's corporate properties) as one pursued by the
corporation itself, for the following reasons.
First, the court a quo has jurisdiction to hear and decide this controversy.
Republic Act No. 8799,86 in relation to Section 5 of Presidential Decree
No. 902-A,87 vests the court a quo with original and exclusive jurisdiction
to hear and decide cases involving:
chanRoblesvirtualLawlibrary
Sec. 5. x x x
(a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partnership, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or of the stockholders, partners, members of associations
or organizations registered with the Commission.
89 | P a g e
Second, we note that petitioners did not object to the institution of the
case (on the ground that a derivative suit should have been lodged
instead of an individual suit) in any of the proceedings before the court a
quo or before the CA.88chanrobleslaw
Third, a reading of the complaint (in relation to the cause of action
pertaining to ALRAI's corporate properties) shows that respondents do
not pray for reliefs for their personal benefit; but in fact, for the benefit of
the ALRAI, to wit:
chanRoblesvirtualLawlibrary
c) To cease and desist from selling donated lands subject of this case
and to annul the titles transferred to Armando Javonillo, Ma. Acelita
Armentano, Romeo de Ia Cruz, Asuncion Alcantara and Lily Loy x x x.
d) To annul the Land Titles fraudulently and directly transferred from the
(sic) Dacudao in the names of Defendants Javonillo, Armentano, Romeo
de la Cruz and Alcantara, and subsequently to Defendant Lily Loy in the
name of Agdao Landless Assiociation.89
The reliefs sought show that the complaint was filed ultimately to curb the
alleged mismanagement of ALRAI's corporate properties. We note that
the danger sought to be avoided in Evangelista v. Santos90 does not exist
in this case. In Santos, plaintiff stockholders sought damages against the
principal officer of the corporation, alleging that the officer's
mismanagement of the affairs and assets of the corporation brought
about the loss of the value of its stocks. In ruling against the plaintiff-
stockholders, this Court held that "[t]he stockholders may not directly
claim those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation x x x."91 More, in Santos,
if only the case was brought before the proper venue, this Court added,
"we note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a
mere change in the prayer."92chanrobleslaw
In this case, the reliefs sought do not entail the premature distribution of
corporate assets. On the contrary, the reliefs seek to preserve them for
the corporate interest of ALRAI. Clearly then, any benefit that may be
recovered is accounted for, not in favor of respondents, but for the
corporation, who is the real party-in-interest Therefore, the occasion for
the strict application of the rule that a derivative suit should be brought in
order to protect and vindicate the interest of the corporation does not
obtain under the circumstances of this case.
Commart (Phils.), Inc. v. Securities and Exchange Commission (SEC)93
upholds the same principle. In that case, the chairman and board of
directors of Commart were sued for diverting into their private accounts
amounts due to Commart as commissions. Respondents argued that the
Hearing Panel of the SEC should dismiss the case·on the ground that it
has no jurisdiction over the matter because the case is not a derivative
suit The Hearing Panel denied the motion, and was affirmed by the SEC.
Upon appeal, this Court affirmed the decision of the SEC, to wit:
chanRoblesvirtualLawlibrary
The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9
under First Cause of Action, readily shows that it avers the diversion of
corporate income into the private bank accounts of petitioner x x x and
his wife. Likewise, the principal relief prayed for in the complaint is the
recovery of a sum of money in favor of the corporation. This being the
case, the complaint is definitely a derivative suit. xxx
xxx
In any case, the suit is for the benefit of Commart itself, for a judgment in
favor of the complainants will necessarily mean recovery by the
corporation of the US$2.5 million alleged to have been diverted from its
coffers to the private bank accounts of its top managers and directors.
Thus, the prayer in the Amended Complaint is for judgment ordering
respondents x x x, "to account for and to, turn over or deliver to the
Corporation" the aforesaid sum, with legal interest, and "ordering all the
respondents, as members of the Board of Directors to take such remedial
steps as would protect the corporation from further depredation of the
funds and property."94
Fourth, based on the records, we find that there is substantial compliance
with the requirements of a derivative suit, to wit:
chanRoblesvirtualLawlibrary
90 | P a g e
a) [T]he party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not being
material;
b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and cralawlawlibrary
c) [T]he cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.95
Here, the court a quo found that respondents are bona fide members of
ALRAI.96 As for the second requisite, respondents also have tried to
demand appropriate relief within the corporation, but the demand was
unheeded. In their Memorandum before the CA, respondents alleged,
thus:
chanRoblesvirtualLawlibrary
4.18 The occurrence of the series of distressing revelation prompted
Respondents to confront Defendant Armentano on the accounting of all
payments made including the justification for the illegal distribution of the
Donated Land to four persons mentioned in preceding paragraph (4.12)
of this memorandum. Unfortunately, Petitioner Armentano merely
reasoned their (referring to the four persons) right to claim ownership of
the land as compensation for their service and attorney's fees;
4.19 Anxious of the plan of action taken by the Respondents against the
Petitioners, the latter started harassing the unschooled Respondents by
unduly threatening them. Respondents simply wanted the land due them,
an accounting of the finances of the Association and justification of the
illegal disposition of the Donated Land which was donated for the
landless members of the Association;
4.20 As a consequence, Petitioners on their own, with grave abuse of
power and in violation of the Constitution and By-Laws of the Association
maliciously expelled the Respondents particularly those persistently
inquisitive about Petitioners' moves and acts which only emphasized their
practice of upholding the MOB RULE by presenting solicited signatures of
alleged members and non-members written on a scrap of paper
signifying confirmation of the ouster (sic) members. x x x 97
We note that respondents' demand on Armentano substantially complies
with the second requirement. While it is true that the complaining
stockholder must show that he has exhausted all the means within his
reach to attain within the corporation the redress for his grievances,
demand is unnecessary if the exercise will result in futility.98 Here, after
respondents demanded Armentano to justify the transfer of ALRAI's
properties to the individual petitioners, respondents were expelled from
the corporation, which termination we have already ruled as invalid. To
our mind, the threat of expulsion against respondents is sufficient to
forestall any expectation of further demand for relief from petitioners.
Ultimately, to make an effort to demand redress within the corporation will
only result in futility, rendering the exhaustion of other remedies
unnecessary.
Finally, the third requirement for the institution of a derivative suit is
clearly complied with. As discussed in the previous paragraphs, the
cause of action and the reliefs sought ultimately redound to the benefit of
ALRAI. In this case, and as in a proper derivative suit, ALRAI is the party-
in-interest and respondents are merely nominal parties.
In view of the foregoing, and considering further the interest of justice,
and the length of time that this case has been pending, we liberally treat
this case as one pursued by the corporation to protect its corporate
rights. As the court a quo noted, this case "commenced [on] April 2,
2002, blossomed in a full-blown trial and ballooned into seven (7)
voluminous rollos."99chanrobleslaw
We now proceed to resolve the issue of the validity of the transfers of the
donated lots to Javonillo, Armentano, DelaCruz, Alcantara and Loy. We
agree with the CA in ruling that the TCTs issued in the names of
Javonillo, Armentano and Alcantara are void.100 We modify the ruling of
the CA insofar as we rule that the TCTs issued in the names of Dela Cruz
and Loy are also void.101chanrobleslaw
One of the primary purposes of ALRAI is the giving of assistance in
uplifting and promoting better living conditions to all members in particular
and the public in general.102 One of its objectives includes "to uplift and
promote better living condition, education, health and general welfare of
91 | P a g e
all members in particular and the public in general by providing its
members humble shelter and decent housing."103 Respondents maintain
that it is pursuant to this purpose and objective that the properties subject
of this case were donated to ALRAI.104chanrobleslaw
Section 36, paragraphs 7 and 11 of the Corporation Code provide:
chanRoblesvirtualLawlibrary
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and
capacity:ChanRoblesVirtualawlibrary
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution.
xxx
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation.105chanroblesvirtuallawlibrary
The Corporation Code therefore tells us that the power of a corporation to
validly grant or convey any of its real or personal properties is
circumscribed by its primary purpose. It is therefore important to
determine whether the grant or conveyance is pursuant to a legitimate
corporate purpose, or is at least reasonable and necessary to further its
purpose.
