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Table of Contents
FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue,
defendant-appellee....................................................................................................................................... 3
STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants, vs. REGISTER OF DEEDS OF
MANILA, respondent-appellee. .................................................................................................................. 21
STRONGHOLD INSURANCE COMPANY, INC., Petitioner, vs. TOMAS CUENCA, MARCELINA CUENCA,
MILAGROS CUENCA, BRAMIE T. TAYACTAC, and MANUEL D. MARANON, JR., Respondents. ................... 24
NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners, vs. ALFONSO G. PUYAT, Respondent. ........ 36
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners, vs. BF CORPORATION, SHANGRI-LA
PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C.
RAMOS, Respondents. ................................................................................................................................ 44
GOLD LINE TOURS, INC., Petitioner, vs. HEIRS OF MARIA CONCEPCION LACSA, Respondents.................. 60
ABOITIZ EQUITY VENTURES, INC., Petitioner, vs. VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and
CARLOS A. GOTHONG LINES, INC. (CAGLI), Respondents. .......................................................................... 69
CHINA BANKING CORPORATION, Petitioner, v. DYNE-SEM ELECTRONICS CORPORATION, Respondent. . 89
JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent. .................................. 95
CONCEPT BUILDERS, INC., Petitioner, v. THE NATIONAL LABOR RELATIONS, COMMISSION,(First Division);
and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo
Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino
Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, Respondents. ........... 103
ENRIQUEZ SECURITY SERVICES, INC., petitioner, vs. VICTOR A. CABOTAJE, respondent. ........................ 114
INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME), PETITIONER, V. LITTON AND
COMPANY, INC., RESPONDENT. ................................................................................................................ 119
PROFESSIONAL SERVICES, INC., PETITIONER, VS. THE COURT OF APPEALS AND NATIVIDAD AND ENRIQUE
AGANA, RESPONDENTS............................................................................................................................. 130
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. ...... 141
GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner, vs. THE HON. COURT OF APPEALS, (8TH
DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO,
CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO, Respondents............................ 183
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NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., AND
MCARTHUR MINING, INC., Petitioners, v. REDMONT CONSOLIDATED MINES CORP., Respondent. ....... 207
 Page 3 of 228

G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD,

Collector of Internal Revenue, defendant-appellee.

JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present
case "income" and taxable as such under the provisions of section 25 of Act No. 2833?
While the appellant presents other important questions, under the view which we have
taken of the facts and the law applicable to the present case, we deem it unnecessary to
discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore
admitted. They are simple and may be stated as follows:

That during the year 1919 the Philippine American Drug Company was a corporation
duly organized and existing under the laws of the Philippine Islands, doing business in
the City of Manila; that he appellant was a stockholder in said corporation; that said
corporation, as result of the business for that year, declared a "stock dividend"; that the
proportionate share of said stock divided of the appellant was P24,800; that the stock
dividend for that amount was issued to the appellant; that thereafter, in the month of
March, 1920, the appellant, upon demand of the appellee, paid under protest, and
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum (P889.91) the present action was instituted. The defendant
demurred to the petition upon the ground that it did not state facts sufficient to
constitute cause of action. The demurrer was sustained and the plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme
Court of the United States as will as the decisions of the supreme court of some of the
states of the Union, in which the questions before us, based upon similar statutes, was
discussed. Among the most important decisions may be mentioned the following: Towne
vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs.
Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs.
Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock
dividends" and in each case it was held that "stock dividends" were capital and not an
"income" and therefore not subject to the "income tax" law.
 Page 4 of 228

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252
U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in
imposing the tax on the stock dividend, does not violate the provisions of the Jones Law.
The appellee further argues that the statute of the United States providing for tax upon
stock dividends is different from the statute of the Philippine Islands, and therefore the
decision of the Supreme Court of the United States should not be followed in interpreting
the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and
Philippine Islands), providing for an income tax in the United States as well as that in
the Philippine Islands, the two statutes are here quoted for the purpose of determining
the difference, if any, in the language of the two statutes.

Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the
collection of an "income tax." Section 2 of said Act attempts to define what is an income.
The definition follows:

That the term "dividends" as used in this title shall be held to mean any distribution
made or ordered to made by a corporation, . . . which stock dividend shall be considered
income, to the amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section
25 of said Act attempts to define the application of the income tax. The definition follows:

The term "dividends" as used in this Law shall be held to mean any distribution made
or ordered to be made by a corporation, . . . out of its earnings or profits accrued since
March first, nineteen hundred and thirteen, and payable to its shareholders, whether
in cash or in stock of the corporation, . . . . Stock dividend shall be considered income,
to the amount of the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the
writer of the law of the Philippine Islands must have had before him the statute of the
United States. No important argument can be based upon the slight different in the
wording of the two sections.
 Page 5 of 228

It is further argued by the appellee that there are no constitutional limitations upon the
power of the Philippine Legislature such as exist in the United States, and in support of
that contention, he cites a number of decisions. There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the guise
of an income tax, collect a tax on property which is not an "income." The Philippine
Legislature can not impose a tax upon "property" under a law which provides for a tax
upon "income" only. The Philippine Legislature has no power to provide a tax upon
"automobiles" only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one purpose
cannot, without amendment, be applied to another purpose which is entirely distinct
and different. A statute providing for an income tax cannot be construed to cover
property which is not, in fact income. The Legislature cannot, by a statutory declaration,
change the real nature of a tax which it imposes. A law which imposes an important tax
on rice only cannot be construed to an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further
provision that "stock dividends" shall be considered income and are therefore subject to
income tax provided for in said law. If "stock dividends" are not "income" then the law
permits a tax upon something not within the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that

we may be able to determine whether "stock dividends" are "income" in the sense that
the word is used in the statute. Perhaps it would be more logical to determine first what
are "stock dividends" in order that we may more clearly understand their relation to
"income." Generally speaking, stock dividends represent undistributed increase in the
capital of corporations or firms, joint stock companies, etc., etc., for a particular period.
They are used to show the increased interest or proportional shares in the capital of
each stockholder. In other words, the inventory of the property of the corporation, etc.,
for particular period shows an increase in its capital, so that the stock theretofore issued
does not show the real value of the stockholder's interest, and additional stock is issued
showing the increase in the actual capital, or property, or assets of the corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the
purpose of opening and conducting a drug store, with assets of the value of P2,000, and
each contributes P1,000. Their entire assets are invested in drugs and put upon the
shelves in their place of business. They commence business without a cent in the
treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000
are issued to each of the incorporators, which represent the actual investment and
entire assets of the corporation. Business for the first year is good. Merchandise is sold,
and purchased, to meet the demands of the growing trade. At the end of the first year
an inventory of the assets of the corporation is made, and it is then ascertained that the
assets or capital of the corporation on hand amount to P4,000, with no debts, and still
not a cent in the treasury. All of the receipts during the year have been reinvested in the
 Page 6 of 228

business. Neither of the stockholders have withdrawn a penny from the business during
the year. Every peso received for the sale of merchandise was immediately used in the
purchase of new stock — new supplies. At the close of the year there is not a centavo in
the treasury, with which either A or B could buy a cup of coffee or a pair of shoes for
his family. At the beginning of the year they were P2,000, and at the end of the year they
were P4,000, and neither of the stockholders have received a centavo from the business
during the year. At the close of the year, when it is discovered that the assets are P4,000
and not P2,000, instead of selling the extra merchandise on hand and thereby reducing
the business to its original capital, they agree among themselves to increase the capital
they agree among themselves to increase the capital issued and for that purpose issue
additional stock in the form of "stock dividends" or additional stock of P1,000 each,
which represents the actual increase of the shares of interest in the business. At the
beginning of the year each stockholder held one-half interest in the capital. At the close
of the year, and after the issue of the said stock dividends, they each still have one-half
interest in the business. The capital of the corporation increased during the year, but
has either of them received an income? It is not denied, for the purpose of ordinary
taxation, that the taxable property of the corporation at the beginning of the year was
P2,000, that at the close of the year it was P4,000, and that the tax rolls should be
changed in accordance with the changed conditions in the business. In other words, the
ordinary tax should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an

authorized capital stock of P20,000 each contributing P5,000. With that capital they
purchased a farm and, with it, one hundred head of cattle. Every peso contributed is
invested. There is no money in the treasury. Much time and labor was expanded during
the year by the stockholders on the farm in the way of improvements. Neither received
a centavo during the year from the farm or the cattle. At the beginning of the year the
assets of the corporation, including the farm and the cattle, were P10,000, and at the
close of the year and inventory of the property of the corporation is made and it is then
found that they have the same farm with its improvements and two hundred head of
cattle by natural increase. At the end of the year it is also discovered that, by reason of
business changes, the farm and the cattle both have increased in value, and that the
value of the corporate property is now P20,000 instead of P10,000 as it was at the
beginning of the year. The incorporators instead of reducing the property to its original
capital, by selling off a part of its, issue to themselves "stock dividends" to represent the
proportional value or interest of each of the stockholders in the increased capital at the
close of the year. There is still not a centavo in the treasury and neither has withdrawn
a peso from the business during the year. No part of the farm or cattle has been sold
and not a single peso was received out of the rents or profits of the capital of the
corporation by the stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of
cattle for the sum of P10,000. At the end of the first year, by reason of business
conditions and the increase of the value of both real estate and personal property, it is
 Page 7 of 228

discovered that the value of the farm and the cattle is P20,000. A, during the year, has
received nothing from the farm or the cattle. His books at the beginning of the year show
that he had property of the value of P10,000. His books at the close of the year show
that he has property of the value of P20,000. A is not a corporation. The assets of his
business are not shown therefore by certificates of stock. His books, however, show that
the value of his property has increased during the year by P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to
pay an income tax? Is there any difference in law in the condition of A in this illustration
and the condition of A and B in the immediately preceding illustration? Can the increase
of the value of the property in either case be regarded as an "income" and be subjected
to the payment of the income tax under the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and,
in view of that fact, let us ascertain how lexicographers and the courts have defined an
"income." The New Standard Dictionary, edition of 1915, defines an income as "the
amount of money coming to a person or corporation within a specified time whether as
payment or corporation within a specified time whether as payment for services,
interest, or profit from investment." Webster's International Dictionary defines an
income as "the receipt, salary; especially, the annual receipts of a private person or a
corporation from property." Bouvier, in his law dictionary, says that an "income" in the
federal constitution and income tax act, is used in its common or ordinary meaning and
not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in
his law dictionary, says "An income is the return in money from one's business, labor,
or capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly
profits arising from property , professions, trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S.,
653), said in speaking of income that mere advance in value in no sense constitutes the
"income" specified in the revenue law as "income" of the owner for the year in which the
sale of the property was made. Such advance constitutes and can be treated merely as
an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa.,
414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States
and now Secretary of State of the United States, in his argument before the Supreme
Court of the United States in the case of Towne vs. Eisner, supra, defined an "income"
in an income tax law, unless it is otherwise specified, to mean cash or its equivalent. It
does not mean choses in action or unrealized increments in the value of the property,
and cites in support of the definition, the definition given by the Supreme Court in the
case of Gray vs. Darlington, supra.
 Page 8 of 228

In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot
doubt that the dividend was capital as well for the purposes of the Income Tax Law. . .
. 'A stock dividend really takes nothing from the property of the corporation, and adds
nothing to the interests of the shareholders. Its property is not diminished and their
interest are not increased. . . . The proportional interest of each shareholder remains
the same. . . .' In short, the corporation is no poorer and the stockholder is no richer
then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs.
U.S., 169 U.S., 255, 261).

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking
for the court, said that the act employs the term "income" in its natural and obvious
sense, as importing something distinct from principal or capital and conveying the idea
of gain or increase arising from corporate activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking
for the court said: "An income may be defined as the gain derived from capital, from
labor, or from both combined, provided it be understood to include profit gained through
a sale or conversion of capital assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or
company acknowledges a liability, in form, to the stockholders, equivalent to the
aggregate par value of their stock, evidenced by a "capital stock account." If profits have
been made by the corporation during a particular period and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss," "undivided profits,"
"surplus account," etc., or the like. None of these, however, gives to the stockholders as
a body, much less to any one of them, either a claim against the going concern or
corporation, for any particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends shall be made a
part of the company's assets segregated from the common fund for that purpose. The
dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income
from the capital that he has invested. Until that, is done the increased assets belong to
the corporation and not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or
retained as surplus available for distribution, in money or in kind, should opportunity
offer. Far from being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been
transferred from surplus to assets, and no longer is available for actual distribution.
 Page 9 of 228

The essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting
from employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company, and subject to business risks which
may result in wiping out of the entire investment. Having regard to the very truth of the
matter, to substance and not to form, the stockholder by virtue of the stock dividend
has in fact received nothing that answers the definition of an "income." (Eisner vs.
Macomber, 252 U.S., 189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation
of his increased interest in the capital of the corporation. There has been no separation
or segregation of his interest. All the property or capital of the corporation still belongs
to the corporation. There has been no separation of the interest of the stockholder from
the general capital of the corporation. The stockholder, by virtue of the stock dividend,
has no separate or individual control over the interest represented thereby, further than
he had before the stock dividend was issued. He cannot use it for the reason that it is
still the property of the corporation and not the property of the individual holder of stock
dividend. A certificate of stock represented by the stock dividend is simply a statement
of his proportional interest or participation in the capital of the corporation. For
bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a
liability in form to the stockholders, evidenced by a capital stock account. The receipt
of a stock dividend in no way increases the money received of a stockholder nor his cash
account at the close of the year. It simply shows that there has been an increase in the
amount of the capital of the corporation during the particular period, which may be due
to an increased business or to a natural increase of the value of the capital due to
business, economic, or other reasons. We believe that the Legislature, when it provided
for an "income tax," intended to tax only the "income" of corporations, firms or
individuals, as that term is generally used in its common acceptation; that is that the
income means money received, coming to a person or corporation for services, interest,
or profit from investments. We do not believe that the Legislature intended that a mere
increase in the value of the capital or assets of a corporation, firm, or individual, should
be taxed as "income." Such property can be reached under the ordinary from of taxation.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
difference between "capital" and "income": "That the fundamental relation of 'capital' to
'income' has been much discussed by economists, the former being likened to the tree
or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied
from springs; the latter as the outlet stream, to be measured by its flow during a period
of time." It may be argued that a stockholder might sell the stock dividend which he had
acquired. If he does, then he has received, in fact, an income and such income, like any
other profit which he realizes from the business, is an income and he may be taxed
thereon.
 Page 10 of 228

There is a clear distinction between an extraordinary cash dividend, no matter when

earned, and stock dividends declared, as in the present case. The one is a disbursement
to the stockholder of accumulated earnings, and the corporation at once parts
irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in the entire capital,
including such as by investment of accumulated profits has been added to the original
capital. They are not income to him, but represent additions to the source of his income,
namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a
person is in the same position, so far as his income is concerned, as the owner of young
domestic animal, one year old at the beginning of the year, which is worth P50 and,
which, at the end of the year, and by reason of its growth, is worth P100. The value of
his property has increased, but has had an income during the year? It is true that he
had taxable property at the beginning of the year of the value of P50, and the same
taxable property at another period, of the value of P100, but he has had no income in
the common acceptation of that word. The increase in the value of the property should
be taken account of on the tax duplicate for the purposes of ordinary taxation, but not
as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently
come before the courts in another form — in cases of inheritance. A is a stockholder in
a large corporation. He dies leaving a will by the terms of which he give to B during his
lifetime the "income" from said stock, with a further provision that C shall, at B's death,
become the owner of his share in the corporation. During B's life the corporation issues
a stock dividend. Does the stock dividend belong to B as an income, or does it finally
belong to C as a part of his share in the capital or assets of the corporation, which had
been left to him as a remainder by A? While there has been some difference of opinion
on that question, we believe that a great weight of authorities hold that the stock
dividend is capital or assets belonging to C and not an income belonging to B. In the
case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in such
cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between
the title of a corporation, and the interest of its members or stockholders in the property
of the corporation, is familiar and well settled. The ownership of that property is in the
corporation, and not in the holders of shares of its stock. The interest of each
stockholder consists in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence, under its charter, and
to a like proportion of the property remaining, upon the termination or dissolution of
the corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205
Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a corporate
profit set aside, declared, and ordered by the directors to be paid to the stockholders on
 Page 11 of 228

demand or at a fixed time. Until the dividend is declared, these corporate profits belong
to the corporation, not to the stockholders, and are liable for corporate indebtedness.