Based on the records of this case, we find that the transfers of the
corporate properties to Javonillo, Armentano, Dela Cruz, Alcantara and
Loy are bereft of any legitimate corporate purpose, nor were they shown
to be reasonably necessary to further ALRAI's purposes. This is
principally because, as respondents argue, petitioners "personally
benefitted themselves by allocating among themselves vast track of lands
at the dire expense of the landless general membership of the
Association."106chanrobleslaw
We take first the cases of Dela Cruz, Alcantara and Loy.
We disagree with theCA in ruling that the TCTs issued in the name of
Dela Cruz are valid. The transfer of property to him does not further the
corporate purpose of ALRAI. To justify the transfer to Dela Cruz,
petitioners merely allege that, "[o]n the other hand, the lots given by
ALRAI to Romeo de la Cruz were compensation for the financial
assistance he had been extending to ALRAI."107 Records of this case do
not bear any evidence to show how much Dela Cruz has extended to
ALRAI as financial assistance. The want of evidence to support this
allegation cannot allow a determination whether the amount of the
financial help that Dela Cruz extended to ALRAI is commensurate to the
amount of the property transferred to him. The lack of evidence on this
point is prejudicial to ALRAI because ALRAI had parted with its property
without any means by which to determine whether the transfer is fair and
reasonable under the circumstances.
The same is true with the transfer of properties to Alcantara. Petitioners
allege that Alcantara's husband, Atty. Pedro Alcantara, "handled all the
legal work both before the Regional Trial Court in Davao City (Civil Case
No. 16192) and the Court of Appeals in Manila (CA GR No. 13744). He
agreed to render his services although he was being paid intermittently,
with just small amounts, in the hope that he will be compensated when
ALRAI triumphs in the litigation."108 Petitioners thus claim that "[b]ecause
of the legal services of her husband, who is now deceased, petitioner
Alcantara was given by ALRAI two (2) lots x x x."109chanrobleslaw
Petitioners admit that Atty. Pedro Alcantara represented ALRAI as
counsel on part contingency basis.110 In their Memorandum before the
court a quo, respondents alleged that, "[i]n fact, Complainants have duly
paid Atty. Alcantara's legal fees as evidence (sic) by corresponding
receipts issued by the receiving Officer of the Association." 111 The
aforementioned receipts112 show that Atty. Pedro Alcantara had already
been paid the total amount of P16,845.00.
In Rayos v. Hernandez,113 we held that a contingent fee arrangement is
valid in this jurisdiction. It is generally recognized as valid and binding,
but must be laid down in an express contract. In the same case, we have
92 | P a g e
identified the circumstances to be considered in determining the
reasonableness of a claim for attorney's fees as follows: (1) the amount
and character of the service rendered; (2) labor, time, and trouble
involved; (3) the nature and importance of the litigation or business in
which the services were rendered; (4) the responsibility imposed; (5) the
amount of money or the value of the property affected by the controversy
or involved in the employment; (6) the skill and experience called for in
the performance of the services; (7) the professional character and social
standing of the attorney; (8) the results secured; (9) whether the fee is
absolute or contingent, it being recognized that an attorney may properly
charge a much larger fee when it is contingent than when it is not; and
(10) the financial capacity and economic status of the client have to be
taken into account in fixing the reasonableness of the
fee.114chanrobleslaw
In this case however, petitioners did not substantiate the extent of the
services that Atty. Pedro Alcantara rendered for ALRAL In fact, no
engagement or retainer contract was ever presented to prove the terms
of their agreement. Petitioners did not also present evidence as to the
value of the ALRAI properties at the time of transfer to Alcantara. There is
therefore no proof that the amount of the properties transferred to
Alcantara, in addition to the legal fees he received, is commensurate (as
compensation) to the reasonable value of his legal services. Using the
guidelines set forth in Rayos, absent proof, there is no basis to determine
whether the transfer of the property to Alcantara is reasonable under the
circumstances.115chanrobleslaw
The importance of this doctrine in Rayos is emphasized in the Canons of
Professional Ethics116 and the Rules of Court.117 In both, the overriding
consideration is the reasonableness of the terms of the contingent fee
agreement, so much so that the grant of the contingent fee is subject to
the supervision of the court.118chanrobleslaw
Spouses Cadavedo v. Lacaya119 further illustrates this principle. In that
case, this Court was confronted with the issue of whether the contingent
attorney's fees consisting of one-half of the property that was subject of
litigation was valid and reasonable. This Court ruled that the attorney's
fee is excessive and unconscionable, and is therefore void. The Court
said that as "matters then stood, [there] was not a sufficient reason to
justify a large fee in the absence of any showing that special skills and
additional work had been involved."120 The Court also noted that Spouses
Cadavedo and Atty. Lacaya already made arrangements for the cost and
expenses for the cases handled.121chanrobleslaw
Similarly in this case, there is no proof that special skills and additional
work have been put in by Atty. Pedro Alcantara. Further, as adverted to in
previous paragraphs, receipts show that intermittent payments as legal
fees have already been paid to him. We also note that in this case, not
only one-half of a property was transferred to Alcantara as compensation;
but two whole parcels of land - one with more or less 400 square meters
(TCT No. 41366), and the other with more or less 395 square meters
(TCT No. 41367). 122 The amount of fee contracted for, standing alone
and unexplained would be sufficient to show that an unfair advantage had
been taken of the client, or that a legal fraud had been perpetrated on
him.123chanrobleslaw
Consequently, we also find that Alcantara's subsequent sale to Loy is not
valid. Alcantara cannot sell the property, over which she did not have the
right to own, in the first place. More, based on the records, the court a
quo had already made a finding that Loy is guilty of bad faith as to render
her purchase of the property from Alcantara void. 124chanrobleslaw
We likewise find that there is failure to show any legitimate corporate
purpose in the transfer of ALRAI's corporate properties to Javonillo and
Armentano.
The Board Resolution125 confirming the transfer of ALRAI's corporate
properties to Javonillo and Armentano merely read, "[t]hat the herein
irrevocable confirmation is made in recognition of, and gratitude for the
outstanding services rendered by x x x Mr. Armando Javonillo, our
tireless President and Mrs. Acelita Armentano, our tactful, courageous,
and equally tireless Secretary, without whose efforts and sacrifices to
acquire a portion of the realty of Dacudao & Sons, Inc., would not have
been attained."126 In their Memorandum, petitioners also alleged that
"[t]he most difficult part of their (Javonillo and Armentano) job was to
raise money to meet expenses. x x x It was very difficult for petitioners
Javonillo and Armentano when they needed to pay P300,000.00 for realty
tax on the land donated by Dakudao and Sons, Inc. to ALRAI. It became
more difficult when the Bureau of Internal Revenue was demanding
P6,874,000.00 as donor's tax on the donated lands. Luckily, they were
able to make representation with the BIR to waive the
tax."127chanrobleslaw
93 | P a g e
These reasons cannot suffice to prove any legitimate corporate purpose
in the transfer of the properties to Javonillo and Armentano. For one,
petitioners cannot argue that the properties transferred to them will serve
as reimbursements of the amounts they advanced for ALRAL There is no
evidence to show that they indeed paid the realty tax on the donated
lands. Neither did petitioners present any proof of actual disbursements
they incurred whenever Javonillo and Armentano allegedly helped Atty.