There is a clear distinction between an extraordinary cash dividend, no matter when

earned, and stock dividends declared. The one is a disbursement to the stockholders of
accumulated earning, and the corporation at once parts irrevocably with all interest
thereon. The other involves no disbursement by the corporation. It parts with nothing
to the stockholders. The latter receives, not an actual dividend, but certificates of stock
which evidence in a new proportion his interest in the entire capital. When a cash
becomes the absolute property of the stockholders and cannot be reached by the
creditors of the corporation in the absence of fraud. A stock dividend however, still being
the property of the corporation and not the stockholder, it may be reached by an
execution against the corporation, and sold as a part of the property of the corporation.
In such a case, if all the property of the corporation is sold, then the stockholder
certainly could not be charged with having received an income by virtue of the issuance
of the stock dividend. Until the dividend is declared and paid, the corporate profits still
belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend, whether large or small,
are regarded as "income" and all stock dividends, as capital or assets (Cook on
Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs.
Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation
and to in the holder of such stock, then it is difficult to understand how it can be
regarded as income to the stockholder and not as a part of the capital or assets of the
corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a matter of fact,
he may never receive anything, depending upon the final outcome of the business of the
corporation. The entire assets of the corporation may be consumed by mismanagement,
or eaten up by debts and obligations, in which case the holder of the stock dividend will
never have received an income from his investment in the corporation. A corporation
may be solvent and prosperous today and issue stock dividends in representation of its
increased assets, and tomorrow be absolutely insolvent by reason of changes in
business conditions, and in such a case the stockholder would have received nothing
from his investment. In such a case, if the holder of the stock dividend is required to
pay an income tax on the same, the result would be that he has paid a tax upon an
income which he never received. Such a conclusion is absolutely contradictory to the
idea of an income. An income subject to taxation under the law must be an actual
income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes
the provisions of the Jones Law. That may be admitted. He further argues that the Act
of Congress (U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures
 Page 12 of 228

to provide for an income tax. That fact may also be admitted. But a careful reading of
that Act will show that, while it permitted a tax upon income, the same provided that
income shall include gains, profits, and income derived from salaries, wages, or
compensation for personal services, as well as from interest, rent, dividends, securities,
etc. The appellee emphasizes the "income from dividends." Of course, income received
as dividends is taxable as an income but an income from "dividends" is a very different
thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is
a receipt of a representation of the increased value of the assets of corporation.

In all of the foregoing argument we have not overlooked the decisions of a few of the
courts in different parts of the world, which have reached a different conclusion from
the one which we have arrived at in the present case. Inasmuch, however, as appeals
may be taken from this court to the Supreme Court of the United States, we feel bound
to follow the same doctrine announced by that court.

Having reached the conclusion, supported by the great weight of the authority, that
"stock dividends" are not "income," the same cannot be taxes under that provision of
Act No. 2833 which provides for a tax upon income. Under the guise of an income tax,
property which is not an income cannot be taxed. When the assets of a corporation have
increased so as to justify the issuance of a stock dividend, the increase of the assets
should be taken account of the Government in the ordinary tax duplicates for the
purposes of assessment and collection of an additional tax. For all of the foregoing
reasons, we are of the opinion, and so decide, that the judgment of the lower court
should be revoked, and without any finding as to costs, it is so ordered.

Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.

Separate Opinions

STREET, J., concurring:

I agree that the trial court erred in sustaining the demurrer, and the judgment must be
reversed. Instead of demurring the defendant should have answered and alleged, if such
be the case, that the stock dividend which was the subject of taxation represents the
amount of earnings or profits distributed by means of the issuance of said stock
dividend; and the case should have been tried on that question of fact.
 Page 13 of 228

In this connection it will be noted that section 25 (a) of Act No. 2833, of the Philippine
Legislature, under which this tax was imposed, does not levy a tax generally on stock
dividends to the extend of the part of the stock nor even to the extend of its value, but
declares that stock dividends shall be considered as income to the amount of the
earnings or profits distributed. Under provision, before the tax can be lawfully assessed
and collected, it must appear that he stock dividend represents earning or profits
distributed; and the burden of proof is on the Collector of Internal Revenue to show this.

The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as
authority for the proposition that it is incompetent for the Legislature to tax as income
any property which by nature is really capital — as a stock dividend is there said to be.
In that case the Supreme Court of the United States held that a Congressional Act taxing
stock dividends as income was repugnant to that provision of the Constitution of the
United States which required that direct taxes upon property shall be apportioned for
collection among the several states according to population and that the Sixteenth
Amendment, in authorizing the imposition by Congress of taxes upon income, had not
vested Congress with the power to levy direct taxes, on property under the guise of
income taxes. But the resolution embodied in that decision was evidently reached
because of the necessity of harmonizing two different provisions of the Constitution of
the United States, as amended. In this jurisdiction our Legislature has full authority to
levy both taxes on property and income taxes; and there is no organic provision here in
force similar to that which, under the Constitution of the United States, requires direct
taxes on property to be levied in a particular way.

It results, under the statute here in force, there being no constitutional restriction upon
the action of the law making body, that the case before us presents merely a question
of statutory construction. That the problem should be viewed in this light, in a case
where there is no restriction upon the legislative body, is pointed our in Eisner vs.
Macomber, supra, where in the course of his opinion Mr. Justice Pitney refers to the
cases of the Swan Brewery Co. vs. Rex ([1914] A. C. 231), and Tax Commissioner vs.
Putnam (227 Mass., 522), as being distinguished from Eisner vs. Macomber by the very
circumstance that in those cases the law making body, or bodies were under no
restriction as to the method of levying taxes. Such is the situation here.

OSTRAND, J., dissenting:

In its final analysis the opinion of the court rests principally, if not entirely on the
decision of the United States Supreme Court in the case of Eisner vs. Macomber (252
U.S., 189), a decision which, for at least two reasons, is entirely inapplicable to the
present case.
 Page 14 of 228

In the first place, there is a radical difference between the definition of a taxable stock
dividend given in the United States Income Tax Law of September 8, 1916, construed in
the case of Eisner vs. Macomber, and that given in Act No. 2833 of the Philippine
Legislature, the Act with which we are concerned in the present case. The former
provides that "stock dividend shall be considered income, to the amount of its cash
value;" the Philippine Act provides that "Stock dividend shall be considered income, to
the amount of the earnings or profits distributed." The United State statute made stock
dividends based upon an advance in the value of the property or investment taxable as
income whether resulting from earning or not; our statute make stock dividends taxable
only to the amount of the earning and profits distributed, and stock dividends based on
the increment income and are not taxable. Though the difference would seem
sufficiently obvious, we will endeavor to make it still clearer by borrowing one of the
illustrations with which the opinion of the court is provided. The court says:

A, an individual farmer, buys a farm with one hundred head of cattle for the sum of
P10,000. At the end of the first year, by reason of business conditions and the increase
of the value of both real estate and personal property, it is discovered that the value of
the farm and the cattle is P20,000. A, during the year has received nothing from the
farm or the cattle. His books at the beginning of the year show that he had property of
the value of P10,000. His books at the close of the year show that he has property of the
value of P20,000. A is not a corporation. The assets of his business are not shown
therefore by certificate of stock. His books, however, show that the value of his property
has increased during the year by P10,000. Can the P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to
pay an income tax? Is there any difference in law in the conditions of A in this illustration
and the conditions of A and B in the immediately preceding illustration? Can the
increase of the value of the property in either case be regarded as an 'income' and be
subjected to the payment of the income tax under the law?

I answer no. And while the increment if in the form of a stock dividend would have been
regarded as income under the United States statute and taxes as such, it is not regarded
as income and cannot be so taxes under our statute because it is not based on earnings
or profits. That is precisely the difference between the two statutes and that is the reason
the illustration is not in point in this case, though it would have been entirely
appropriate in the Eisner vs. Macomber case. It is also one of the reasons why that case
is inapplicable here and why most of the arguments in the majority opinion are beside
the mark.

But let us suppose that A had sold the products of the farm during the year for P10,000
over and above his expense, and had invested the money in buildings and improvements
on the farm, thus increasing its value to P20,000. Why would not the P10,000 earned
during the year and so invested in improvements still be income for the year? And why
would not a tax on these earnings be an income tax under the definition given in Black's
 Page 15 of 228

Law Dictionary, and quoted with approval in the decision of the court, that "An income
tax is a tax on the yearly profits arising from the property, professions, trades, and
offices?" There can be but one answer. There is no reason whatever why the gains
derived from the sale of the products of the farm should not be regarded as income
whether reinvested in improvements upon the farm or not and there is no reason way a
tax levied thereon cannot be considered an income tax.

Moreover, to constitute income, profits, or earnings need not necessarily be converted

into cash. Black's Law Dictionary says — and I am again quoting from the decision of
the court — "An income is the return in money from one's business, labor, or capital
invested; gains profits, or private revenue." As will be seen in the secondary sense of the
word, income need not consist in money; upon this point there is no divergence of view
among the lexicographers. If a farmer stores the gain produced upon his farm without
selling, it may none the less be regarded as income.

In the Eisner vs. Macomber case, the United States Supreme Court felt bound to give
the word "income" a strict interpretation. Under article 1, paragraph 2, clause 3, and
paragraph 9, clause 4 of the original Constitution of the United States, Congress could
not impose direct taxes without apportioning them among the States according to
population. As it was thought desirable to impose Federal taxes upon incomes and as a
levy of such taxes by appointment among the States in proportion to population would
lead to an unequal distribution of the tax with reference to the amount of taxable
incomes, the Sixteenth Amendment was adopted and which provided that "The Congress
shall have power to lay and collect taxes on incomes, from whatever source derived,
without apportionment among the several states, and without regard to any census or
enumeration."

The United States Supreme Court therefore says in the Eisner vs. Macomber case:

A proper regard for its generis, as well as its very clear language, requires also that this
Amendment shall not be extended by loose construction, so as to repeal or modify,
except as applied to income, those provisions of the Constitution that require an
apportionment according to population for direct taxes upon property, real and
personal. This limitation still has an appropriate and important functions, and is not to
be overridden by Congress or disregarded by the courts.

In order, therefore, that the clauses cited from Article I of the constitution may have
proper force and effect, save only as modified by the Amendment, and that the latter
also may have proper effect, it becomes essential to distinguish between what is and
what is not "income," as the term is there used; and to apply the distinction as cases
 Page 16 of 228

arise, according to truth and substance, without regard to form. Congress cannot by
any definition it may adopt conclude the matter, since it cannot by legislation alter the
Constitution, from which alone it derives its power to legislate, and within whose
limitations alone that power can be lawfully exercised.

That, in the absence of the peculiar restrictions placed by the Constitution upon taxing
power of Congress, the decision of the court might have been different is clearly
indicated by the following language:

Two recent decisions, proceeding from courts of high jurisdiction, are cited in support
of the position of the Government.

Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend Duties Act of
Western Australia, which provided that "dividend" should include "every dividend, profit,
advantage, or gain intended to be paid or credited to or distributed among any members
or director of any company," except etc. There was a stock dividend, the new shares
being alloted among the shareholders pro rata; and the question was whether this was
a distribution of a dividend within the meaning of the act. The Judicial Committee of
the Privy Council sustained the dividend duty upon the ground that, although "in
ordinary language the new shares would not be distribution of a dividend," yet within
the meaning of the act, such new share were an "advantage" to the recipients. There
being no constitutional restriction upon the action of the lawmaking body, the case
presented merely a question of statutory construction, and manifestly the decision is
not a precedent for the guidance of this court when acting under a duty to test an act
of Congress by the limitations of a written Constitution having superior force.

In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th
Amendment to the constitution of Massachusetts, which conferred upon the legislature
full power to tax incomes, "must be interpreted as including every item which by any
reasonable understanding can fairly be regarded as income" (pp. 526, 531); and that
under it a stock dividend was taxable as income. . . . Evidently, in order to give a
sufficiently broad sweep to the new taxing provision, it was deemed necessary to take
the symbol for the substance, accumulation for distribution, capital accretion for its
opposite; while a case where money is paid into the hand of the stockholder with an
option to buy new shares with it, followed by acceptance of the option, was regarded as
identical in substance with a case where the stockholder receives no money and has no
option. The Massachusetts court was not under an obligation, like the one which binds
us, of applying a constitutional provisions that stand in the way of extending it by
construction.
 Page 17 of 228

The Philippine Legislature has full power to levy taxes both on capital or property and
on income, subject only to the provisions of the Organic Act that "the rule of taxation
shall be uniform." In providing for the income tax the Legislature is therefore entirely
free to employ the term "income" in its widest sense and is in nowise limited or hampered
by organic limitations such as those imposed upon Congress by the Constitution of the
United States. This is the second reason why the rule laid down in Eisner vs. Macomber
has no application here.

The majority opinion in discussing this question, says:

There is no question that the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property
which is not an "income." The Philippine Legislature cannot impose a tax upon "income"
only . The Philippine Legislature has no power to provide a tax upon "automobiles," only,
and under that law collect a tax upon a carreton or bull cart. Constitutional limitations
upon the power of the Legislature are not stronger than statutory limitations, that is to
say, a statute expressly adopted for one purpose cannot, without amendment, be
applied to another purpose which is entirely distinct and different. A statute providing
for an income tax cannot be construed to cover property which is not, in fact, income.
The Legislature cannot, by a statutory declaration, change the real of a nature of a tax
which it imposes. A law which imposes an importation tax on rice only cannot be
construed to impose an importation tax on corn.

These assertions while in the main true are, perhaps, a little to broadly stated; much
will depend on the circumstances of each particular case. If the Legislature cannot do
the things enumerate it must be by reason of the limitation imposed by the Organic Act,
"That no bill which may be enacted into law shall embrace more than on subject, and
that subject shall be expressed in the title of the bill." Similar provisions are contained
in most State Constitutions, their object being to prevent "log-rolling" and the passing
of undesirable measures without their being brought properly to the attention of the
legislators. Where the prevention of this mischief is not involved, the courts have
uniformly given such provisions a very liberal construction and there are few, if any,
cases where a statute has been declared unconstitutional for dealing with several
cognate subjects in the same Act and under the same title. (Lewis Sutherland on
Statutory Construction, 2d ed., pars 109 et seq.: Government of the Philippine Island
vs. Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia, 32, Phil.,
634). Certainly no income tax statute would be declared unconstitutional on that ground
for treating dividends as income and providing for their taxation as such.

Reverting to the question of the nature of income, it is argued that a stock certificate
has no intrinsic value and that, therefore, even it is based on earnings instead of
 Page 18 of 228

increment in capital it cannot be regarded as income. But neither has a bank check or
a time deposit certificate any intrinsic value, yet it may be negotiated, or sold, or
assigned and it represents a cash value. So also does a stock certificate. A lawyer might
take his fee in stock certificates instead of in money. Would it be seriously contended
that he had received no fee and that his efforts had brought no income?1awph!l.net

Some of the members of the court agree that stock dividends based on earnings or
profits may be taxed as income, but take the view that in an action against the Collector
of the Internal Revenue for recovering back taxes paid on non-taxable stock dividends,
the plaintiff need not allege that the stock dividends are not base on earnings or profits
distributed, but that question of the taxability or non-taxability of the stock dividends
is a matter of defense and should be set up by the defendant by way of answer.

I think this view is erroneous. If some stock dividends are taxable and others are not,
an allegation that stock dividends in general have been taxed is not sufficient and does
not state a cause of action. the presumption is that the tax has been legally collected
and the burden is upon the plaintiff both to allege and prove facts showing that the
collection is unlawfully or irregular. (Code of Civil Procedure, sec. 334, subsec. 14 and
31.)

Malcolm, J., concurs.

————

JOHNS, J., dissenting:

We have studied and analyzed with care the able and exhaustive majority opinion
written by Mr. Justice Johnson.

In the final analysis, the question involved is whether the words "which stock dividend
shall be considered income, to the amount of its cash value" are to be construed as
meaning the same things as the words "stock dividend shall be considered income, to
the amount of the earnings or profits distributed," as the majority opinion says. The first
is an Act of Congress defining what is a stock dividend, and that the word dividend shall
be construed as income to the amount of its cash value. It is upon that construction
and that definition that the majority opinion is founded. That is the definition of the
words as used in an Act of Congress. The other is an Act defining the meaning of the
words as used in an Act of Congress. The other is an Act defining the meaning of the
 Page 19 of 228

words by the Legislature of the Philippine Islands, and it says: "Stock dividend shall be
considered income, to the amount of the earnings or profits distributed."

It is true, as the majority opinion says, that in enacting the Income Tax Law of the
Philippine Islands, the Legislature had before it the Act of Congress. But it is also true
that by the Act of the Philippine Legislature "Stock dividend shall be considered income,
to the amount of the earnings or profits distributed." One law is founded upon the actual
cash value of the stock and the other is founded upon distributed earnings and profits.

Much is said in the textbooks and by the numerous decisions cited in the majority
opinion as to the meaning of the word income, and the decision in the United States are
founded upon the meaning of that word, as it is used in the Act of Congress, and to the
effect that the word is to be construed in its usual and ordinary meaning. But assuming
that to be true, it must also be conceded that the Legislature of the Philippine Islands
has a legal right to define the meaning of the word "income" by a legislative act, and
when its meaning is defined by legislative act, it is the duty of the courts to follow that
definition regardless of whether it is the usual and ordinary meaning of the word, and
therein lies the distinction between the two acts and the reason why the authorities
cited in the majority opinion are not in point. Act No. 2833 of the Philippine Legislature
specifically says that "Stock dividend shall be considered income, to the amount of the
earnings or profits distributed." The Act of Congress is founded upon the "cash value of
the stock," and the Act in question is founded upon "the amount of the earnings or
profits distributed."

Hence, then, we have the meaning of the words defined in the legislative act, and it is
very apparent that the purpose and intent of the legislative act was to avoid the meaning
and construction of such words which is now given to them in the majority opinion. The
Legislature had the power to define the meaning of the words, did define them, and it is
the duty of the courts to follow and adopt the meaning and definition of the words given
to them in the legislative act.

As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon
the legislative power for taxation purposes, which exist in the United States, does not
exist in the Philippine Islands. There is no organic law here similar to the provisions of
the Constitution of the United States which require direct taxes on property to be levied
in a specific way, in other words, the restrictions and limitations placed on the power to
levy an income tax under the Constitution of the United States do not exist in the
Philippine Islands. Hence, it must follow that the authorities cited in the majority
opinion are not in point the instant case. They are founded upon different language,
different organic powers, different conditions, and the different meaning of the same
words as defined in the different legislative acts. The Philippine Legislature had a legal
 Page 20 of 228

right to define the meaning of the words "dividend" and "income," and it expressly says
"Stock dividend shall be considered income, to the amount of the earnings or profits
distributed." In the instant case, the earnings and profits of the corporation were
distributed among the existing stockholders of the company upon a pro rata basis, and
they were made exclusively out of "distributed earnings and profits." The declaring of
the dividend was a matter in the sole discretion of the stockholders, but when such a
dividend is made from and out of "earnings or profits distributed," it then becomes and
is an income within the meaning of Act No. 2833, and should be subject to an income
tax.

For such reason, I dissent.

 Page 21 of 228

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs. REGISTER OF DEEDS OF MANILA, respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed
a certificate of liquidation of the assets of the corporation reciting, among other things,
that by virtue of a resolution of the stockholders adopted on September 17, 1960,
dissolving the corporation, they have distributed among themselves in proportion to
their shareholdings, as liquidating dividends, the assets of said corporation, including
real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was
denied registration on seven grounds, of which the following were disputed by the
stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the disposition of
the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land

Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or

impropriety of the three grounds on which the denial of the registration of the certificate
of liquidation was predicated hinges on whether or not that certificate merely involves a
 Page 22 of 228

distribution of the corporation's assets or should be considered a transfer or

conveyance.

Appellants contend that the certificate of liquidation is not a conveyance or transfer but
merely a distribution of the assets of the corporation which has ceased to exist for having
been dissolved. This is apparent in the minutes for dissolution attached to the
document. Not being a conveyance the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the acknowledgment appearing
therein. Hence the amount of documentary stamps to be affixed thereon should only be
P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to
require appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He

concurred in the view expressed by the register of deed to the effect that the certificate
of liquidation in question, though it involves a distribution of the corporation's assets,
in the last analysis represents a transfer of said assets from the corporation to the
stockholders. Hence, in substance it is a transfer or conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person
distinct from the members composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property they do not represent property of the
corporation. The corporation has property of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743).
A share of stock only typifies an aliquot part of the corporation's property, or the right
to share in its proceeds to that extent when distributed according to law and equity (Hall
& Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner
of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is
he entitled to the possession of any definite portion of its property or assets (Gottfried
v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-
owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317,
51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by
the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot
be considered a partition of community property, but rather a transfer or conveyance of
the title of its assets to the individual stockholders. Indeed, since the purpose of the
liquidation, as well as the distribution of the assets of the corporation, is to transfer
their title from the corporation to the stockholders in proportion to their shareholdings,
— and this is in effect the purpose which they seek to obtain from the Register of Deeds
of Manila, — that transfer cannot be effected without the corresponding deed of
 Page 23 of 228

conveyance from the corporation to the stockholders. It is, therefore, fair and logical to
consider the certificate of liquidation as one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Barrera, J., took no part.
 Page 24 of 228

G.R. No. 173297 March 6, 2013

STRONGHOLD INSURANCE COMPANY, INC., Petitioner, vs. TOMAS

CUENCA, MARCELINA CUENCA, MILAGROS CUENCA, BRAMIE T.
TAYACTAC, and MANUEL D. MARANON, JR., Respondents.

BERSAMIN, J.:

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to
claim and recover compensation for the damages arising from the wrongful attachment
of its assets. Only the corporation is the real party in interest for that purpose.

The Case

Stronghold Insurance Company, Inc. (Stronghold Insurance), a domestic insurance

company, assails the decision promulgated on January 31, 2006,1 whereby the Court
of Appeals (CA) in CA-G.R. CV No. 79145 affirmed the judgment rendered on April 28,
2003 by the Regional Trial Court in Parafiaque City (RTC) holding Stronghold Insurance
and respondent Manuel D. Marafion, Jr. jointly and solidarily liable for damages to
respondents Tomas Cuenca, Marcelina Cuenca, Milagros Cuenca (collectively referred
to as Cuencas), and Bramie Tayactac, upon the latter’s claims against the surety bond
issued by Stronghold Insurance for the benefit of Marañon.2

Antecedents

On January 19, 1998, Marañon filed a complaint in the RTC against the Cuencas for
the collection of a sum of money and damages. His complaint, docketed as Civil Case
No. 98-023, included an application for the issuance of a writ of preliminary
attachment.3 On January 26, 1998, the RTC granted the application for the issuance
of the writ of preliminary attachment conditioned upon the posting of a bond of
₱1,000,000.00 executed in favor of the Cuencas. Less than a month later, Marañon
amended the complaint to implead Tayactac as a defendant.4

On February 11, 1998, Marañon posted SICI Bond No. 68427 JCL (4) No. 02370 in the
amount of ₱1,000,000.00 issued by Stronghold Insurance. Two days later, the RTC
issued the writ of preliminary attachment.5 The sheriff served the writ, the summons
 Page 25 of 228

and a copy of the complaint on the Cuencas on the same day. The service of the writ,
summons and copy of the complaint were made on Tayactac on February 16, 1998.6

Enforcing the writ of preliminary attachment on February 16 and February 17, 1998,
the sheriff levied upon the equipment, supplies, materials and various other personal
property belonging to Arc Cuisine, Inc. that were found in the leased corporate office-
cum-commissary or kitchen of the corporation.7 On February 19, 1998, the sheriff
submitted a report on his proceedings,8 and filed an ex parte motion seeking the
transfer of the levied properties to a safe place. The RTC granted the ex parte motion on
February 23, 1998.9

On February 25, 1998, the Cuencas and Tayactac presented in the RTC a Motion to
Dismiss and to Quash Writ of Preliminary Attachment on the grounds that: (1) the action
involved intra-corporate matters that were within the original and exclusive jurisdiction
of the Securities and Exchange Commission (SEC); and (2) there was another action
pending in the SEC as well as a criminal complaint in the Office of the City Prosecutor
of Parañaque City.10

On March 5, 1998, Marañon opposed the motion.11

On August 10, 1998, the RTC denied the Motion to Dismiss and to Quash Writ of
Preliminary Attachment, stating that the action, being one for the recovery of a sum of
money and damages, was within its jurisdiction.12

Under date of September 3, 1998, the Cuencas and Tayactac moved for the
reconsideration of the denial of their Motion to Dismiss and to Quash Writ of Preliminary
Attachment, but the RTC denied their motion for reconsideration on September 16,
1998.

Thus, on October 14, 1998, the Cuencas and Tayactac went to the CA on certiorari and
prohibition to challenge the August 10, 1998 and September 16, 1998 orders of the RTC
on the basis of being issued with grave abuse of discretion amounting to lack or excess
of jurisdiction (C.A.-G.R. SP No. 49288).13

On June 16, 1999, the CA promulgated its assailed decision in C.A.-G.R. SP No.
49288,14 granting the petition. It annulled and set aside the challenged orders, and
dismissed the amended complaint in Civil Case No. 98-023 for lack of jurisdiction, to
wit:
 Page 26 of 228

WHEREFORE, the Orders herein assailed are hereby ANNULLED AND SET ASIDE, and
the judgment is hereby rendered DISMISSING the Amended Complaint in Civil Case No.
98-023 of the respondent court, for lack of jurisdiction.

SO ORDERED.

On December 27, 1999, the CA remanded to the RTC for hearing and resolution of the
Cuencas and Tayactac’s claim for the damages sustained from the enforcement of the
writ of preliminary attachment.15

On February 17, 2000,16 the sheriff reported to the RTC, as follows:

On the scheduled inventory of the properties (February 17, 2000) and to comply with
the Resolution of the Court of Appeals dated December 24, 1999 ordering the delivery
of the attached properties to the defendants, the proceedings thereon being:

1. With the assistance for (sic) the counsel of Cuencas, Atty. Pulumbarit, Atty. Ayo,
defendant Marcelina Cuenca, and two Court Personnel, Robertson Catorce and Danilo
Abanto, went to the warehouse where Mr. Marañon recommended for safekeeping the
properties in which he personally assured its safety, at No. 14, Marian II Street, East
Service Road, Parañaque Metro Manila.

2. That to our surprise, said warehouse is now tenanted by a new lessee and the
properties were all gone and missing.

3. That there are informations (sic) that the properties are seen at Conti’s Pastry & Bake
Shop owned by Mr. Marañon, located at BF Homes in Parañaque City.

On April 6, 2000, the Cuencas and Tayactac filed a Motion to Require Sheriff to Deliver
Attached Properties and to Set Case for Hearing,17 praying that: (1) the Branch Sheriff
be ordered to immediately deliver the attached properties to them; (2) Stronghold
Insurance be directed to pay them the damages being sought in accordance with its
undertaking under the surety bond for ₱1,000,0000.00; (3) Marañon be held personally
liable to them considering the insufficiency of the amount of the surety bond; (4) they
be paid the total of ₱1,721,557.20 as actual damages representing the value of the lost
attached properties because they, being accountable for the properties, would be
turning that amount over to Arc Cuisine, Inc.; and (5) Marañon be made to pay
 Page 27 of 228

₱200,000.00 as moral damages, ₱100,000.00 as exemplary damages, and ₱100,000.00

as attorney’s fees.

Stronghold Insurance filed its answer and opposition on April 13, 2000. In turn, the
Cuencas and Tayactac filed their reply on May 5, 2000.

On May 25, 2000, Marañon filed his own comment/opposition to the Motion to Require
Sheriff to Deliver Attached Properties and to Set Case for Hearing of the Cuencas and
Tayactac, arguing that because the attached properties belonged to Arc Cuisine, Inc.
50% of the stockholding of which he and his relatives owned, it should follow that 50%
of the value of the missing attached properties constituted liquidating dividends that
should remain with and belong to him. Accordingly, he prayed that he should be
required to return only ₱100,000.00 to the Cuencas and Tayactac.18

On June 5, 2000, the RTC commanded Marañon to surrender all the attached properties
to the RTC through the sheriff within 10 days from notice; and directed the Cuencas
and Tayactac to submit the affidavits of their witnesses in support of their claim for
damages.19

On June 6, 2000, the Cuencas and Tayactac submitted their Manifestation and
Compliance.20

Ruling of the RTC

After trial, the RTC rendered its judgment on April 28, 2003, holding Marañon and
Stronghold Insurance jointly and solidarily liable for damages to the Cuencas and
Tayactac,21 viz:

WHEREFORE, premises considered, as the defendants were able to preponderantly

prove their entitlement for damages by reason of the unlawful and wrongful issuance of
the writ of attachment, MANUEL D. MARAÑON, JR., plaintiff and defendant, Stronghold
Insurance Company Inc., are found to be jointly and solidarily liable to pay the
defendants the following amount to wit:

(1) Ph₱1,000,000.00 representing the amount of the bond;

 Page 28 of 228

(2) PhP 100,000.00 as moral damages;

(3) PhP 50,000.00 as exemplary damages;

(4) Php 100,000.00 as attorney’s fees; and

(5) To pay the cost of suit.

SO ORDERED.

Ruling of the CA

Only Stronghold Insurance appealed to the CA (C.A.-G.R. CV No. 79145), assigning the
following errors to the RTC, to wit:

I.

THE LOWER COURT ERRED IN ORDERING SURETY-APPELLANT TO PAY THE

AMOUNT OF ₱1,000,000.00 REPRESENTING THE AMOUNT OF THE BOND AND
OTHER DAMAGES TO THE DEFENDANTS.

II.

THE LOWER COURT ERRED IN NOT TAKING INTO ACCOUNT THE INDEMNITY
AGREEMENT (EXH. "2-SURETY") EXECUTED BY MANUEL D. MARAÑON, JR. IN
FAVOR OF STRONGHOLD WHEREIN HE BOUND HIMSELF TO INDEMNIFY
STRONGHOLD OF WHATEVER AMOUNT IT MAY BE HELD LIABLE ON ACCOUNT OF
THE ISSUANCE OF THE ATTACHMENT BOND.22

On January 31, 2006, the CA, finding no reversible error, promulgated its decision
affirming the judgment of the RTC.23
 Page 29 of 228

Stronghold Insurance moved for reconsideration, but the CA denied its motion for
reconsideration on June 22, 2006.