Pedro Alcantara in handling the cases involving ALRAI.128 Like in the
cases of Dela Cruz and Alcantara, absent proof, there was no basis by
which it could have been determined whether the transfer of properties to
Javonillo and Armentano was reasonable under the circumstances at that
time. Second, petitioners cannot argue that the properties are transferred
as compensatioh for Javonillo. It is well settled that directors of
corporations presumptively serve without compensation; so that while the
directors, in assigning themselves additional duties, act within their
power, they nonetheless act in excess of their authority by voting for
themselves compensation for such additional duties.129 Even then, aside
from the claim of petitioners, there is no showing that Javonillo rendered
extraordinary or unusual services to ALRAI.
The lack of legitimate corporate purpose is even more emphasized when
Javonillo and Armentano, as a director and an officer of ALRAI,
respectively, violated the fiduciary nature130 of their positions in the
corporation.
Section 32 of the Corporation Code provides, thus:
chanRoblesvirtualLawlibrary
Sec. 32. Dealings of directors, trustees or officers with the corporation. —
A contract of the corporation with one or more of its directors or trustees
or officers is voidable, at the option of such corporation, unless all of the
following conditions are present:
chanRoblesvirtualLawlibrary1. That the presence of such director or
trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized
by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph
is absent, in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of at least two
thirds (2/3) of the members in a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract
is fair and reasonable under the circumstances.
Being the corporation's agents and therefore, entrusted with the
management of its affairs, the directors or trustees and other officers of a
corporation occupy a fiduciary relation towards it, and cannot be allowed
to contract with the corporation, directly or indirectly, or to sell property to
it, or purchase property from it, where they act both for the corporation
and for themselves.131 One situation where a director may gain undue
advantage over his corporation is when he enters into a contract with the
latter. 132chanrobleslaw
Here, we note that Javonillo, as a director, signed the Board
Resolutions133 confirming the transfer of the corporate properties to
himself, and to Armentano. Petitioners cannot argue that the transfer of
the corporate properties to them is valid by virtue of the Resolution134 by
the general membership of ALRAI confirming the transfer for three
reasons.
First, as cited, Section 32 requires that the contract should be ratified by
a vote representing at least two-thirds of the members in a meeting called
for the purpose. Records of this case do not show whether the Resolution
was indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the
persons who voted in the Resolution. They argue that, "from the alleged
134 signatures, 24 of which are non-members, 4 of which were signed
twice under different numbers, and 27 of which are apparently proxies
unequipped with the proper authorization. Obviously, on such alleged
general membership meeting the majority of the entire membership was
not attained."135chanrobleslaw
Second, there is also no showing that there was full disclosure of the
adverse interest of the directors involved when the Resolution was
94 | P a g e
approved. Full disclosure is required under the aforecited Section 32 of
the Corporation Code.136chanrobleslaw
Third, Section 32 requires that the contract be fair and reasonable under
the circumstances. As previously discussed, we find that the transfer of
the corporate properties to the individual petitioners is not fair and
reasonable for (1) want of legitimate corporate purpose, and for (2) the
breach of the fiduciary nature of the positions held by Javonillo and
Armentano. Lacking any of these (full disclosure and a showing that the
contract is fair and reasonable), ratification by the two-thirds vote would
be of no avail.137chanrobleslaw
In view of the foregoing, we rule that the transfers of ALRAI's corporate
properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy are
void. We affirm the finding of the court a quo when it ruled that "[n]o proof
was shown to justify the transfer of the titles, hence, said transfer should
be annulled."138chanrobleslaw
WHEREFORE, in view of the foregoing, the petitions for review on
certiorari in G.R. Nos. 188642 & 189425 and in G.R. Nos. 188888-89 are
PARTIALLY GRANTED. The Decision of the CA dated November 24,
2008 and its Resolution dated June 19, 2009 ruling that respondents are
reinstated as members of ALRAI are hereby AFFIRMED. The Decision of
theCA dated November 24, 2008 and its Resolution dated June 19, 2009
are MODIFIED as follows:
chanRoblesvirtualLawlibraryThe following Transfer Certificates of Title
are VOID:ChanRoblesVirtualawlibrary
(1) TCT Nos. T-322962 and T-322963 in the name of Armando Javonillo;
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita
Armentano;
(3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the name
of Romeo Dela Cruz;
(4) TCT No. T-338403 in the name of Lily Loy; and
(5) TCT No. T-322971 in the name of Asuncion Alcantara.
SO ORDERED.chanRoblesvirtualLawlibrary
 SECOND DIVISION
January 11, 2016
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,
vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
Acts of an officer that are not authorized by the board of directors/trustees
do not bind the corporation unless the corporation ratifies the acts or holds
the officer out as a person with authority to transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals'
December 17, 2009 Decision2 and December 20, 2010 Resolution.3 The
Court of Appeals reversed the Cagayan De Oro City trial court’s and the
Iligan City trial court’s Decisions to nullify mortgage contracts involving
University of Mindanao’s properties.4
University of Mindanao is an educational institution. For the year 1982, its
Board of Trustees was chaired by Guillermo B. Torres. His wife, Dolores
P. Torres, sat as University of Mindanao’s Assistant Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and
operated two (2) thrift banks: (1) First Iligan Savings & Loan Association,
Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI).
Guillermo B. Torres chaired both thrift banks. He acted as FISLAI’s
President, while his wife, Dolores P. Torres, acted as DSLAI’s President
and FISLAI’s Treasurer.6
Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas issued a
P1.9 million standby emergency credit to FISLAI. The release of standby
emergency credit was evidenced by three (3) promissory notes dated
February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of
P500,000.00, P600,000.00, and P800,000.00, respectively. All these
promissory notes were signed by Guillermo B. Torres, and were co-signed
95 | P a g e
by either his wife, Dolores P. Torres, or FISLAI’s Special Assistant to the
President, Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanao’s Vice President for Finance,
Saturnino Petalcorin, executed a deed of real estate mortgage over
University of Mindanao’s property in Cagayan de Oro City (covered by
Transfer Certificate of Title No. T-14345) in favor of Bangko Sentral ng
Pilipinas.8 "The mortgage served as security for FISLAI’s P1.9 Million
loan[.]"9 It was allegedly executed on University of Mindanao’s behalf.10
As proof of his authority to execute a real estate mortgage for University of
Mindanao, Saturnino Petalcorin showed a Secretary’s Certificate signed
on April 13, 1982 by University of Mindanao’s Corporate Secretary, Aurora
de Leon.11 The Secretary’s Certificate stated:
That at the regular meeting of the Board of Trustees of the aforesaid
corporation [University of Mindanao] duly convened on March 30, 1982, at
which a quorum was present, the following resolution was unanimously
adopted:
"Resolved that the University of Mindanao, Inc. be
and is hereby authorized, to mortgage real estate
properties with the Central Bank of the Philippines
to serve as security for the credit facility of First
Iligan Savings and Loan Association, hereby
authorizing the President and/or Vice-president
for Finance, Saturnino R. Petalcorin of the
University of Mindanao, Inc. to sign, execute and
deliver the covering mortgage document or any
other documents which may be proper[l]y
required."12
The Secretary’s Certificate was supported by an excerpt from the minutes
of the January 19, 1982 alleged meeting of University of Mindanao’s Board
of Trustees. The excerpt was certified by Aurora de Leon on March 13,
1982 to be a true copy of University of Mindanao’s records on file. 13 The
excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-
President for Finance, to represent the University of Mindanao to transact,
transfer, convey, lease, mortgage, or otherwise hypothecate any or all of
the following properties situated at Cagayan de Oro and Iligan City and
authorizing further Mr. Petalcorin to sign any or all documents relative
thereto:
1. A parcel of land situated at Cagayan de Oro
City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-
14345 of the Registry of Deeds of Cagayan de
Oro City;
2. A parcel of land situated at Iligan City, covered
and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15696 (a.t.) of
the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered
and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of
the Registry of Deeds of Iligan City.14
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko
Sentral ng Pilipinas was annotated on the certificate of title of the Cagayan
de Oro City property (Transfer Certificate of Title No. 14345) on June 25,
1982. Aurora de Leon’s certification was also annotated on the Cagayan
de Oro City property’s certificate of title (Transfer Certificate of Title No.
14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an
additional loan of P620,700.00. Guillermo B. Torres and Edmundo Ramos
executed a promissory note on October 21, 1982 to cover that amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed of real
estate mortgage, allegedly on behalf of University of Mindanao, over its
two properties in Iligan City.1âwphi1 This mortgage served as additional
security for FISLAI’s loans. The two Iligan City properties were covered by
Transfer Certificates of Title Nos. T-15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the
Iligan City properties and Aurora de Leon’s certification were annotated on
Transfer Certificates of Title Nos. T-15696 and T-15697.18 On January 18,
96 | P a g e
1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City
properties was also annotated on the tax declarations covering the Iligan
City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI
on May 27, 1983 and on August 20, 1984 in the amounts of P1,633,900.00
and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines
entered into a Memorandum of Agreement intended to rehabilitate the thrift
banks, which had been suffering from their depositors’ heavy withdrawals.
Among the terms of the agreement was the merger of FISLAI and DSLAI,
with DSLAI as the surviving corporation. DSLAI later became known as
Mindanao Savings and Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May 24,
1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University
of Mindanao, informing it that the bank would foreclose its properties if
MSLAI’s total outstanding obligation of P12,534,907.73 remained
unpaid.24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter, University
of Mindanao, through its Vice President for Accounting, Gloria E. Detoya,
denied that University of Mindanao’s properties were mortgaged. It also
denied having received any loan proceeds from Bangko Sentral ng
Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for
nullification and cancellation of mortgage. One Complaint was filed before
the Regional Trial Court of Cagayan de Oro City, and the other Complaint
was filed before the Regional Trial Court of Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain any
loan from Bangko Sentral ng Pilipinas. It also did not receive any loan
proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon’s certification was
anomalous. It never authorized Saturnino Petalcorin to execute real estate
mortgage contracts involving its properties to secure FISLAI’s debts. It
never ratified the execution of the mortgage contracts. Moreover, as an
educational institution, it cannot mortgage its properties to secure another
person’s debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City
rendered a Decision in favor of University of Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of plaintiff and against defendants:
1. DECLARING the real estate mortgage
Saturnino R. Petalcorin executed in favor of
BANGKO SENTRAL NG PILIPINAS involving Lot
421-A located in Cagayan de Oro City with an
area of 482 square meters covered by TCT No. T-
14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan
de Oro City to cancel Entry No. 9951 and Entry
No. 9952 annotated at the back of said TCT No.
T-14345, Registry of Deeds of Cagayan de Oro
City;
Prayer for attorney’s fee [sic] is hereby denied there being no proof that in
demanding payment of the emergency loan, defendant BANGKO
SENTRAL NG PILIPINAS was motivated by evident bad faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there was no
board resolution giving Saturnino Petalcorin authority to execute mortgage
contracts on behalf of University of Mindanao. The Cagayan de Oro City
trial court gave weight to Aurora de Leon’s testimony that University of
Mindanao’s Board of Trustees did not issue a board resolution that would
support the Secretary’s Certificate she issued. She testified that she signed
the Secretary’s Certificate only upon Guillermo B. Torres’ orders.31
Saturnino Petalcorin testified that he had no authority to execute a
mortgage contract on University of Mindanao’s behalf. He merely executed
the contract because of Guillermo B. Torres’ request.32
97 | P a g e
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted that
there was no board resolution giving Saturnino Petalcorin authority to
execute mortgage contracts on behalf of University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino
Petalcorin was not authorized to execute mortgage contracts for University
of Mindanao. Hence, the mortgage of University of Mindanao’s Cagayan
de Oro City property was unenforceable. Saturnino Petalcorin’s
unauthorized acts should be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on
December 7, 2001 in favor of University of Mindanao.35 The dispositive
portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiff and against the defendants, as follows:
1. Nullifying and canceling [sic] the subject Deed of Real
Estate Mortgage dated November 5, 1982 for being
unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of Iligan
City to cancel the entries on TCT No. T-15696 and TCT
No. T-15697 with respect to the aforesaid Deed of Real
Estate Mortgage dated November 5, 1982 and all other
entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to
return the owner’s duplicate copies of TCT No. T-15696
and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings and
the [a]uction [s]ale conducted by defendant Atty. Gerardo
Paguio, Jr. on October 8, 1999 including all the acts
subsequent thereto and ordering the Register of Deeds of
Iligan City not to register any Certificate of Sale pursuant
to the said auction sale nor make any transfer of the
corresponding titles, and if already registered and
transferred, to cancel all the said entries in TCT No. T-
15696 and TCT No. T-15697 and/or cancel the
corresponding new TCTs in the name of defendant
Bangko Sentral ng Pilipinas;
 5. Making the Preliminary Injunction per Order of this
Court dated October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued by
Aurora de Leon was fictitious37 and irregular for being unnumbered.38 It
also did not specify the identity, description, or location of the mortgaged
properties.39
The Iligan City trial court gave credence to Aurora de Leon’s testimony that
the University of Mindanao’s Board of Trustees did not take up the
documents in its meetings. Saturnino Petalcorin corroborated her
testimony.40
The Iligan City trial court ruled that the lack of a board resolution
authorizing Saturnino Petalcorin to execute documents of mortgage on
behalf of University of Mindanao made the real estate mortgage contract
unenforceable under Article 140341 of the Civil Code.42 The mortgage
contract and the subsequent acts of foreclosure and auction sale were void
because the mortgage contract was executed without University of
Mindanao’s authority.43
The Iligan City trial court also ruled that the annotations on the titles of
University of Mindanao’s properties do not operate as notice to the
University because annotations only bind third parties and not owners. 44
Further, Bangko Sentral ng Pilipinas’ right to foreclose the University of
Mindanao’s properties had already prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the
Cagayan de Oro City and the Iligan City trial courts.46
After consolidating both cases, the Court of Appeals issued a Decision on
December 17, 2009 in favor of Bangko Sentral ng Pilipinas, thus:
FOR THE REASONS STATED, the Decision dated 23 November 2001 of
the Regional Trial Court of Cagayan de Oro City, Branch 24 in Civil Case
No. 99-414 and the Decision dated 7 December 2001 of the Regional Trial
Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and
SET ASIDE. The Complaints in both cases before the trial courts are
DISMISSED. The Writ of Preliminary Injunction issued by the Regional
Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and
SET ASIDE.