Issues

Hence, this appeal by petition for review on certiorari by Stronghold Insurance, which
submits that:

I.

THE COURT OF APPEALS COMMITTED GRAVE REVERSIBLE ERROR AND DECIDED

QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND
APPLICABLE DECISIONS OF THE HONORABLE COURT CONSIDERING THAT THE
COURT OF APPEALS AFFIRMED THE ERRONEOUS DECISION OF THE TRIAL COURT
HOLDING RESPONDENT MARA[Ñ]ON AND PETITIONER STRONGHOLD JOINTLY AND
SOLIDARILY LIABLE TO PAY THE RESPONDENTS CUENCA, et al., FOR PURPORTED
DAMAGES BY REASON OF THE ALLEGED UNLAWFUL AND WRONGFUL ISSUANCE
OF THE WRIT OF ATTACHMENT, DESPITE THE FACT THAT:

A) RESPONDENT CUENCA et al., ARE NOT THE OWNERS OF THE PROPERTIES

ATTACHED AND THUS, ARE NOT THE PROPER PARTIES TO CLAIM ANY PURPORTED
DAMAGES ARISING THEREFROM.

B) THE PURPORTED DAMAGES BY REASON OF THE ALLEGED UNLAWFUL AND

WRONGFUL ISSUANCE OF THE WRIT OF ATTACHMENT WERE CAUSED BY THE
NEGLIGENCE OF THE BRANCH SHERIFF OF THE TRIAL COURT AND HIS FAILURE
TO COMPLY WITH THE PROVISIONS OF THE RULES OF COURT PERTAINING TO THE
ATTACHMENT OF PROPERTIES.

C) THE TRIAL COURT GRAVELY ERRED WHEN IT HELD PETITIONER STRONGHOLD

TO BE SOLIDARILY LIABLE WITH RESPONDENT MARA[Ñ]ON TO RESPONDENTS
CUENCA et al., FOR MORAL DAMAGES, EXEMPLARY DAMAGES, ATTORNEY’S FEES
AND COST OF SUIT DESPITE THE FACT THAT THE GUARANTY OF PETITIONER
STRONGHOLD PURSUANT TO ITS SURETY BOND IS LIMITED ONLY TO THE AMOUNT
OF ₱1,000,000.00.

II
 Page 30 of 228

IN ANY EVENT, THE DECISION OF THE COURT APPEALS SHOULD HAVE HELD
RESPONDENT MARA[Ñ]ON TO BE LIABLE TO INDEMNIFY PETITIONER STRONGHOLD
FOR ALL PAYMENTS, DAMAGES, COSTS, LOSSES, PENALTIES, CHARGES AND
EXPENSES IT SUSTAINED IN CONNECTION WITH THE INSTANT CASE, PURSUANT
TO THE INDEMNITY AGREEMENT ENTERED INTO BY PETITIONER STRONGHOLD
AND RESPONDENT MARA[Ñ]ON.24

On their part, the Cuencas and Tayactac counter:

A. Having actively participated in the trial and appellate proceedings of this case before
the Regional Trial Court and the Court of Appeals, respectively, petitioner Stronghold is
legally and effectively BARRED by ESTOPPEL from raising for the first time on appeal
before this Honorable Court a defense and/or issue not raised below.25

B. Even assuming arguendo without admitting that the principle of estoppel is not
applicable in this instant case, the assailed Decision and Resolution find firm basis in
law considering that the writ of attachment issued and enforced against herein
respondents has been declared ILLEGAL, NULL AND VOID for having been issued
beyond the jurisdiction of the trial court.

C. There having been a factual and legal finding of the illegality of the issuance and
consequently, the enforcement of the writ of attachment, Maranon and his surety
Stronghold, consistent with the facts and the law, including the contract of suretyship
they entered into, are JOINTLY AND SEVERALLY liable for the damages sustained by
herein respondents by reason thereof.

D. Contrary to the allegations of Stronghold, its liability as surety under the attachment
bond without which the writ of attachment shall not issue and be enforced against
herein respondent if prescribed by law. In like manner, the obligations and liability on
the attachment bond are also prescribed by law and not left to the discretion or will of
the contracting parties to the prejudice of the persons against whom the writ was issued.

E. Contrary to the allegations of Stronghold, its liability for the damages sustained by
herein respondents is both a statutory and contractual obligation and for which, it
cannot escape accountability and liability in favor of the person against whom the illegal
writ of attachment was issued and enforced. To allow Stronghold to delay, excuse or
exempt itself from liability is unconstitutional, unlawful, and contrary to the basic tenets
of equity and fair play.
 Page 31 of 228

F. While the liability of Stronghold as surety indeed covers the principal amount of
₱1,000,000.00, nothing in the law and the contract between the parties limit or exempt
Stronghold from liability for other damages. Including costs of suit and interest.26

In his own comment,27

Marañon insisted that he could not be personally held liable under the attachment bond
because the judgment of the RTC was rendered without jurisdiction over the subject
matter of the action that involved an intra-corporate controversy among the
stockholders of Arc Cuisine, Inc.; and that the jurisdiction properly pertained to the
SEC, where another action was already pending between the parties.

Ruling

Although the question of whether the Cuencas and Tayactac could themselves recover
damages arising from the wrongful attachment of the assets of Arc Cuisine, Inc. by
claiming against the bond issued by Stronghold Insurance was not raised in the CA, we
do not brush it aside because the actual legal interest of the parties in the subject of the
litigation is a matter of substance that has jurisdictional impact, even on appeal before
this Court.

The petition for review is meritorious.

There is no question that a litigation should be disallowed immediately if it involves a

person without any interest at stake, for it would be futile and meaningless to still
proceed and render a judgment where there is no actual controversy to be thereby
determined. Courts of law in our judicial system are not allowed to delve on academic
issues or to render advisory opinions. They only resolve actual controversies, for that is
what they are authorized to do by the Fundamental Law itself, which forthrightly ordains
that the judicial power is wielded only to settle actual controversies involving rights that
are legally demandable and enforceable.28

To ensure the observance of the mandate of the Constitution, Section 2, Rule 3 of the
Rules of Court requires that unless otherwise authorized by law or the Rules of Court
every action must be prosecuted or defended in the name of the real party in interest.29
Under the same rule, a real party in interest is one who stands to be benefited or injured
by the judgment in the suit, or one who is entitled to the avails of the suit. Accordingly,
a person , to be a real party in interest in whose name an action must be prosecuted,
 Page 32 of 228

should appear to be the present real owner of the right sought to be enforced, that is,
his interest must be a present substantial interest, not a mere expectancy, or a future,
contingent, subordinate, or consequential interest.30

Where the plaintiff is not the real party in interest, the ground for the motion to dismiss
is lack of cause of action.31 The reason for this is that the courts ought not to pass
upon questions not derived from any actual controversy. Truly, a person having no
material interest to protect cannot invoke the jurisdiction of the court as the plaintiff in
an action.32 Nor does a court acquire jurisdiction over a case where the real party in
interest is not present or impleaded.

The purposes of the requirement for the real party in interest prosecuting or defending
an action at law are: (a) to prevent the prosecution of actions by persons without any
right, title or interest in the case; (b) to require that the actual party entitled to legal
relief be the one to prosecute the action; (c) to avoid a multiplicity of suits; and (d) to
discourage litigation and keep it within certain bounds, pursuant to sound public
policy.33 Indeed, considering that all civil actions must be based on a cause of action,34
defined as the act or omission by which a party violates the right of another,35 the
former as the defendant must be allowed to insist upon being opposed by the real party
in interest so that he is protected from further suits regarding the same claim.36 Under
this rationale, the requirement benefits the defendant because "the defendant can insist
upon a plaintiff who will afford him a setup providing good res judicata protection if the
struggle is carried through on the merits to the end."37

The rule on real party in interest ensures, therefore, that the party with the legal right
to sue brings the action, and this interest ends when a judgment involving the nominal
plaintiff will protect the defendant from a subsequent identical action. Such a rule is
intended to bring before the court the party rightfully interested in the litigation so that
only real controversies will be presented and the judgment, when entered, will be
binding and conclusive and the defendant will be saved from further harassment and
vexation at the hands of other claimants to the same demand.38

But the real party in interest need not be the person who ultimately will benefit from
the successful prosecution of the action. Hence, to aid itself in the proper identification
of the real party in interest, the court should first ascertain the nature of the substantive
right being asserted, and then must determine whether the party asserting that right is
recognized as the real party in interest under the rules of procedure. Truly, that a party
stands to gain from the litigation is not necessarily controlling.39
 Page 33 of 228

It is fundamental that the courts are established in order to afford reliefs to persons
whose rights or property interests have been invaded or violated, or are threatened with
invasion by others’ conduct or acts, and to give relief only at the instance of such
persons. The jurisdiction of a court of law or equity may not be invoked by or for an
individual whose rights have not been breached.40

The remedial right or the remedial obligation is the person’s interest in the controversy.
The right of the plaintiff or other claimant is alleged to be violated by the defendant, who
has the correlative obligation to respect the right of the former. Otherwise put, without
the right, a person may not become a party plaintiff; without the obligation, a person
may not be sued as a party defendant; without the violation, there may not be a suit. In
such a situation, it is legally impossible for any person or entity to be both plaintiff and
defendant in the same action, thereby ensuring that the controversy is actual and exists
between adversary parties. Where there are no adversary parties before it, the court
would be without jurisdiction to render a judgment.41

There is no dispute that the properties subject to the levy on attachment belonged to
Arc Cuisine, Inc. alone, not to the Cuencas and Tayactac in their own right. They were
only stockholders of Arc Cuisine, Inc., which had a personality distinct and separate
from that of any or all of them.42 The damages occasioned to the properties by the levy
on attachment, wrongful or not, prejudiced Arc Cuisine, Inc., not them. As such, only
Arc Cuisine, Inc. had the right under the substantive law to claim and recover such
damages. This right could not also be asserted by the Cuencas and Tayactac unless
they did so in the name of the corporation itself. But that did not happen herein, because
Arc Cuisine, Inc. was not even joined in the action either as an original party or as an
intervenor.

The Cuencas and Tayactac were clearly not vested with any direct interest in the
personal properties coming under the levy on attachment by virtue alone of their being
stockholders in Arc Cuisine, Inc. Their stockholdings represented only their
proportionate or aliquot interest in the properties of the corporation, but did not vest in
them any legal right or title to any specific properties of the corporation. Without doubt,
Arc Cuisine, Inc. remained the owner as a distinct legal person.43

Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuencas and
Tayactac lacked the legal personality to claim the damages sustained from the levy of
the former’s properties. According to Asset Privatization Trust v. Court of Appeals,44
even when the foreclosure on the assets of the corporation was wrongful and done in
bad faith the stockholders had no standing to recover for themselves moral damages;
otherwise, they would be appropriating and distributing part of the corporation’s assets
prior to the dissolution of the corporation and the liquidation of its debts and liabilities.
 Page 34 of 228

Moreover, in Evangelista v. Santos,45 the Court, resolving whether or not the minority
stockholders had the right to bring an action for damages against the principal officers
of the corporation for their own benefit, said:

As to the second question, the complaint shows that the action is for damages resulting
from mismanagement of the affairs and assets of the corporation by its principal officer,
it being alleged that defendant’s maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury complained of is
thus primarily to the corporation, so that the suit for the damages claimed should be by
the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation
pp. 977-980). The stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of
the corporate assets before the dissolution of the corporation and the liquidation of its
debts and liabilities, something which cannot be legally done in view of section 16 of the
Corporation Law, which provides:

No shall corporation shall make or declare any stock or bond dividend or any dividend
whatsoever except from the surplus profits arising from its business, or divide or
distribute its capital stock or property other than actual profits among its members or
stockholders until after the payment of its debts and the termination of its existence by
limitation or lawful dissolution.

xxxx

In the present case, the plaintiff stockholders have brought the action not for the benefit
of the corporation but for their own benefit, since they ask that the defendant make
good the losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective holdings.
Clearly, this cannot be done until all corporate debts, if there be any, are paid and the
existence of the corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation Law. (Emphasis
ours)

It results that plaintiffs complaint shows no cause of action in their favor so that the
lower court did not err in dismissing the complaint on that ground.

While plaintiffs ask for remedy to which they are not entitled unless the requirement of
section 16 of the Corporation Law be first complied with, we note that the action stated
in their complaint is susceptible of being converted into a derivative suit for the benefit
 Page 35 of 228

of the corporation by a mere change in the prayer. Such amendment, however, is not
possible now, since the complaint has been filed in the wrong court, so that the same
has to be dismissed.46

That Marañon knew that Arc Cuisine, Inc. owned the properties levied on attachment
but he still excluded Arc Cuisine, Inc. from his complaint was of no consequence now.
The Cuencas and Tayactac still had no right of action even if the affected properties were
then under their custody at the time of the attachment, considering that their custody
was only incidental to the operation of the corporation.

It is true, too, that the Cuencas and Tayactac could bring in behalf of Arc Cuisine, Inc.
a proper action to recover damages resulting from the attachment. Such action would
be one directly brought in the name of the corporation. Yet, that was not true here, for,
instead, the Cuencas and Tayactac presented the claim in their own names.

In view of the outcome just reached, the Court deems it unnecessary to give any
extensive consideration to the remaining issues.

WHEREFORE, the Court GRANTS the petition for review; and REVERSES and SETS
ASIDE the decision of the Court of Appeals in CA-G.R. CV No. 79145 promulgated on
January 31,2006.

No pronouncements on costs of suit.

SO ORDERED.
 Page 36 of 228

G.R. No. 186433 November 27, 2013

NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners, vs. ALFONSO

G. PUYAT, Respondent.

BRION, J.:

We resolve the petition for review on certiorari,1 filed by petitioners Nuccio Saverio and
NS International, Inc. (NS) against respondent Alfonso G. Puyat, challenging the October
27, 2008 decision2 and the February 10, 2009 resolution3 of the Court of Appeals (CA)
in CA-G.R. CV. No. 87879. The CA decision affirmed the December 15, 2004 decision4
of the Regional Trial Court RTC) of Makati City, Branch 136, in Civil Case No. 00-594.
The CA subsequently denied the petitioners motion for reconsideration.

The Factual Antecedents

On July 22, 1996, the respondent granted a loan to NSI. The loan was made pursuant
to the Memorandum of Agreement and Promissory Note (MOA)5 between the respondent
and NSI, represented by Nuccio. It was agreed that the respondent would extend a credit
line with a limit of ₱500,000.00 to NSI, to be paid within thirty (30) days from the time
of the signing of the document. The loan carried an interest rate of 17% per annum, or
at an adjusted rate of 25% per annum if payment is beyond the stipulated period. The
petitioners received a total amount of ₱300,000.00 and certain machineries intended for
their fertilizer processing plant business (business). The proposed business, however,
failed to materialize.

On several occasions, Nuccio made personal payments amounting to ₱600,000.00.

However, as of December 16, 1999, the petitioners allegedly had an outstanding balance
of ₱460,505.86. When the petitioners defaulted in the payment of the loan, the
respondent filed a collection suit with the RTC, alleging mainly that the petitioners still
owe him the value of the machineries as shown by the Breakdown of Account6 he
presented.

The petitioners refuted the respondent’s allegation and insisted that they have already
paid the loan, evidenced by the respondent’s receipt for the amount of ₱600,000.00.
They submitted that their remaining obligation to pay the machineries’ value, if any,
had long been extinguished by their business’ failure to materialize. They posited that,
even assuming without conceding that they are liable, the amount being claimed is
inaccurate, the penalty and the interest imposed are unconscionable, and an
independent accounting is needed to determine the exact amount of their liability.
 Page 37 of 228

The RTC Ruling

In its decision dated December 15, 2004, the RTC found that aside from the cash loan,
the petitioners’ obligation to the respondent also covered the payment of the
machineries’ value. The RTC also brushed aside the petitioners’ claim of partnership.
The RTC thus ruled that the payment of ₱600,000.00 did not completely extinguish the
petitioners’ obligation.

The RTC also found merit in the respondent’s contention that the petitioners are one
and the same. Based on Nuccio’s act of entering a loan with the respondent for purposes
of financing NSI’s proposed business and his own admission during cross-examination
that the word "NS" in NSI’s name stands for "Nuccio Saverio," the RTC found that the
application of the doctrine of piercing the veil of corporate fiction was proper.

The RTC, moreover, concluded that the interest rates stipulated in the MOA were not
usurious and that the respondent is entitled to attorney’s fees on account of the
petitioners’ willful breach of the loan obligation. Thus, principally relying on the
submitted Breakdown of Account, the RTC ordered the petitioners, jointly and severally,
to pay the balance of ₱460,505.86, at 12% interest, and attorney’s fees equivalent to
25% of the total amount due.

The CA Ruling

The petitioners appealed the RTC ruling to the CA. There, they argued that in view of
the lack of proper accounting and the respondent’s failure to substantiate his claims,
the exact amount of their indebtedness had not been proven. Nuccio also argued that
by virtue of NSI’s separate and distinct personality, he cannot be made solidarily liable
with NSI.

On October 27, 2008, the CA rendered a decision7 declaring the petitioners jointly and
severally liable for the amount that the respondent sought. The appellate court likewise
held that since the petitioners neither questioned the delivery of the machineries nor
their valuation, their obligation to pay the amount of ₱460,505.86 under the Breakdown
of Account remained unrefuted.
 Page 38 of 228

The CA also affirmed the RTC ruling that petitioners are one and the same for the
following reasons: (1) Nuccio owned forty percent (40%) of NSI; (2) Nuccio personally
entered into the loan contract with the respondent because there was no board
resolution from NSI; (3) the petitioners were represented by the same counsel; (4) the
failure of NSI to object to Nuccio’s acts shows the latter’s control over the corporation;
and (5) Nuccio’s control over NSI was used to commit a wrong or fraud. It further
adopted the RTC’s findings of bad faith and willful breach of obligation on the
petitioners’ part, and affirmed its award of attorney’s fees.

The Petition

The petitioners submit that the CA gravely erred in ruling that a proper accounting was
not necessary. They argue that the Breakdown of Account - which the RTC used as a
basis in awarding the claim, as affirmed by the CA - is hearsay since the person who
prepared it, Ramoncito P. Puyat, was not presented in court to authenticate it. They also
point to the absence of the award’s computation in the RTC ruling, arguing that
assuming they are still indebted to the respondent, the specific amount of their
indebtedness remains undetermined, thus the need for an accounting to determine their
exact liability.

They further question the CA’s findings of solidary liability. They submit that in the
absence of any showing that corporate fiction was used to defeat public convenience,
justify a wrong, protect fraud or defend a crime, or where the corporation is a mere alter
ego or business conduit of a person, Nuccio’s mere ownership of forty percent (40%)
does not justify the piercing of the separate and distinct personality of NSI.

The Case for the Respondent

The respondent counters that the issues raised by the petitioners in the present petition
– pertaining to the correctness of the calibration of the documentary and testimonial
evidence by the RTC, as affirmed by the CA, in awarding the money claims – are
essentially factual, not legal. These issues, therefore, cannot, as a general rule, be
reviewed by the Supreme Court in an appeal by certiorari. In other words, the resolution
of the assigned errors is beyond the ambit of a Rule 45 petition.

The Issue

The case presents to us the issue of whether the CA committed a reversible error in
affirming the RTC’s decision holding the petitioners jointly and severally liable for the
amount claimed.
 Page 39 of 228

Our Ruling

After a review of the parties’ contentions, we hold that a remand of the case to the court
of origin for a complete accounting and determination of the actual amount of the
petitioners’ indebtedness is called for.

The determination of questions of fact is improper in a Rule 45 proceeding; Exceptions.

The respondent questions the present petition’s propriety, and contends that in a
petition for review on certiorari under Rule 45 of the Rules of Court, only questions of
law may be raised. He argues that the petitioners are raising factual issues that are not
permissible under the present petition and these issues have already been extensively
passed upon by the RTC and the CA. The petitioners, on the other hand, assert that the
exact amount of their indebtedness has not been determined with certainty. They insist
that the amount of ₱460,505.86 awarded in favor of the respondent has no basis
because the latter failed to substantiate his claim. They also maintain that the
Breakdown of Account used by the lower courts in arriving at the collectible amount is
unreliable for the respondent’s failure to adduce supporting documents for the alleged
additional expenses charged against them. With no independent determination of the
actual amount of their indebtedness, the petitioners submit that an order for a proper
accounting is imperative.

We agree with the petitioners. While we find the fact of indebtedness to be undisputed,
the determination of the extent of the adjudged money award is not, because of the lack
of any supporting documentary and testimonial evidence. These evidentiary issues, of
course, are necessarily factual, but as we held in The Insular Life Assurance Company,
Ltd. v. Court of Appeals,8 this Court may take cognizance even of factual issues under
exceptional circumstances. In this cited case, we held:

It is a settled rule that in the exercise of the Supreme Court's power of review, the Court
is not a trier of facts and does not normally undertake the re-examination of the evidence
presented by the contending parties during the trial of the case considering that the
findings of facts of the CA are conclusive and binding on the Court. However, the Court
had recognized several exceptions to this rule, to wit: (1) when the findings are grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion;
(4) when the judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the Court of Appeals went beyond
the issues of the case, or its findings are contrary to the admissions of both the appellant
and the appellee; (7) when the findings are contrary to the trial court; (8) when the
 Page 40 of 228

findings are conclusions without citation of specific evidence on which they are based;
(9) when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; (10) when the findings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on record; and
(11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed
by the parties, which, if properly considered, would justify a different conclusion.

We note in this regard that the RTC, in awarding the amount of ₱460,505.86 in favor of
the respondent, principally relied on the Breakdown of Account. Under this document,
numerous entries, including the cash loan, were enumerated and identified with their
corresponding amounts. It included the items of expenses allegedly chargeable to the
petitioners, the value of the machineries, the amount credited as paid, and the interest
and penalty allegedly incurred.

A careful perusal of the records, however, reveals that the entries in the Breakdown of
Account and their corresponding amounts are not supported by the respondent’s
presented evidence. The itemized expenses, as repeatedly pointed out by the petitioners,
were not proven, and the remaining indebtedness, after the partial payment of
₱600,000.00, was merely derived by the RTC from the Breakdown of Account.

Significantly, the RTC ruling neither showed how the award was computed nor how the
interest and penalty were calculated. In fact, it merely declared the petitioners liable for
the amount claimed by the respondent and adopted the breakdown of liability in the
Breakdown of Account. This irregularity is even aggravated by the RTC’s explicit refusal
to explain why the payment of ₱600,000.00 did not extinguish the debt. While it may be
true that the petitioners’ indebtedness, aside from the cash loan of ₱300,000.00,
undoubtedly covered the value of the machineries, the RTC decision was far from clear
and instructive on the actual remaining indebtedness (inclusive of the machineries’
value, penalties and interests) after the partial payment was made and how these were
all computed.

We, thus, find it unacceptable for the RTC to simply come up with a conclusion that the
payment of ₱600,000.00 did not extinguish the debt, or, assuming it really did not, that
the remaining amount of indebtedness amounts exactly to ₱460,505.86, without any
showing of how this balance was arrived at. To our mind, the RTC’s ruling, in so far as
the determination of the actual indebtedness is concerned, is incomplete.
What happened at the RTC likewise transpired at the CA when the latter affirmed the
appealed decision; the CA merely glossed over the contention of the petitioners, and
adopted the RTC’s findings without giving any enlightenment. To reiterate, nowhere in
the decisions of the RTC and the CA did they specify how the award, including the
penalty and interest, was determined. The petitioners were left in the dark as to how
 Page 41 of 228

their indebtedness of ₱300,000.00, after making a payment of ₱600,000.00, ballooned

to ₱460,505.86. Worse, unsubstantiated expenses, appearing in the Breakdown of
Account, were charged to them.

We, therefore, hold it inescapable that the prayer for proper accounting to determine
the petitioners’ actual remaining indebtedness should be granted. As this requires
presentation of additional evidence, a remand of the case is only proper and in order.

Piercing the veil of corporate fiction is not justified. The petitioners are not one and the
same.

At the outset, we note that the question of whether NSI is an alter ego of Nuccio is a
factual one. This is also true with respect to the question of whether the totality of the
evidence adduced by the respondent warrants the application of the piercing the veil of
corporate fiction doctrine. As we did in the issue of accounting, we hold that the Court
may properly wade into the piercing the veil issue although purely factual questions are
involved.

After a careful study of the records and the findings of both the RTC and the CA, we
hold that their conclusions, based on the given findings, are not supported by the
evidence on record.

The rule is settled that a corporation is vested by law with a personality separate and
distinct from the persons composing it. Following this principle, a stockholder,
generally, is not answerable for the acts or liabilities of the corporation, and vice versa.
The obligations incurred by the corporate officers, or other persons acting as corporate
agents, are the direct accountabilities of the corporation they represent, and not theirs.
A director, officer or employee of a corporation is generally not held personally liable for
obligations incurred by the corporation9 and while there may be instances where
solidary liabilities may arise, these circumstances are exceptional.10

Incidentally, we have ruled that mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stocks of the corporation is not, by itself, a
sufficient ground for disregarding the separate corporate personality. Other than mere
ownership of capital stocks, circumstances showing that the corporation is being used
to commit fraud or proof of existence of absolute control over the corporation have to be
proven. In short, before the corporate fiction can be disregarded, alter-ego elements
must first be sufficiently established.
 Page 42 of 228

In Hi-Cement Corporation v. Insular Bank of Asia and America (later PCI-Bank, now
Equitable PCI-Bank),11 we refused to apply the piercing the veil doctrine on the ground
that the corporation was a mere alter ego because mere ownership by a stockholder of
all or nearly all of the capital stocks of a corporation does not, by itself, justify the
disregard of the separate corporate personality. In this cited case, we ruled that in order
for the ground of corporate ownership to stand, the following circumstances should also
be established: (1) that the stockholders had control or complete domination of the
corporation’s finances and that the latter had no separate existence with respect to the
act complained of; (2) that they used such control to commit a wrong or fraud; and (3)
the control was the proximate cause of the loss or injury.

Applying these principles to the present case, we opine and so hold that the attendant
circumstances do not warrant the piercing of the veil of NSI’s corporate fiction.

Aside from the undisputed fact of Nuccio’s 40% shareholdings with NSI, the RTC applied
the piercing the veil doctrine based on the following reasons. First, there was no board
resolution authorizing Nuccio to enter into a contract of loan. Second, the petitioners
were represented by one and the same counsel. Third, NSI did not object to Nuccio’s act
of contracting the loan.

Fourth, the control over NSI was used to commit a wrong or fraud. Fifth, Nuccio’s
admission that "NS" in the corporate name "NSI" means "Nuccio Saverio."

We are not convinced of the sufficiency of these cited reasons. In our view, the RTC
failed to provide a clear and convincing explanation why the doctrine was applied. It
merely declared that its application of the doctrine of piercing the veil of corporate fiction
has a basis, specifying for this purpose the act of Nuccio’s entering into a contract of
loan with the respondent and the reasons stated above.

The records of the case, however, do not show that Nuccio had control or domination
over NSI’s finances.1âwphi1 The mere fact that it was Nuccio who, in behalf of the
corporation, signed the MOA is not sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a board resolution authorizing him to
contract the loan nor NSI’s failure to object thereto supports this conclusion. These may
be indicators that, among others, may point the proof required to justify the piercing
the veil of corporate fiction, but by themselves, they do not rise to the level of proof
required to support the desired conclusion. It should be noted in this regard that while
Nuccio was the signatory of the loan and the money was delivered to him, the proceeds
of the loan were unquestionably intended for NSI’s proposed business plan. That the
business did not materialize is not also sufficient proof to justify a piercing, in the
 Page 43 of 228

absence of proof that the business plan was a fraudulent scheme geared to secure funds
from the respondent for the petitioners’ undisclosed goals.

Considering that the basis for holding Nuccio liable for the payment of the loan has been
proven to be insufficient, we find no justification for the RTC to hold him jointly and
solidarily liable for NSI’s unpaid loan. Similarly, we find that the CA ruling is wanting
in sufficient explanation to justify the doctrine’s application and affirmation of the RTC’s
ruling. With these points firmly in mind, we hold that NSI’s liability should not attach
to Nuccio.

On the final issue of the award of attorney’s fees, Article 1229 of the New Civil Code
provides:

Article 1229. The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

Under the circumstances of the case, we find the respondent’s entitlement to attorney’s
fees to be justified. There is no doubt that he was forced to litigate to protect his interest,
i.e., to recover his money. We find, however, that in view of the partial payment of
₱600,000.00, the award of attorney’s fees equivalent to 25% should be reduced to 10%
of the total amount due. The award of appearance fee of ₱3,000.00 and litigation cost of
₱10,000.00 should, however, stand as these are costs necessarily attendant to litigation.

WHEREFORE, the petition is GRANTED. The October 27, 2008 decision and the
February 10, 2009 resolution of the Court of Appeals in CA-G.R. CV. No. 87879 are
REVERSED AND SET ASIDE. The case is REMANDED to the Regional Trial Court of
Makati City, Branch 136, for proper accounting and reception of such evidence as may
be needed to determine the actual amount of petitioner NS International, Inc.’s
indebtedness, and to adjudicate respondent Alfonso G. Puyat’s claims as such evidence
may warrant.
SO ORDERED.
 Page 44 of 228

G.R. No. 174938 October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners, vs. BF

CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS,
RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS,
Respondents.