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SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM
Board of Trustees actually passed a Board Resolution authorizing
Petalcorin to mortgage the subject real properties,"48 Aurora de Leon’s
Secretary’s Certificate "clothed Petalcorin with apparent and ostensible
authority to execute the mortgage deed on its behalf[.]"49 Bangko Sentral
ng Pilipinas merely relied in good faith on the Secretary’s Certificate. 50
University of Mindanao is estopped from denying Saturnino Petalcorin’s
authority.51
Moreover, the Secretary’s Certificate was notarized. This meant that it
enjoyed the presumption of regularity as to the truth of its statements and
authenticity of the signatures.52 Thus, "BSP cannot be faulted for relying
on the [Secretary’s Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao’s
officers, Guillermo B. Torres and his wife, Dolores P. Torres, signed the
promissory notes, University of Mindanao was presumed to have
knowledge of the transaction.54 Knowledge of an officer in relation to
matters within the scope of his or her authority is notice to the corporation. 55
The annotations on University of Mindanao’s certificates of title also
operate as constructive notice to it that its properties were mortgaged.56 Its
failure to disown the mortgages for more than a decade was implied
ratification.57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’ action
for foreclosure had not yet prescribed because the due date extensions
that Bangko Sentral ng Pilipinas granted to FISLAI extended the due date
of payment to five (5) years from February 8, 1985. 58 The bank’s demand
letter to Dolores P. Torres on June 18, 1999 also interrupted the
prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for
Reconsideration60 and Motion for Partial Reconsideration respectively of
the Court of Appeals’ Decision. On December 20, 2010, the Court of
Appeals issued a Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for
extension of time to file comment/opposition and
 NOTE the Comment on the appellee’s Motion for
Reconsideration it subsequently filed on June 23,
2010;
2. GRANT the appellee’s three (3) motions for
extension of time to file comment/opposition and
NOTE the Comment on the appellant’s Motion for
Partial Reconsideration it filed on July 26, 2010;
3. NOTE the appellant’s "Motion for Leave to File
Attached Reply Dated August 11, 2010" filed on
August 13, 2010 and DENY the attached "Reply
to Comment Dated July 26, 2010";
4. DENY the appellee’s Motion for
Reconsideration as it does not offer any
arguments sufficiently meritorious to warrant
modification or reversal of the Court’s 17
December 2009 Decision. The Court finds that
there is no compelling reason to reconsider its
ruling; and
5. GRANT the appellant’s Motion for Partial
Reconsideration, as the Court finds it meritorious,
considering that it ruled in its Decision that "BSP
can still foreclose on the UM’s real property in
Cagayan de Oro City covered by TCT No. T-
14345." It then follows that the injunctive writ
issued by the RTC of Cagayan de Oro City,
Branch 24 must be lifted. The Court’s 17
December 2009 Decision is accordingly
MODIFIED and AMENDED to read as follows:
"FOR THE REASONS STATED, the
Decision dated 23 November 2001 of the
Regional Trial Court of Cagayan de Oro
City, Branch 24 in Civil Case No. 99-414
and the Decision dated 7 December 2001
of the Regional Trial Court of Iligan City,
Branch 1 in Civil Case No. 4790 are
REVERSED and SET ASIDE. The
Complaints in both cases before the trial
courts are DISMISSED. The Writs of
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Preliminary Injunction issued by the
Regional Trial Court of Iligan City, Branch
1 in Civil Case No. 4790 and in the
Regional Trial Court of Cagayan de Oro
City, Branch 24 in Civil Case No. 99-414
are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to foreclose
the mortgaged properties had already prescribed; and
Second, whether petitioner University of Mindanao is bound by the real
estate mortgage contracts executed by Saturnino Petalcorin.
We grant the Petition.
I
Petitioner argues that respondent’s action to foreclose its mortgaged
properties had already prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of
time.62 Its purpose is "to protect the diligent and vigilant, not those who
sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years from the
day they may be brought.64 Actions on mortgages may be brought not upon
the execution of the mortgage contract but upon default in payment of the
obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the obligation
on due date and, subject to exceptions, after demands for payment were
made by the creditor. Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:
(1) When the obligation or the law expressly so
declare; or
(2) When from the nature and the circumstances
of the obligation it appears that the designation of
the time when the thing is to be delivered or the
service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the
obligor has rendered it beyond his power to
perform.
Article 1193 of the Civil Code provides that an obligation is demandable
only upon due date. It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon
arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation
is conditional, and it shall be regulated by the rules of the preceding
Section.
In other words, as a general rule, a person defaults and prescriptive period
for action runs when (1) the obligation becomes due and demandable; and
(2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a
contract nor does the prescriptive period necessarily run on the date when
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the loan becomes due and demandable.66 Prescriptive period runs from
the date of demand,67 subject to certain exceptions.
In other words, ten (10) years may lapse from the date of the execution of
contract, without barring a cause of action on the mortgage when there is
a gap between the period of execution of the contract and the due date or
between the due date and the demand date in cases when demand is
necessary.68
The mortgage contracts in this case were executed by Saturnino Petalcorin
in 1982. The maturity dates of FISLAI’s loans were repeatedly extended
until the loans became due and demandable only in 1990.69 Respondent
informed petitioner of its decision to foreclose its properties and demanded
payment in 1999.
The running of the prescriptive period of respondent’s action on the
mortgages did not start when it executed the mortgage contracts with
Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from 1990
when the loan became due, if the obligation was covered by the exceptions
under Article 1169 of the Civil Code; (2) or from 1999 when respondent
demanded payment, if the obligation was not covered by the exceptions
under Article 1169 of the Civil Code.
In either case, respondent’s Complaint with cause of action based on the
mortgage contract was filed well within the prescriptive period.
Given the termination of all traces of FISLAI’s existence, 70 demand may
have been rendered unnecessary under Article 1169(3) 71 of the Civil Code.
Granting that this is the case, respondent would have had ten (10) years
from due date in 1990 or until 2000 to institute an action on the mortgage
contract.
However, under Article 115572 of the Civil Code, prescription of actions
may be interrupted by (1) the filing of a court action; (2) a written
extrajudicial demand; and (3) the written acknowledgment of the debt by
the debtor.
Therefore, the running of the prescriptive period was interrupted when
respondent sent its demand letter to petitioner on June 18, 1999. This
eventually led to petitioner’s filing of its annulment of mortgage complaints
before the Regional Trial Courts of Iligan City and Cagayan De Oro City
on July 16, 1999.
Assuming that demand was necessary, respondent’s action was within the
ten (10)-year prescriptive period. Respondent demanded payment of the
loans in 1999 and filed an action in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra
vires. As an educational institution, it may not secure the loans of third
persons.73 Securing loans of third persons is not among the purposes for
which petitioner was established.74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon their
creation by their incorporators in accordance with law. Unlike natural
persons, they have no inherent powers. Third persons dealing with
corporations cannot assume that corporations have powers. It is up to
those persons dealing with corporations to determine their competence as
expressly defined by the law and their articles of incorporation. 75
A corporation may exercise its powers only within those definitions.
Corporate acts that are outside those express definitions under the law or
articles of incorporation or those "committed outside the object for which a
corporation is created"76 are ultra vires.
The only exception to this rule is when acts are necessary and incidental
to carry out a corporation’s purposes, and to the exercise of powers
conferred by the Corporation Code and under a corporation’s articles of
incorporation.77 This exception is specifically included in the general
powers of a corporation under Section 36 of the Corporation Code:
SEC. 36. Corporate powers and capacity.—Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of
time stated in the articles of incorporation and the
certificate of incorporation;
101 | P a g e
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance
with this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful
business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in its articles of incorporation. (Emphasis supplied)
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to
determine if a corporate act is in accordance with its purposes:
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.79 (Emphasis supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or colleges,
and/or university;
b. To acquire properties, real and/or personal, in
connection with the establishment and operation of such
college or colleges;
c. To do and perform the various and sundry acts and
things permitted by the laws of the Philippines unto
corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial
pursuits in line with educational program of the corporation
and to acquire all properties, real and personal[,]
necessary for the purposes[;]
e. To establish, operate, and/or acquire broadcasting and
television stations also in line with the educational
program of the corporation and for such other purposes as
the Board of Trustees may determine from time to time;
f. To undertake housing projects of faculty members and
employees, and to acquire real estates for this purpose;
g. To establish, conduct and operate and/or invest in
educational foundations; [As amended on December 15,
1965][;]
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h. To establish, conduct and operate housing and dental
schools, medical facilities and other related undertakings;
i. To invest in other corporations. [As amended on
December 9, 1998]. [Amended Articles of Incorporation of
the University of Mindanao, Inc. – the Petitioner].80
Petitioner does not have the power to mortgage its properties in order to
secure loans of other persons. As an educational institution, it is limited to
developing human capital through formal instruction. It is not a corporation
engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment and real
estate; establishing housing facilities for personnel and students; hiring a
concessionaire; and other activities that can be directly connected to the
operations and conduct of the education business may constitute the
necessary and incidental acts of an educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does not
appear to have even the remotest connection to the operations of petitioner
as an educational institution. Securing loans is not an adjunct of the
educational institution’s conduct of business.81 It does not appear that
securing third-party loans was necessary to maintain petitioner’s business
of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were
shown to be clearly within the corporation’s powers or were connected to
the corporation’s purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid
the donation given to the children of a deceased person who contributed
to the growth of the corporation.83 This court found that this donation was
within the broad scope of powers and purposes of the corporation to "aid
in any other manner any person . . . in which any interest is held by this
corporation or in the affairs or prosperity of which this corporation has a
lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this
court declared valid a rule by Twin Towers Condominium denying
delinquent members the right to use condominium facilities. 86 This court
ruled that the condominium’s power to promulgate rules on the use of
facilities and to enforce provisions of the Master Deed was clear in the
Condominium Act, Master Deed, and By-laws of the condominium.87
Moreover, the promulgation of such rule was "reasonably necessary" to
attain the purposes of the condominium project.88
This court has, in effect, created a presumption that corporate acts are
valid if, on their face, the acts were within the corporation’s powers or
purposes. This presumption was explained as early as in 1915 in Coleman
v. Hotel De France89 where this court ruled that contracts entered into by
corporations in the exercise of their incidental powers are not ultra vires. 90
Coleman involved a hotel’s cancellation of an employment contract it
executed with a gymnast. One of the hotel’s contentions was the supposed
ultra vires nature of the contract. It was executed outside its express and
implied powers under the articles of incorporation.91
In ruling in favor of the contract’s validity, this court considered the
incidental powers of the hotel to include the execution of employment
contracts with entertainers for the purpose of providing its guests
entertainment and increasing patronage.92
This court ruled that a contract executed by a corporation shall be
presumed valid if on its face its execution was not beyond the powers of
the corporation to do.93 Thus:
When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence of
proof to the contrary, be presumed to be valid. Corporations are presumed
to contract within their powers. The doctrine of ultra vires, when invoked
for or against a corporation, should not be allowed to prevail where it would
defeat the ends of justice or work a legal wrong.94
However, this should not be interpreted to mean that such presumption
applies to all cases, even when the act in question is on its face beyond
the corporation’s power to do or when the evidence contradicts the
presumption.