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings

pursuant to a contract entered into by the corporation they represent if there are
allegations of bad faith or malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and
October 5, 2006 resolution. The Court of Appeals affirmed the trial court's decision
holding that petitioners, as director, should submit themselves as parties tothe
arbitration proceedings between BF Corporation and Shangri-La Properties, Inc.
(Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo
B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin
C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991,
it entered into agreements with Shangri-La wherein it undertook to construct for
Shangri-La a mall and a multilevel parking structure along EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its

progress billing statements.3 However, by October 1991, Shangri-La started defaulting
in payment.4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to
pay for its obligations with BF Corporation, and the delay in payment was simply a
matter of delayed processing of BF Corporation’s progress billing statements.6
 Page 45 of 228

BF Corporation eventually completed the construction of the buildings.7 Shangri-La

allegedly took possession of the buildings while still owing BF Corporation an
outstanding balance.8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in
directing Shangri-La’s affairs. Therefore, they should be held jointly and severally liable
with Shangri-La for its obligations as well as for the damages that BF Corporation
incurred as a result of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco

III, and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF
Corporation’s failure to submit its dispute to arbitration, in accordance with the
arbitration clauseprovided in its contract, quoted in the motion as follows:11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner
or the Project Manager on his behalf and the Contractor, either during the progress or
after the completion or abandonment of the Works as to the construction of this
Contract or as to any matter or thing of whatsoever nature arising there under or
inconnection therewith (including any matter or thing left by this Contract to the
discretion of the Project Manager or the withholding by the Project Manager of any
certificate to which the Contractor may claim to be entitled or the measurement and
valuation mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of
the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the
Contractor hereby agree to exert all efforts to settle their differences or dispute amicably.
Failing these efforts then such dispute or difference shall be referred to arbitration in
accordance with the rules and procedures of the Philippine Arbitration Law.

xxx xxx xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The decision
of the Arbitrators shall be a condition precedent to any right of legal action that either
party may have against the other. . . .12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13

 Page 46 of 228

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with

compulsory counter claim against BF Corporation and crossclaim against Shangri-
La.15 They alleged that they had resigned as members of Shangri-La’s board of directors
as of July 15, 1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B.
Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a petition for certiorari with
the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered
the submission of the dispute to arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review
on certiorari with this court.19 On March 27, 1998, this court affirmed the Court of
Appeals’ decision, directing that the dispute be submitted for arbitration.20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF

Corporation and Shangri-La failed to agree as to the law that should govern the
arbitration proceedings.21 On October 27, 1998, the trial court issued the order
directing the parties to conduct the proceedings in accordance with Republic Act No.
876.22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for

clarification, both seeking to clarify the term, "parties," and whether Shangri-La’s
directors should be included in the arbitration proceedings and served with separate
demands for arbitration.23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying

that they be excluded from the arbitration proceedings for being non-parties to Shangri-
La’s and BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for
arbitration upon all defendants in BF Corporation’s complaint.25 According to the trial
 Page 47 of 228

court, Shangri-La’s directors were interested parties who "must also be served with a
demand for arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective positions."26
Petitioners’ motion for reconsideration ofthis order was denied by the trial court on
January 19, 2005.27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse
of discretion in the issuance of orders compelling them to submit to arbitration
proceedings despite being third parties to the contract between Shangri-La and BF
Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties
in the arbitration proceedings.30 According to the Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code,
and that as directors of the defendant corporation, [they], in accordance with Art. 1217
of the Civil Code, stand to be benefited or injured by the result of the arbitration
proceedings, hence, being necessary parties, they must be joined in order to have
complete adjudication of the controversy. Consequently, if [they were] excluded as
parties in the arbitration proceedings and an arbitral award is rendered, holding
[Shangri-La] and its board of directors jointly and solidarily liable to private respondent
BF Corporation, a problem will arise, i.e., whether petitioners will be bound bysuch
arbitral award, and this will prevent complete determination of the issues and resolution
of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and
January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No.
63400, are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5,
2006 resolution.34
 Page 48 of 228

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court
of Appeals decision and the October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF
Corporation’s allegation that they are solidarily liable with Shangri-La.37 Neither did
they bind themselves personally nor did they undertake to shoulder Shangri-La’s
obligations should it fail in its obligations.38 BF Corporation also failed to establish
fraud or bad faith on their part.39

Petitioners also argue that they are third parties to the contract between BF Corporation
and Shangri-La.40 Provisions including arbitration stipulations should bind only the
parties.41 Based on our arbitration laws, parties who are strangers to an agreement
cannot be compelled to arbitrate.42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of
parties in resolving their disputes.43 Compelling them to submit to arbitration is against
this purpose and may be tantamount to stipulating for the parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco

III, Alfredo C.Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners
that Shangri-La’sdirectors, being non-parties to the contract, should not be made
personally liable for Shangri-La’s acts.46 Since the contract was executed only by BF
Corporation and Shangri-La, only they should be affected by the contract’s
stipulation.47 BF Corporation also failed to specifically allege the unlawful acts of the
directors that should make them solidarily liable with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the
parties should undergo arbitration "clearly contemplated the inclusion of the directors
of the corporation[.]"49 BF Corporation also argued that while petitioners were not
 Page 49 of 228

parties to the agreement, they were still impleaded under Section 31 of the Corporation
Code.50 Section 31 makes directors solidarily liable for fraud, gross negligence, and bad
faith.51 Petitioners are not really third parties to the agreement because they are being
sued as Shangri-La’s representatives, under Section 31 of the Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their
solidary liability, they are necessary parties to the arbitration proceedings.53 The full
resolution of all disputes in the arbitration proceedings should also be done in the
interest of justice.54

In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007.55 The Arbitral
Tribunal denied BF Corporation’s claims against them.56 Petitioners stated that "[they]
were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ."57 They also stated that "[their]
unwilling participation in the arbitration case was done ex abundante ad cautela, as
manifested therein on several occasions."58 Petitioners informed the court that they
already manifested with the trial court that "any action taken on [the Arbitral Tribunal’s
decision] should be without prejudice to the resolution of [this] case."59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos
reiterated their arguments that they should not be held liable for Shangri-La’s default
and made parties to the arbitration proceedings because only BF Corporation and
Shangri-La were parties to the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their
solidary liability under Section 31 of the Corporation Code. Shangri-La added that their
exclusion from the arbitration proceedings will result in multiplicity of suits, which "is
not favored in this jurisdiction."60 It pointed out that the case had already been mooted
by the termination of the arbitration proceedings, which petitioners actively participated
in.61 Moreover, BF Corporation assailed only the correctness of the Arbitral Tribunal’s
award and not the part absolving Shangri-La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the

required memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’

counterclaims were already dismissed with finality, and the claims against them were
 Page 50 of 228

likewise dismissed with finality, they no longer have any interest orpersonality in the
arbitration case. Thus, there is no longer any need to resolve the present Petition, which
mainly questions the inclusion of petitioners in the arbitration proceedings."64 The
court’s decision in this case will no longer have any effect on the issue of petitioners’
inclusion in the arbitration proceedings.65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding
effect on BF Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De
la Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case
already escaped from prison and ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is
moot and academic should not preclude this Tribunal from setting forth in language
clear and unmistakable, the obligation of fidelity on the part of lower court judges to the
unequivocal command of the Constitution that excessive bail shall not be required.67

This principle was repeated in subsequent cases when this court deemed it proper to
clarify important matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings
in accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if
the distinction between Shangri-La’s personality and their personalities should be
disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to
avoid litigation and settle disputes amicably and more expeditiously by themselves and
through their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,69 which was
approved as early as 1949. It was later institutionalized by the approval of Republic Act
No. 876,70 which expressly authorized, made valid, enforceable, and irrevocable parties’
 Page 51 of 228

decision to submit their controversies, including incidental issues, to arbitration. This

court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael and Company,
Inc.:71

As a corollary to the question regarding the existence of an arbitration agreement,

defendant raises the issue that, even if it be granted that it agreed to submit its dispute
with plaintiff to arbitration, said agreement is void and without effect for it amounts to
removing said dispute from the jurisdiction of the courts in which the parties are
domiciled or where the dispute occurred. It is true that there are authorities which hold
that "a clause in a contract providing that all matters in dispute between the parties
shall be referred to arbitrators and to them alone, is contrary to public policy and cannot
oust the courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57
Phil., 600, 603), however, there are authorities which favor "the more intelligent view
that arbitration, as an inexpensive, speedy and amicable method of settling disputes,
and as a means of avoiding litigation, should receive every encouragement from the
courts which may be extended without contravening sound public policy or settled law"
(3 Am. Jur., p. 835). Congress has officially adopted the modern view when it reproduced
in the new Civil Code the provisions of the old Code on Arbitration. And only recently it
approved Republic Act No. 876 expressly authorizing arbitration of future disputes.72
(Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration

clauses are liberally construed to favor arbitration. Thus, in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc.,73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration —

along with mediation, conciliation and negotiation — is encouraged by the Supreme
Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind. It is thus regarded as the "wave of the
future" in international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute

resolution methods, courts should liberally construe arbitration clauses. Provided such
clause is susceptible of an interpretation that covers the asserted dispute, an order to
arbitrate should be granted. Any doubt should be resolved in favor of arbitration.74
(Emphasis supplied)
 Page 52 of 228

A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively
promote party autonomy in the resolution of disputes or the freedom of the party to
make their own arrangements to resolve their disputes. Towards this end, the State
shall encourage and actively promote the use of Alternative Dispute Resolution (ADR)
as an important means to achieve speedy and impartial justice and declog court dockets.
As such, the State shall provide means for the use of ADR as an efficient tool and an
alternative procedure for the resolution of appropriate cases. Likewise, the State shall
enlist active private sector participation in the settlement of disputes through ADR. This
Act shall be without prejudice to the adoption by the Supreme Court of any ADR system,
such as mediation, conciliation, arbitration, or any combination thereof as a means of
achieving speedy and efficient means of resolving cases pending before all courts in the
Philippines which shall be governed by such rules as the Supreme Court may approve
from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due
regard to the policy of the law in favor of arbitration.Where action is commenced by or
against multiple parties, one or more of whomare parties who are bound by the
arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that
interpretation shall be adopted. Petitioners’ main argument arises from the separate
personality given to juridical persons vis-à-vis their directors, officers, stockholders, and
agents. Since they did not sign the arbitration agreement in any capacity, they cannot
be forced to submit to the jurisdiction of the Arbitration Tribunal in accordance with the
arbitration agreement. Moreover, they had already resigned as directors of Shangri-Laat
the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are

separate and distinct from Shangri-La.
 Page 53 of 228

A corporation is an artificial entity created by fiction of law.76 This means that while it
is not a person, naturally, the law gives it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with a personality that is distinct and
separate from other persons including its stockholders, officers, directors,
representatives,77 and other juridical entities. The law vests in corporations
rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own.78 For instance, they have the power to sue and
enter into transactions or contracts. Section 36 of the Corporation Code enumerates
some of a corporation’s powers, thus:

Section 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 ofincorporation;

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;
 Page 54 of 228

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 asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights
and powers through itsdirectors, officers, or agents, who are all natural persons. A
corporation cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation

through its representatives is not consent of the representative, personally. Its
obligations, incurred through official acts of its representatives, are its own. A
stockholder, director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder, director or
representative.

Hence, a corporation’s representatives are generally not bound by the terms of the
contract executed by the corporation. They are not personally liable for obligations and
liabilities incurred on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving
their disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither
parties to the contract nor assignees of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the

stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs.
But only they.80 (Citations omitted)
 Page 55 of 228

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract. As a rule, contracts are
respected as the law between the contracting parties and produce effect as between
them, their assigns and heirs. Clearly, only parties to the Agreement . . . are bound by
the Agreement and its arbitration clause as they are the only signatories thereto.82
(Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air
Terminals Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in
arbitration proceedings made pursuant to an agreement entered into by the corporation.
He or she is generally not considered a party to that agreement.

However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this
piercing the veil of corporate fiction.

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."85 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."86

When corporate veil is pierced, the corporation and persons who are normally treated
as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.
 Page 56 of 228

Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation Code provides
the instances when directors, trustees, or officers may become liable for corporate acts:

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.

When a director, trustee or officer attempts to acquire or acquires, in violation of his

duty, any interest adverse to the corporation in respect of any matter which has been
reposed inhim in confidence, as to which equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation. (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or
her duties as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto";87
 Page 57 of 228

b) "When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action."89

When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons
and the corporation should be treated as one. Without a trial, courts and tribunals have
no basis for determining whether the veil of corporate fiction should be pierced. Courts
or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first
determine whether circumstances exist towarrant the courts or tribunals to disregard
the distinction between the corporation and the persons representing it. The
determination of these circumstances must be made by one tribunal or court in a
proceeding participated in by all parties involved, including current representatives of
the corporation, and those persons whose personalities are impliedly the sameas the
corporation. This is because when the court or tribunal finds that circumstances exist
warranting the piercing of the corporate veil, the corporate representatives are treated
as the corporation itself and should be held liable for corporate acts. The corporation’s
distinct personality is disregarded, and the corporation is seen as a mere aggregation of
persons undertaking a business under the collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the corporation are not
acting as separate entities. They are alleging that the acts or omissions by the
corporation that violated their rights are also the directors’ acts or omissions.90 They
are alleging that contracts executed by the corporation are contracts executed by the
directors. Complainants effectively pray that the corporate veilbe pierced because the
cause of action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against
the parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause
of action is prohibited. Institution of more than one suit for the same cause of action
constitutes splitting the cause of action, which is a ground for the dismissal ofthe others.
Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than
one suit for a single cause of action. (3a)
 Page 58 of 228

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted
on the basis of the same cause of action, the filing of one or a judgment upon the merits
in any one is available as a ground for the dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to
be indistinct that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration

proceedings, we are not overturning Heirs of Augusto Salas wherein this court affirmed
the basic arbitration principle that only parties to an arbitration agreement may be
compelled to submit to arbitration. In that case, this court recognizedthat persons other
than the main party may be compelled to submit to arbitration, e.g., assignees and
heirs. Assignees and heirs may be considered parties to an arbitration agreement
entered into by their assignor because the assignor’s rights and obligations are
transferred to them upon assignment. In other words, the assignor’s rights and
obligations become their own rights and obligations. In the same way, the corporation’s
obligations are treated as the representative’s obligations when the corporate veil is
pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its policy against
multiplicity of suits and unnecessary delay. This court said that "to split the proceeding
into arbitration for some parties and trial for other parties would "result in multiplicity
of suits, duplicitous procedure and unnecessary delay."91 This court also intimated that
the interest of justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to direct the trial court
to proceed to determine the issues of thatcase, it did not prohibit courts from allowing
the case to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights,
and the incidental issue of whether piercing of the corporate veil is warranted, should
be determined in a single proceeding. Such finding would determine if the corporation
is merely an aggregation of persons whose liabilities must be treated as one with the
corporation.

However, when the courts disregard the corporation’s distinct and separate personality
from its directors or officers, the courts do not say that the corporation, in all instances
and for all purposes, is the same as its directors, stockholders, officers, and agents. It
does not result in an absolute confusion of personalities of the corporation and the
persons composing or representing it. Courts merely discount the distinction and treat
them as one, in relation to a specific act, in order to extend the terms of the contract
and the liabilities for all damages to erring corporate officials who participated in the
corporation’s illegal acts. This is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.
 Page 59 of 228

Thus, in cases alleging solidary liability with the corporation or praying for the piercing
of the corporate veil, parties who are normally treated as distinct individuals should be
made to participate in the arbitration proceedings in order to determine ifsuch
distinction should indeed be disregarded and, if so, to determine the extent of their
liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed
to prove the existence of circumstances that render petitioners and the other directors
solidarily liable. It ruled that petitioners and Shangri-La’s other directors were not liable
for the contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s
decision was made with the participation of petitioners, albeit with their continuing
objection. In view of our discussion above, we rule that petitioners are bound by such
decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006
and resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.
 Page 60 of 228

G.R. No. 159108 June 18, 2012

GOLD LINE TOURS, INC., Petitioner, vs. HEIRS OF MARIA CONCEPCION

LACSA, Respondents.

BERSAMIN, J.:

The veil of corporate existence of a corporation is a fiction of law that should not defeat
the ends of justice.

Petitioner seeks to reverse the decision promulgated on October 30, 20021 and the
resolution promulgated on June 25, 2003,2 whereby the Court of Appeals (CA) upheld
the orders issued on August 2, 20013 and October 22, 20014 by the Regional Trial
Court (RTC), Branch 51, in Sorsogon in Civil Case No. 93-5917 entitled Heirs of
Concepcion Lacsa, represented by Teodoro Lacsa v. Travel & Tours Advisers, Inc., et al.
authorizing the implementation of the writ of execution against petitioner despite its
protestation of being a separate and different corporate personality from Travel & Tours
Advisers, Inc. (defendant in Civil Case No. 93-5917).

In the orders assailed in the CA, the RTC declared petitioner and Travel & Tours
Advisers, Inc. to be one and the same entity, and ruled that the levy of petitioner’s
property to satisfy the final and executory decision rendered on June 30, 1997 against
Travel & Tours Advisers, Inc. in Civil Case No. 93-59175 was valid even if petitioner had
not been impleaded as a party.

Antecedents

On August 2, 1993, Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa
(Miriam), boarded a Goldline passenger bus with Plate No. NXM-105 owned and
operated by Travel &Tours Advisers, Inc. They were enroute from Sorsogon to Cubao,
Quezon City.6 At the time, Concepcion, having just obtained her degree of Bachelor of
Science in Nursing at the Ago Medical and Educational Center, was proceeding to Manila
to take the nursing licensure board examination.7 Upon reaching the highway at
Barangay San Agustin in Pili, Camarines Sur, the Goldline bus, driven by Rene Abania
(Abania), collided with a passenger jeepney with Plate No. EAV-313 coming from the
opposite direction and driven by Alejandro Belbis.8 As a result, a metal part of the
jeepney was detached and struck Concepcion in the chest, causing her instant death.9
 Page 61 of 228

On August 23, 1993, Concepcion’s heirs, represented by Teodoro Lacsa, instituted in

the RTC a suit against Travel & Tours Advisers Inc. and Abania to recover damages
arising from breach of contract of carriage.10 The complaint, docketed as Civil Case No.
93-5917 and entitled Heirs of Concepcion Lacsa, represented by Teodoro Lacsa v. Travel
& Tours Advisers, Inc. (Goldline) and Rene Abania, alleged that the collision was due to
the reckless and imprudent manner by which Abania had driven the Goldline bus.11

In support of the complaint, Miriam testified that Abania had been occasionally looking
up at the video monitor installed in the front portion of the Goldline bus despite driving
his bus at a fast speed;12 that in Barangay San Agustin, the Goldline bus had collided
with a service jeepney coming from the opposite direction while in the process of
overtaking another bus;13 that the impact had caused the angle bar of the jeepney to
detach and to go through the windshield of the bus directly into the chest of Concepcion
who had then been seated behind the driver’s seat;14 that concerned bystanders had
hailed another bus to rush Concepcion to the Ago Foundation Hospital in Naga City
because the Goldline bus employees and her co-passengers had ignored Miriam’s cries
for help;15 and that Concepcion was pronounced dead upon arrival at the hospital.16

To refute the plaintiffs’ allegations, the defendants presented SPO1 Pedro Corporal of
the Philippine National Police Station in Pili, Camarines Sur, and William Cheng, the
operator of the Goldline bus.17 SPO1 Corporal opined that based on his investigation
report, the driver of the jeepney had been at fault for failing to observe precautionary
measures to avoid the collision;18 and suggested that criminal and civil charges should
be brought against the operator and driver of the jeepney.19 On his part, Cheng attested
that he had exercised the required diligence in the selection and supervision of his
employees; and that he had been engaged in the transportation business since 1980
with the use of a total of 60 units of Goldline buses, employing about 100 employees
(including drivers, conductors, maintenance personnel, and mechanics);20 that as a
condition for regular employment, applicant drivers had undergone a one-month
training period and a six-month probationary period during which they had gotten
acquainted with Goldline’s driving practices and demeanor;21 that the employees had
come under constant supervision, rendering improbable the claim that Abania, who was
a regular employee, had been glancing at the video monitor while driving the bus;22
that the incident causing Concepcion’s death was the first serious incident his (Cheng)
transportation business had encountered, because the rest had been only minor traffic
accidents;23 and that immediately upon being informed of the accident, he had
instructed his personnel to contact the family of Concepcion.24

The defendants blamed the death of Concepcion to the recklessness of Bilbes as the
driver of the jeepney, and of its operator, Salvador Romano;25 and that they had
consequently brought a third-party complaint against the latter.26
 Page 62 of 228

After trial, the RTC rendered its decision dated June 30, 1997, disposing:

ACCORDINGLY, judgment is hereby rendered:

(1) Finding the plaintiffs entitled to damages for the death of Ma. Concepcion Lacsa in
violation of the contract of carriage;

(2) Ordering defendant Travel & Tours Advisers, Inc. (Goldline) to pay plaintiffs:

a. ₱30,000.00 – expenses for the wake;

b. ₱ 6,000.00 – funeral expenses;

c. ₱50,000.00 – for the death of Ma. Concepcion Lacsa;

d. ₱150,000.00 – for moral damages;

e. ₱20,000.00 – for exemplary damages;

f. ₱8,000.00 – for attorney’s fees;

g. ₱2,000.00 – for litigation expenses;

h. Costs of suit.

(3) Ordering the dismissal of the case against Rene Abania;

(4) Ordering the dismissal of the third-party complaint.

SO ORDERED.27
 Page 63 of 228

The RTC found that a contract of carriage had been forged between Travel & Tours
Advisers, Inc. and Concepcion as soon as she had boarded the Goldline bus as a paying
passenger; that Travel & Tours Advisers, Inc. had then become duty-bound to safely
transport her as its passenger to her destination; that due to Travel & Tours Advisers,
Inc.’s inability to perform its duty, Article 1786 of the Civil Code created against it the
disputable presumption that it had been at fault or had been negligent in the
performance of its obligations towards the passenger; that Travel & Tours Advisers, Inc.
failed to disprove the presumption of negligence; and that a rigid selection of employees
was not sufficient to exempt Travel & Tours Advisers, Inc. from the obligation of
exercising extraordinary diligence to ensure that its passenger was carried safely to her
destination.

Aggrieved, the defendants appealed to the CA.

On June 11, 1998,28 the CA dismissed the appeal for failure of the defendants to pay
the docket and other lawful fees within the required period as provided in Rule 41,
Section 4 of the Rules of Court (1997). The dismissal became final, and entry of
judgment was made on July 17, 1998.29

Thereafter, the plaintiffs moved for the issuance of a writ of execution to implement the
decision dated June 30, 1997.30 The RTC granted their motion on January 31, 2000,31
and issued the writ of execution on February 24, 2000.32

On May 10, 2000, the sheriff implementing the writ of execution rendered a Sheriff’s
Partial Return,33 certifying that the writ of execution had been personally served and a
copy of it had been duly tendered to Travel & Tours Advisers, Inc. or William Cheng,
through his secretary, Grace Miranda, and that Cheng had failed to settle the judgment
amount despite promising to do so. Accordingly, a tourist bus bearing Plate No. NWW-
883 was levied pursuant to the writ of execution.

The plaintiffs moved to cite Cheng in contempt of court for failure to obey a lawful writ
of the RTC.34 Cheng filed his opposition.35 Acting on the motion to cite Cheng in
contempt of court, the RTC directed the plaintiffs to file a verified petition for indirect
contempt on February 19, 2001.36

On April 20, 2001, petitioner submitted a so-called verified third party claim,37 claiming
that the tourist bus bearing Plate No. NWW-883 be returned to petitioner because it was
the owner; that petitioner had not been made a party to Civil Case No. 93-5917; and
 Page 64 of 228

that petitioner was a corporation entirely different from Travel & Tours Advisers, Inc.,
the defendant in Civil Case No. 93-5917.

It is notable that petitioner’s Articles of Incorporation was amended on November 8,

1993,38 shortly after the filing of Civil Case No. 93-5917 against Travel & Tours
Advisers, Inc.

Respondents opposed petitioner’s verified third-party claim on the following grounds,

namely: (a) the third-party claim did not comply with the required notice of hearing as
required by Rule 15, Sections 4 and 5 of the Rules of Court; (b) Travel & Tours Advisers,
Inc. and petitioner were identical entities and were both operated and managed by the
same person, William Cheng; and (c) petitioner was attempting to defraud its creditors
–respondents herein – hence, the doctrine of piercing the veil of corporate entity was
squarely applicable.39

On August 2, 2001, the RTC dismissed petitioner’s verified third-party claim, observing
that the identity of Travel & Tours Adivsers, Inc. could not be divorced from that of
petitioner considering that Cheng had claimed to be the operator as well as the
President/Manager/incorporator of both entities; and that Travel & Tours Advisers, Inc.
had been known in Sorsogon as Goldline.40

Petitioner moved for reconsideration,41 but the RTC denied the motion on October 22,
2001.42

Thence, petitioner initiated a special civil action for certiorari in the CA,43 asserting:

THE RESPONDENT HONORABLE RTC JUDGE HAD ACTED WITHOUT JURISDICTION

OR COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN ISSUING THE: (A) ORDER DATED 2 AUGUST 2001, COPY OF WHICH
IS HERETO ATTACHED AS ANNEX A, DISMISSING HEREIN PETITIONER’S THIRD
PARTY CLAIM; AND (B) ORDER DATED 22 OCTOBER 2001, COPY OF WHICH IS
HERETO ATTACHED AS ANNEX B DENYING SAID PETITIONER’S MOTION FOR
RECONSIDERATION; AND THAT THERE IS NO APPEAL, OR ANY PLAIN, SPEEDY AND
ADEQUATE REMEDY AVAILABLE TO SAID PETITIONER.

On October 30, 2002, the CA promulgated its decision dismissing the petition for
certiorari,44 holding as follows:
 Page 65 of 228

The petition lacks merit.

As stated in the decision supra, William Ching disclosed during the trial of the case that
defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating
sixty (60) units of Goldline buses. That the Goldline buses are used in the operations of
defendant company is obvious from Mr. Cheng’s admission. The Amended Articles of
Incorporation of Gold Line Tours, Inc. disclose that the following persons are the original
incorporators thereof: Antonio O. Ching, Maribel Lim Ching, witness William Ching,
Anita Dy Ching and Zosimo Ching. (Rollo, pp. 105-106) We see no reason why defendant
company would be using Goldline buses in its operations unless the two companies are
actually one and the same.

Moreover, the name Goldline was added to defendant’s name in the Complaint. There
was no objection from William Ching who could have raised the defense that Gold Line
Tours, Inc. was in no way liable or involved. Indeed, it appears to this Court that rather
than Travel & Tours Advisers, Inc., it is Gold Line Tours, Inc., which should have been
named party defendant.

Be that as it may, We concur in the trial court’s finding that the two companies are
actually one and the same, hence the levy of the bus in question was proper.

WHEREFORE, for lack of merit, the petition is DISMISSED and the assailed Orders are
AFFIRMED.

SO ORDERED.

Petitioner filed a motion for reconsideration,45 which the CA denied on June 25,
2003.46

Hence, this appeal, in which petitioner faults the CA for holding that the RTC did not
act without jurisdiction or grave abuse of discretion in finding that petitioner and Travel
& Tours Advisers, Inc., the defendant in Civil Case No. 5917, were one and same entity,
and for sustaining the propriety of the levy of the tourist bus with Plate No. NWW-883
in satisfaction of the writ of execution. 47
 Page 66 of 228

In the meantime, respondents filed in the RTC a motion to direct the sheriff to implement
the writ of execution in view of the non-issuance of any restraining order either by this
Court or the CA.48 On February 23, 2007, the RTC granted the motion and directed the
sheriff to sell the Goldline tourist bus with Plate No. NWW-883 through a public
auction.49

Issue

Did the CA rightly find and conclude that the RTC did not gravely abuse its discretion
in denying petitioner’s verified third-party claim?

Ruling

We find no reason to reverse the assailed CA decision.

In the order dated August 2, 2001, the RTC rendered its justification for rejecting the
third-party claim of petitioner in the following manner:

xxx

The main contention of Third Party Claimant is that it is the owner of the Bus and
therefore, it should not be seized by the sheriff because the same does not belong to the
defendant Travel & Tours Advises, Inc. (GOLDLINE) as the third party claimant and
defendant are two separate corporation with separate juridical personalities. Upon the
other hand, this Court had scrutinized the documents submitted by the Third party
Claimant and found out that William Ching who claimed to be the operator of the Travel
& Tours Advisers, Inc. (GOLDLINE) is also the President/Manager and incorporator of
the Third Party Claimant Goldline Tours Inc. and he is joined by his co-incorporators
who are "Ching" and "Dy" thereby this Court could only say that these two corporations
are one and the same corporations. This is of judicial knowledge that since Travel &
Tours Advisers, Inc. came to Sorsogon it has been known as GOLDLINE.

This Court is not persuaded by the proposition of the third party claimant that a
corporation has an existence separate and/or distinct from its members insofar as this
case at bar is concerned, for the reason that whenever necessary for the interest of the
public or for the protection of enforcement of their rights, the notion of legal entity
 Page 67 of 228

should not and is not to be used to defeat public convenience, justify wrong, protect
fraud or defend crime.

Apposite to the case at bar is the case of Palacio vs. Fely Transportation Co., L-15121,
May 31, 1962, 5 SCRA 1011 where the Supreme Court held:

"Where the main purpose in forming the corporation was to evade one’s subsidiary
liability for damages in a criminal case, the corporation may not be heard to say that it
has a personality separate and distinct from its members, because to allow it to do so
would be to sanction the use of fiction of corporate entity as a shield to further an end
subversive of justice (La Campana Coffee Factory, et al. v. Kaisahan ng mga
Manggagawa, etc., et al., L-5677, May 25, 1953). The Supreme Court can even
substitute the real party in interest in place of the defendant corporation in order to
avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay.
(Alfonso vs. Villamor, 16 Phil. 315)."

This is what the third party claimant wants to do including the defendant in this case,
to use the separate and distinct personality of the two corporation as a shield to further
an end subversive of justice by avoiding the execution of a final judgment of the court.50

As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and
Tours Advisers, Inc. were one and the same entity, specifically:– (a) documents
submitted by petitioner in the RTC showing that William Cheng, who claimed to be the
operator of Travel and Tours Advisers, Inc., was also the President/Manager and an
incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had been known
in Sorsogon as Goldline. On its part, the CA cogently observed:

As stated in the (RTC) decision supra, William Ching disclosed during the trial of the
case that defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is
operating sixty (60) units of Goldline buses. That the Goldline buses are used in the
operations of defendant company is obvious from Mr. Cheng’s admission. The Amended
Articles of Incorporation of Gold Line Tours, Inc. disclose that the following persons are
the original incorporators thereof: Antonio O. Ching, Maribel Lim Ching, witness William
Ching, Anita Dy Ching and Zosimo Ching. (Rollo, pp. 105-108) We see no reason why
defendant company would be using Goldline buses in its operations unless the two
companies are actually one and the same.

Moreover, the name Goldline was added to defendant’s name in the Complaint. There
was no objection from William Ching who could have raised the defense that Gold Line
 Page 68 of 228

Tours, Inc. was in no way liable or involved. Indeed it appears to this Court that rather
than Travel & Tours Advisers, Inc. it is Gold Line Tours, Inc., which should have been
named party defendant.

Be that as it may, We concur in the trial court’s finding that the two companies are
actually one and the same, hence the levy of the bus in question was proper.51

The RTC thus rightly ruled that petitioner might not be shielded from liability under the
final judgment through the use of the doctrine of separate corporate identity. Truly, this
fiction of law could not be employed to defeat the ends of justice.

But petitioner continues to challenge the RTC orders by insisting that the evidence to
establish its identity with Travel and Tours Advisers, Inc. was insufficient.