Presumptions are "inference[s] as to the existence of a fact not actually
known, arising from its usual connection with another which is known, or a
conjecture based on past experience as to what course human affairs
ordinarily take."95 Presumptions embody values and revealed behavioral
expectations under a given set of circumstances.
Presumptions may be conclusive96 or disputable.97
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Conclusive presumptions are presumptions that may not be overturned by
evidence, however strong the evidence is.98 They are made conclusive not
because there is an established uniformity in behavior whenever identified
circumstances arise. They are conclusive because they are declared as
such under the law or the rules. Rule 131, Section 2 of the Rules of Court
identifies two (2) conclusive presumptions:
SEC. 2. Conclusive presumptions.— The following are instances of
conclusive presumptions:
(a) Whenever 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;
(b) The tenant is not permitted to deny the title of his
landlord at the time of the commencement of the relation
of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that may be
overcome by contrary evidence.99 They are disputable in recognition of the
variability of human behavior. Presumptions are not always true. They may
be wrong under certain circumstances, and courts are expected to apply
them, keeping in mind the nuances of every experience that may render
the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance
must be based on the existence of certain facts on which they are meant
to operate. "[P]resumptions are not allegations, nor do they supply their
absence[.]"100 Presumptions are conclusions. They do not apply when
there are no facts or allegations to support them.
If the facts exist to set in motion the operation of a disputable presumption,
courts may accept the presumption. However, contrary evidence may be
presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut disputable
presumptions. Disputable presumptions apply only in the absence of
contrary evidence or explanations. This court explained in Philippine Agila
Satellite Inc. v. Usec. Trinidad-Lichauco:101
We do not doubt the existence of the presumptions of "good faith" or
"regular performance of official duty," yet these presumptions are
disputable and may be contradicted and overcome by other evidence.
Many civil actions are oriented towards overcoming any number of these
presumptions, and a cause of action can certainly be geared towards such
effect. The very purpose of trial is to allow a party to present evidence to
overcome the disputable presumptions involved. Otherwise, if trial is
deemed irrelevant or unnecessary, owing to the perceived indisputability
of the presumptions, the judicial exercise would be relegated to a mere
ascertainment of what presumptions apply in a given case, nothing more.
Consequently, the entire Rules of Court is rendered as excess verbiage,
save perhaps for the provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a
jurisprudential rule, no public officer could ever be sued for acts executed
beyond their official functions or authority, or for tortious conduct or
behavior, since such acts would "enjoy the presumption of good faith and
in the regular performance of official duty." Indeed, few civil actions of any
nature would ever reach the trial stage, if a case can be adjudicated by a
mere determination from the complaint or answer as to which legal
presumptions are applicable. For example, the presumption that a person
is innocent of a wrong is a disputable presumption on the same level as
that of the regular performance of official duty. A civil complaint for
damages necessarily alleges that the defendant committed a wrongful act
or omission that would serve as basis for the award of damages. With the
rationale of the Court of Appeals, such complaint can be dismissed upon
a motion to dismiss solely on the ground that the presumption is that a
person is innocent of a wrong.102 (Emphasis supplied, citations omitted)
In this case, the presumption that the execution of mortgage contracts was
within petitioner’s corporate powers does not apply. Securing third-party
loans is not connected to petitioner’s purposes as an educational
institution.
III
Respondent argues that petitioner’s act of mortgaging its properties to
guarantee FISLAI’s loans was consistent with petitioner’s business
interests, since petitioner was presumably a FISLAI shareholder whose
officers and shareholders interlock with FISLAI. Respondent points out that
petitioner and its key officers held substantial shares in MSLAI when
DSLAI and FISLAI merged. Therefore, it was safe to assume that when
the mortgages were executed in 1982, petitioner held substantial shares
in FISLAI.103
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Parties dealing with corporations cannot simply assume that their
transaction is within the corporate powers. The acts of a corporation are
still limited by its powers and purposes as provided in the law and its
articles of incorporation.
Acquiring shares in another corporation is not a means to create new
powers for the acquiring corporation. Being a shareholder of another
corporation does not automatically change the nature and purpose of a
corporation’s business. Appropriate amendments must be made either to
the law or the articles of incorporation before a corporation can validly
exercise powers outside those provided in law or the articles of
incorporation. In other words, without an amendment, what is ultra vires
before a corporation acquires shares in other corporations is still ultra vires
after such acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI,
DSLAI, or MSLAI, securing loans of third persons is still beyond petitioner’s
power to do. It is still inconsistent with its purposes under the law104 and its
articles of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans by
adverting to their interlocking directors and shareholders, respondent
disregards petitioner’s separate personality from its officers, shareholders,
and other juridical persons.
The separate personality of corporations means that they are "vest[ed]
[with] rights, powers, and attributes [of their own] as if they were natural
persons[.]"106 Their assets and liabilities are their own and not their
officers’, shareholders’, or another corporation’s. In the same vein, the
assets and liabilities of their officers and shareholders are not the
corporations’. Obligations incurred by corporations are not obligations of
their officers and shareholders. Obligations of officers and shareholders
are not obligations of corporations.107 In other words, corporate interests
are separate from the personal interests of the natural persons that
comprise corporations.
Corporations are given separate personalities to allow natural persons to
balance the risks of business as they accumulate capital. They are,
however, given limited competence as a means to protect the public from
fraudulent acts that may be committed using the separate juridical
personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an interest
in ensuring the viability of FISLAI by obtaining a loan from respondent and
securing it by whatever means. However, having interlocking officers and
stockholders with FISLAI does not mean that petitioner, as an educational
institution, is or must necessarily be interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its own
officers and shareholders but also from FISLAI, its interests as an
educational institution may not be consistent with FISLAI’s.
Petitioner and FISLAI have different constituencies. Petitioner’s
constituents comprise persons who have committed to developing skills
and acquiring knowledge in their chosen fields by availing the formal
instruction provided by petitioner. On the other hand, FISLAI is a thrift bank,
which constituencies comprise investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders,
their constituencies affect the means by which they can maintain their
existence. Their interests are congruent with sustaining their constituents’
needs because their existence depends on that. Petitioner can exist only if
it continues to provide for the kind and quality of instruction that is needed
by its constituents. Its operations and existence are placed at risk when
resources are used on activities that are not geared toward the attainment
of its purpose. Petitioner has no business in securing FISLAI, DSLAI, or
MSLAI’s loans. This activity is not compatible with its business of providing
quality instruction to its constituents.
Indeed, there are instances when we disregard the separate corporate
personalities of the corporation and its stockholders, directors, or officers.
This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the corporation
is being used to perpetrate fraud, illegalities, and injustices. 108 In Lanuza,
Jr. v. BF Corporation:109
Piercing the corporate veil is warranted when "[the separate personality of
a corporation] is used as a means to perpetrate fraud or an illegal act, or
as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues." It is also warranted in alter ego
cases "where a corporation is merely a farce since it is a 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."110
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These instances have not been shown in this case. There is no evidence
pointing to the possibility that petitioner used its separate personality to
defraud third persons or commit illegal acts. Neither is there evidence to
show that petitioner was merely a farce of a corporation. What has been
shown instead was that petitioner, too, had been victimized by fraudulent
and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we
accept respondent’s contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage
its properties on its behalf. There was no board resolution to that effect.
Thus, the mortgages executed by Saturnino Petalcorin were
unenforceable.111
The mortgage contracts executed in favor of respondent do not bind
petitioner. They were executed without authority from petitioner.
Petitioner must exercise its powers and conduct its business through its
Board of Trustees. Section 23 of the Corporation Code 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.
Being a juridical person, petitioner cannot conduct its business, make
decisions, or act in any manner without action from its Board of Trustees.
The Board of Trustees must act as a body in order to exercise corporate
powers. Individual trustees are not clothed with corporate powers just by
being a trustee. Hence, the individual trustee cannot bind the corporation
by himself or herself.
The corporation may, however, delegate through a board resolution its
corporate powers or functions to a representative, subject to limitations
under the law and the corporation’s articles of incorporation.112
The relationship between a corporation and its representatives is governed
by the general principles of agency.113 Article 1317 of the Civil Code
provides that there must be authority from the principal before anyone can
act in his or her name:
ART. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a
person—including those of the corporation’s directors, trustees,
shareholders, or officers—executed on behalf of the corporation are
generally not binding on the corporation.114
Contracts entered into in another’s name without authority or valid legal
representation are generally unenforceable. The Civil Code provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers[.]
The unenforceable status of contracts entered into by an unauthorized
person on behalf of another is based on the basic principle that contracts
must be consented to by both parties.115 There is no contract without
meeting of the minds as to the subject matter and cause of the obligations
created under the contract.116
Consent of a person cannot be presumed from representations of another,
especially if obligations will be incurred as a result. Thus, authority is
required to make actions made on his or her behalf binding on a person.
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Contracts entered into by persons without authority from the corporation
shall generally be considered ultra vires and unenforceable 117 against the
corporation.
Two trial courts118 found that the Secretary’s Certificate and the board
resolution were either non-existent or fictitious. The trial courts based their
findings on the testimony of the Corporate Secretary, Aurora de Leon
herself. She signed the Secretary’s Certificate and the excerpt of the
minutes of the alleged board meeting purporting to authorize Saturnino
Petalcorin to mortgage petitioner’s properties. There was no board meeting
to that effect. Guillermo B. Torres ordered the issuance of the Secretary’s
Certificate. Aurora de Leon’s testimony was corroborated by Saturnino
Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions,
recognized that "BSP failed to prove that the UM Board of Trustees actually
passed a Board Resolution authorizing Petalcorin to mortgage the subject
real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound
by the findings of fact of the trial courts and the Court of Appeals when
such findings are supported by evidence on record. 120 Hence, not having
the proper board resolution to authorize Saturnino Petalcorin to execute
the mortgage contracts for petitioner, the contracts he executed are
unenforceable against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who assented to
such unauthorized act121 and by the person who contracted in excess of
the limits of his or her authority without the corporation’s knowledge.122
V
Unauthorized acts that are merely beyond the powers of the corporation
under its articles of incorporation are not void ab initio.
In Pirovano, et al., this court explained that corporate acts may be ultra
vires but not void.123 Corporate acts may be capable of ratification:124
[A] distinction should be made between corporate acts or contracts which
are illegal and those which are merely ultra vires. The former contemplates
the doing of an act which is contrary to law, morals, or public order, or
contravene some rules of public policy or public duty, and are, like similar
transactions between individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance, ratification, or estoppel.
Mere ultra vires acts, on the other hand, or those which are not illegal and
void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.125
Thus, even though a person did not give another person authority to act
on his or her behalf, the action may be enforced against him or her if it is
shown that he or she ratified it or allowed the other person to act as if he
or she had full authority to do so. The Civil Code provides:
ART. 1910. The principal must comply with all the obligations which the
agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal
is solidarily liable with the agent if the former allowed the latter to act as
though he had full powers. (Emphasis supplied)
Ratification is a voluntary and deliberate confirmation or adoption of a
previous unauthorized act.126 It converts the unauthorized act of an agent
into an act of the principal.127 It cures the lack of consent at the time of the
execution of the contract entered into by the representative, making the
contract valid and enforceable.128 It is, in essence, consent belatedly given
through express or implied acts that are deemed a confirmation or waiver
of the right to impugn the unauthorized act.129 Ratification has the effect of
placing the principal in a position as if he or she signed the original contract.
In Board of Liquidators v. Heirs of M. Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a
corporation of an unauthorized act or contract by its officers or others
relates back to the time of the act or contract ratified, and is equivalent to
original authority;" and that "[t]he corporation and the other party to the
transaction are in precisely the same position as if the act or contract had
been authorized at the time." The language of one case is expressive: "The
adoption or ratification of a contract by a corporation is nothing more nor
less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority." 131
(Citations omitted)
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Implied ratification may take the form of silence, acquiescence, acts
consistent with approval of the act, or acceptance or retention of
benefits.132 However, silence, acquiescence, retention of benefits, and acts
that may be interpreted as approval of the act do not by themselves
constitute implied ratification. For an act to constitute an implied ratification,
there must be no acceptable explanation for the act other than that there
is an intention to adopt the act as his or her own.133 "[It] cannot be inferred
from acts that a principal has a right to do independently of the
unauthorized act of the agent."134
No act by petitioner can be interpreted as anything close to ratification. It
was not shown that it issued a resolution ratifying the execution of the
mortgage contracts. It was not shown that it received proceeds of the loans
secured by the mortgage contracts. There was also no showing that it
received any consideration for the execution of the mortgage contracts. It
even appears that petitioner was unaware of the mortgage contracts until
respondent notified it of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done. 135 Petitioner’s lack of
knowledge about the mortgage executed in its name precludes an
interpretation that there was any ratification on its part.
Respondent further argues that petitioner is presumed to have knowledge
of its transactions with respondent because its officers, the Spouses
Guillermo and Dolores Torres, participated in obtaining the loan.136
Indeed, a corporation, being a person created by mere fiction of law, can
act only through natural persons such as its directors, officers, agents, and
representatives. Hence, the general rule is that knowledge of an officer is
considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were
officers of both the thrift banks and petitioner, their knowledge of the
mortgage contracts cannot be considered as knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of the
corporation applies only when the officer is acting within the authority given
to him or her by the corporation. In Francisco v. Government Service
Insurance System:137
Knowledge of facts acquired or possessed by an officer or agent of a
corporation in the course of his employment, and in relation to matters
within the scope of his authority, is notice to the corporation, whether he
communicates such knowledge or not.138
The public should be able to rely on and be protected from the
representations of a corporate representative acting within the scope of his
or her authority. This is why an authorized officer’s knowledge is
considered knowledge of corporation. However, just as the public should
be able to rely on and be protected from corporate representations,
corporations should also be able to expect that they will not be bound by
unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation
through its authorized representatives. A corporation cannot be expected
to act or not act on a knowledge that had not been communicated to it
through an authorized representative. There can be no implied ratification
without actual communication. Knowledge of the existence of contract
must be brought to the corporation’s representative who has authority to
ratify it. Further, "the circumstances must be shown from which such
knowledge may be presumed."139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be
interpreted as knowledge of petitioner. Their knowledge was not obtained
as petitioner’s representatives. It was not shown that they were acting for
and within the authority given by petitioner when they acquired knowledge
of the loan transactions and the mortgages. The knowledge was obtained
in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Saturnino Petalcorin was clothed with the
authority to transact on behalf of petitioner, based on the board resolution
dated March 30, 1982 and Aurora de Leon’s notarized Secretary’s
Certificate.140 According to respondent, petitioner is bound by the
mortgage contracts executed by Saturnino Petalcorin. 141
This court has recognized presumed or apparent authority or capacity to
bind corporate representatives in instances when the corporation, through
its silence or other acts of recognition, allowed others to believe that
persons, through their usual exercise of corporate powers, were conferred
with authority to deal on the corporation’s behalf.142
The doctrine of apparent authority does not go into the question of the
corporation’s competence or power to do a particular act. It involves the
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question of whether the officer has the power or is clothed with the
appearance of having the power to act for the corporation. A finding that
there is apparent authority is not the same as a finding that the corporate
act in question is within the corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel. The
Civil Code provides:
ART. 1431. Through 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.
....
ART. 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate the
agency, knowing that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition because
we recognize that there is information asymmetry between third persons
who have little to no information as to what happens during corporate
meetings, and the corporate officers, directors, and representatives who
are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this
court held that the contract entered into by the corporation’s officer without
a board resolution was binding upon the corporation because it previously
allowed the officer to contract on its behalf despite the lack of board
resolution.145
In Francisco, this court ruled that Francisco’s proposal for redemption of
property was accepted by and binding upon the Government Service
Insurance System. This court did not appreciate the Government Service
Insurance System’s defense that since it was the Board Secretary and not
the General Manager who sent Francisco the acceptance telegram, it
could not be made binding upon the Government Service Insurance
System. It did not authorize the Board Secretary to sign for the General
Manager. This court appreciated the Government Service Insurance
System’s failure to disown the telegram sent by the Board Secretary and
its silence while it accepted all payments made by Francisco for the
redemption of property.146
There can be no apparent authority and the corporation cannot be
estopped from denying the binding affect of an act when there is no
evidence pointing to similar acts and other circumstances that can be
interpreted as the corporation holding out a representative as having
authority to contract on its behalf. In Advance Paper Corporation v. Arma
Traders Corporation,147 this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal did not
commit any acts or conduct which a third party knew and relied upon in
good faith as a result of the exercise of reasonable prudence. Moreover,
the agent’s acts or conduct must have produced a change of position to
the third party’s detriment.148 (Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot
be presumed based on a Secretary’s Certificate and excerpt from the
minutes of the alleged board meeting that were found to have been
simulated. These documents cannot be considered as the corporate acts
that held out Saturnino Petalcorin as petitioner’s authorized representative
for mortgage transactions. They were not supported by an actual board
meeting.149
VII
Respondent argues that it may rely on the Secretary’s Certificate issued
by Aurora de Leon because it was notarized.
The Secretary’s Certificate was void whether or not it was notarized.
Notarization creates a presumption of regularity and authenticity on the
document. This presumption may be rebutted by "strong, complete and
conclusive proof"150 to the contrary. While notarial acknowledgment
"attaches full faith and credit to the document concerned[,]"151 it does not
give the document its validity or binding effect. When there is evidence
showing that the document is invalid, the presumption of regularity or
authenticity is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the
purported signatory on a deed of sale was not as represented, despite
testimony from the notary public that the signatory appeared before him
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and signed the instrument.153 Apart from finding that there was forgery,154
this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one who
notarized the document and that Dionisio Z. Basilio appeared personally
before him and signed the instrument himself. However, he admitted that
he did not know Dionisio Z. Basilio personally to ascertain if the person
who signed the document was actually Dionisio Z. Basilio himself, or
another person who stood in his place. He could not even recall whether
the document had been executed in his office or not.
Thus, considering the testimonies of various witnesses and a comparison
of the signature in question with admittedly genuine signatures, the Court
is convinced that Dionisio Z. Basilio did not execute the questioned deed
of sale. Although the questioned deed of sale was a public document
having in its favor the presumption of regularity, such presumption was
adequately refuted by competent witnesses showing its forgery and the
Court’s own visual analysis of the document.155 (Emphasis supplied,
citations omitted)
In Suntay v. Court of Appeals,156 this court held that a notarized deed of
sale was void because it was a mere sham.157 It was not intended to have
any effect between the parties.158 This court said:
[I]t is not the intention nor the function of the notary public to validate and
make binding an instrument never, in the first place, intended to have any
binding legal effect upon the parties thereto. 159
Since the notarized Secretary’s Certificate was found to have been issued
without a supporting board resolution, it produced no effect. It is not binding
upon petitioner. It should not have been relied on by respondent especially
given its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that the
public’s faith is "of paramount importance."161 Thus, banks are required to
exercise the highest degree of diligence in their transactions. 162 In China
Banking Corporation v. Lagon,163 this court found that the bank was not a
mortgagee in good faith for its failure to question the due execution of a
Special Power of Attorney that was presented to it in relation to a mortgage
contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive investigation
on the history of the mortgagor’s title, it cannot be excused from the duty
of exercising the due diligence required of a banking institution. Banks are
expected to exercise more care and prudence than private individuals in
their dealings, even those that involve registered lands, for their business
is affected with public interest.165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks,
respondent cannot claim good faith in the execution of the mortgage
contracts with Saturnino Petalcorin. Respondent’s witness, Daciano
Paguio, Jr., testified that there was no board resolution authorizing
Saturnino Petalcorin to act on behalf of petitioner.166 Respondent did not
inquire further as to Saturnino Petalcorin’s authority.
Thus, annotations are not conclusive upon courts or upon owners who may
not have reason to doubt the security of their claim as their properties' title
holders.
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision
dated December 17, 2009 is REVERSED and SET ASIDE. The Regional
Trial Courts' Decisions of November 23, 2001 and December 7, 2001 are
REINSTATED.
SO ORDERED.

Banks cannot rely on assumptions. This will be contrary to the high

standard of diligence required of them.

VI

According to respondent, the annotations of respondent’s mortgage

interests on the certificates of titles of petitioner’s properties operated as
constructive notice to petitioner of the existence of such interests. 167
Hence, petitioners are now estopped from claiming that they did not know
about the mortgage.

Annotations of adverse claims on certificates of title to properties operate

as constructive notice only to third parties—not to the court or the
registered owner.1âwphi1 In Sajonas v. Court of Appeals:168

[A]nnotation of an adverse claim is a measure designed to protect the

interest of a person over a piece of real property where the registration of
such interest or right is not otherwise provided for by the Land Registration
Act or Act 496 (now [Presidential Decree No.] 1529 or the Property
Registration Decree), and serves a warning to third parties dealing with
said property that someone is claiming an interest on the same or a better
right than that of the registered owner thereof.169 (Emphasis supplied)

Annotations are merely claims of interest or claims of the legal nature and
incidents of relationship between the person whose name appears on the
document and the person who caused the annotation. It does not say
anything about the validity of the claim or convert a defective claim or
document into a valid one. 170 These claims may be proved or disproved
during trial.
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