We cannot agree with petitioner. As already stated, there was sufficient evidence that
petitioner and Travel and Tours Advisers, Inc.1âwphi1 were one and the same entity.
Moreover, we remind that a petition for the writ of certiorari neither deals with errors of
judgment nor extends to a mistake in the appreciation of the contending parties’
evidence or in the evaluation of their relative weight.52 It is timely to remind that the
petitioner in a special civil action for certiorari commenced against a trial court that has
jurisdiction over the proceedings bears the burden to demonstrate not merely reversible
error, but grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the respondent trial court in issuing the impugned order.53 The term grave
abuse of discretion is defined as a capricious and whimsical exercise of judgment so
patent and gross as to amount to an evasion of a positive duty or a virtual refusal to
perform a duty enjoined by law, as where the power is exercised in an arbitrary and
despotic manner because of passion or hostility.54 Mere abuse of discretion is not
enough; it must be grave.55 Yet, here, petitioner did not discharge its burden because
it failed to demonstrate that the CA erred in holding that the RTC had not committed
grave abuse of discretion. A review of the records shows, indeed, that the RTC correctly
rejected petitioner’s third-party claim. Hence, the rejection did not come within the
domain of the writ of certiorari’s limiting requirement of excess or lack of jurisdiction.56

WHEREFORE, the Court DENIES the petition for review on certiorari, and AFFIRMS the
decision promulgated by the Court of Appeals on October 30, 2002. Costs of suit to be
paid by petitioner.
SO ORDERED.
 Page 69 of 228

G.R. No.197530 July 9, 2014

ABOITIZ EQUITY VENTURES, INC., Petitioner, vs. VICTOR S. CHIONGBIAN,

BENJAMIN D. GOTHONG, and CARLOS A. GOTHONG LINES, INC. (CAGLI),
Respondents.

LEONEN, J.:

This is a petition for review on certiorari with an application for the issuance of a
temporary restraining order and/or writ of preliminary injunction under Rule 45 of the
Rules of Court. This petition prays that the assailed orders dated May 5, 20111 and
June 24, 20112 of the Regional Trial Court, Cebu City, Branch 10 in Civil Case No.
CEB-37004 be nullified and set aside and that judgment be rendered dismissing with
prejudice the complaint3 dated July 20, 2010 filed by respondents Carlos A. Gothong
Lines, Inc. ("CAGLI") and Benjamin D. Gothong. On January 8, 1996, Aboitiz Shipping
Corporation ("ASC"), principally owned by the Aboitiz family, CAGLI, principally owned
by the Gothong family, and William Lines, Inc.("WLI"), principally owned by the
Chiongbian family, entered into anagreement (the "Agreement"),4 whereby ASC and
CAGLI would transfer their shipping assets to WLI in exchange for WLI’s shares of
stock.5 WLI, in turn, would run their merged shipping businesses and, henceforth, be
known as WG&A, Inc. ("WG&A").6

Sec. 11.06 of the Agreement required all disputes arising out of or in connection with
the Agreement tobe settled by arbitration:

11.06 Arbitration

All disputes arising out of or in connection with this Agreement including any issue as
to this Agreement’s validity or enforceability, which cannot be settled amicably among
the parties, shall be finally settled by arbitration in accordance with the Arbitration Law
(Republic Act No. 876) by an arbitration tribunal composed of four (4) arbitrators. Each
of the parties shall appoint one (1) arbitrator, the three (3) to appoint the fourth
arbitrator who shall act as Chairman. Any award by the arbitration tribunal shall be
final and binding upon the parties and shall be enforced by judgment of the Courts of
Cebu or Metro Manila.7

Among the attachments to the Agreement was Annex SL-V.8 This was a letter dated
January 8,1996, from WLI, through its President (herein respondent) Victor S.
Chiongbian addressed to CAGLI, through its Chief Executive Officer Bob D. Gothong
and Executive Vice President for Engineering (herein respondent) Benjamin D. Gothong.
 Page 70 of 228

On its second page, Annex SL-V bore the signatures ofBob D. Gothong and respondent
Benjamin D. Gothong by way of a conforme on behalf of CAGLI.

Annex SL-V confirmed WLI’s commitment to acquire certain inventories of CAGLI. These
inventories would havea total aggregate value of, at most, ₱400 million, "as
determinedafter a special examination of the [i]nventories."9 Annex SL-V also
specificallystated that such acquisition was "pursuant to the Agreement."10

The entirety of Annex SL-V’s substantive portion reads:

We refer to the Agreement dated January 8, 1996 (the "Agreement") among William
Lines, Inc. ("Company C"), Aboitiz Shipping Corporation ("Company A") and Carlos A.
Gothong Lines, Inc. ("Company B") regarding the transfer of various assets of Company
A and Company B to Company C in exchangefor shares of capital stock of Company C.
Terms defined in the Agreement are used herein as therein defined.

This will confirm our commitment to acquire certain spare parts and materials inventory
(the "Inventories") of Company B pursuant to the Agreement.

The total aggregate value of the Inventories to be acquired shall not exceed ₱400 Million
as determined after a special examination of the Inventories as performed by SGV & Co.
to be completed on or before the Closing Date under the agreed procedures determined
by the parties.

Subject to documentation acceptable to both parties, the Inventories to be acquired shall

be determined not later than thirty (30) days after the Closing Date and the payments
shall be made in equal quarterly instalments over a period of two years with the first
payment due on March 31, 1996.11

Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These
inventories were assessed to have a value of 514 million, which was later adjusted to
558.89 million.12 Of the total amount of 558.89 million, "CAGLIwas paid the amount of
400 Million."13 In addition to the payment of 400 million,petitioner Aboitiz Equity
Ventures ("AEV") noted that WG&A shares with a book value of 38.5 million were
transferred to CAGLI.14
 Page 71 of 228

As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI) demand
letters "for the return of or the payment for the excess [i]nventories."15 AEV alleged that
to satisfy CAGLI’s demand, WLI/WG&A returned inventories amounting to 120.04
million.16 As proof of this, AEV attached copies of delivery receipts signed by CAGLI’s
representatives as Annex "K" of the present petition.17

Sometime in 2002, the Chiongbian and Gothong families decided to leave the WG&A
enterprise and sell their interest in WG&A to the Aboitiz family. As such, a share
purchase agreement18 ("SPA") was entered into by petitioner AEV and the respective
shareholders groups of the Chiongbians and Gothongs. In the SPA, AEV agreedto
purchase the Chiongbian group's 40.61% share and the Gothong group's 20.66% share
in WG&A’s issued and outstanding stock.19

Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising
from the SPA. It reads:

6.5 Arbitration. Should there be any dispute arising between the parties relating to this
Agreement including the interpretation or performance hereof which cannot beresolved
by agreement of the parties within fifteen (15) days after written notice by a party to
another, such matter shall then be finally settled by arbitration in Cebu City in
accordance with the Philippine Arbitration Law. Substantive aspects of the dispute shall
be settled by applying the laws of the Philippines. The decision of the arbitrators shall
be final and binding upon the parties hereto and the expense of arbitration (including
without limitation the award of attorney’s fees to the prevailing party) shall be paid as
the arbitrators shall determine.20

Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996) shall
be deemed terminated except its Annex SL-V. It reads:

6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby agree
that on Closing, the Agreement among Aboitiz Shipping Corporation, Carlos A. Gothong
Lines, Inc. and William Lines, Inc. dated January 8, 1996, as the same has been
amended from time to time (the "Shareholders’ Agreement") shall all be considered
terminated, except with respect to such rights and obligations that the parties to the
Shareholders’ Agreement have under a letter dated January 8, 1996 (otherwise known
as "SL-V") from William Lines, Inc. to Carlos A. Gothong Lines, Inc. regarding certain
spare parts and materials inventory, which rights and obligations shall survive through
the date prescribed by the applicable statute of limitations.21
 Page 72 of 228

As part of the SPA, the parties entered into an Escrow Agreement22 whereby ING Bank
N.V.-Manila Branch was to take custody of the shares subject of the SPA.23 Section
14.7 of the Escrow Agreement provided that all disputes arising from it shall be settled
through arbitration:

14.7 All disputes, controversies or differences which may arise by and among the parties
hereto out of, or in relation to, or in connection with this Agreement, orfor the breach
thereof shall be finally settled by arbitration in Cebu City in accordance with the
Philippine Arbitration Law. The award rendered by the arbitrator(s) shall be final and
binding upon the parties concerned. However, notwithstanding the foregoing provision,
the parties reserve the right to seek redress before the regular court and avail of any
provisional remedies in the event of any misconduct, negligence, fraud or tortuous acts
which arise from any extra-contractual conduct that affects the ability ofa party to
comply with his obligations and responsibilities under this Agreement.24

As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A was
renamed Aboitiz Transport Shipping Corporation ("ATSC").25

Petitioner AEV alleged that in2008, CAGLI resumed making demands despite having
already received 120.04 million worth of excess inventories.26 CAGLI initially made its
demand to ATSC (the renamed WLI/WG&A) through a letter27 dated February 14, 2008.
As alleged by AEV, however, CAGLI subsequently resorted to a "shotgun approach"28
and directed its subsequent demand letters to AEV29 as well as to FCLC30 (a company
related to respondent Chiongbian).

AEV responded to CAGLI’s demands through several letters.31 In these letters, AEV
rebuffed CAGLI's demands noting that: (1) CAGLI already received the excess
inventories;(2) it was not a party to CAGLI's claim as it had a personality distinct from
WLI/WG&A/ATSC; and (3) CAGLI's claim was already barred by prescription.

In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the delivery
to it of the excess inventories and asked for copies of the corresponding delivery
receipts.33 CAGLI threatened that unless it received proof of payment or return ofexcess
inventories having been made on or before March 31, 1996, it would pursue
arbitration.34

In letters written for AEV (the first dated October 16, 2008 by Aboitiz and Company,
Inc.’s Associate General Counsel Maria Cristina G. Gabutina35 and the second dated
October 27, 2008 by SyCip Salazar Hernandez and Gatmaitan36), it was noted that the
 Page 73 of 228

excess inventories were delivered to GT Ferry Warehouse.37 Attached to these letters

were a listing and/or samples38 of the corresponding delivery receipts. In these letters
it was also noted that the amount of excess inventories delivered (120.04 million) was
actually in excess of the value of the supposedly unreturned inventories (119.89
million).39 Thus, it was pointed out that it was CAGLI which was liable to return the
difference between 120.04 million and 119.89 million.40 Its claims not having been
satisfied, CAGLI filed on November 6, 2008 the first of two applications for arbitration
("first complaint")41 against respondent Chiongbian, ATSC, ASC, and petitioner AEV,
before the Cebu City Regional Trial Court, Branch 20. The first complaint was docketed
as Civil Case No. CEB-34951.

In response, AEV filed a motion to dismiss42 dated February 5, 2009. AEV argued that
CAGLI failed to state a cause of action as there was no agreement to arbitrate between
CAGLI and AEV.43 Specifically, AEV pointed out that: (1) AEV was never a party to the
January 8, 1996 Agreement or to its Annex SL-V;44 (2) while AEV is a party to the SPA
and Escrow Agreement, CAGLI's claim had no connection to either agreement; (3) the
unsigned and unexecuted SPA attached to the complaint cannot be a source of any right
to arbitrate;45 and (4) CAGLI did not say how WLI/WG&A/ATSC's obligation to return
the excess inventories can be charged to AEV.

On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an order46
dismissing the first complaint with respect to AEV. It sustained AEV’s assertion that
there was no agreement binding AEV and CAGLI to arbitrate CAGLI’s claim.47 Whether
by motion for reconsideration, appeal or other means, CAGLI did not contest this
dismissal.

On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an order48
directing the parties remaining in the first complaint (after the discharge of AEV) to
proceed with arbitration.

The February 26, 2010 order notwithstanding, CAGLI filed a notice of dismissal49 dated
July 8, 2010, withdrawing the first complaint. In an order50 dated August 13, 2010,
the Cebu City Regional Trial Court, Branch 20 allowed this withdrawal.

ATSC (the renamed WLI/WG&A) filed a motion for reconsideration51 dated September
20, 2010 to the allowance of CAGLI's notice of dismissal. This motion was denied in an
order52 dated April 15, 2011.
 Page 74 of 228

On September 1, 2010, while the first complaint was still pending (n.b., it was only on
April 15, 2011 that the Cebu City Regional Trial Court, Branch 20 denied ATSC’s motion
for reconsideration assailing the allowance of CAGLI’s notice of disallowance), CAGLI,
now joined by respondent Benjamin D. Gothong, filed a second application for
arbitration ("second complaint")53 before the Cebu City Regional Trial Court, Branch
10. The second complaint was docketed as Civil Case No. CEB-37004 and was also in
view of the return of the same excess inventories subject of the first complaint.

On October 28, 2010, AEV filed a motion to dismiss54 the second complaint on the
following grounds:55 (1) forum shopping; (2) failure to state a cause of action; (3) res
judicata; and (4) litis pendentia.

In the first of the two (2) assailed orders dated May 5, 2011,56 the Cebu City Regional
Trial Court, Branch 10 denied AEV's motion to dismiss.

On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that the first
complaint was dismissed with respect to AEV on December 4, 2009, while the second
complaint was filed on September 1, 2010. As such, the first complaint was no longer
pending at the time of the filing of the second complaint.57 On the matter of res judicata,
the trial court noted that the dismissal without prejudice of the first complaint "[left] the
parties free to litigate the matter in a subsequent action, as though the dismiss[ed]
action had not been commenced."58 It added that since litis pendentia and res judicata
did not exist, CAGLI could not be charged with forum shopping.59 On the matter of an
agreement to arbitrate, the Regional Trial Court, Branch 10 pointed to the SPA as
"clearly express[ing] the intention of the parties to bring to arbitration process all
disputes, if amicable settlement fails."60 It further dismissed AEV’s claim that it was
not a party to the SPA, as "already touching on the merits of the case"61 and therefore
beyond its duty "to determine if they should proceed to arbitration or not."62

In the second assailed order63 dated June 24, 2011, the Cebu City Regional Trial Court,
Branch 10 deniedAEV's motion for reconsideration.

Aggrieved, AEV filed the present petition.64 AEV asserts that the second complaint is
barred by res judicata and litis pendentia and that CAGLI engaged in blatant forum
shopping.65 It insists that it is not bound by an agreement to arbitrate with CAGLI and
that, even assuming that it may be required to arbitrate, it is being ordered to do so
under terms that are "manifestly contrary to the . . . agreements on which CAGLI based
its demand for arbitration."66
 Page 75 of 228

For resolution are the following issues:

I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum shopping
and/or is barred by res judicata and/or litis pendentia

II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to

arbitrate with Carlos A. Gothong Lines, Inc., with respect to the latter’s claims for
unreturned inventories delivered to William Lines, Inc./WG&A, Inc./Aboitiz Transport
System Corporation

AEV availed of the wrong

remedy in seeking relief from
this court

Before addressing the specific mattersraised by the present petition, we emphasize that
AEV is in error inseeking relief from this court via a petition for review on certiorari
under Rule45 of the Rules of Court. As such, we are well in a position to dismiss the
present petition outright. Nevertheless, as the actions of the Cebu City Regional Trial
Court, Branch 10 are tainted with grave abuse of discretion amounting to lack or excess
of jurisdiction, this court treats the present Rule 45 petition as a Rule 65 petition and
gives it due course.

A petition for review on certiorari under Rule 45 is a mode of appeal. This is eminently
clear from the very title and from the first section of Rule 45 (as amended by A.M. No.
07-7-12-SC):

Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by

certiorarifrom a judgment, final order or resolution of the Court of Appeals, the
Sandiganbayan, the Court of Tax Appeals, the Regional Trial Court or other courts,
whenever authorized by law, may file with the Supreme Court a verified petition for
review on certiorari. The petition may include an application for a writ of preliminary
injunction or other provisional remedies and shall raise only questions of law, which
must be distinctly set forth. The petitioner may seek the same provisional remedies by
 Page 76 of 228

verified motion filed inthe same action or proceeding at any time during its pendency.
(Emphasis supplied)

Further, it is elementary that anappeal may only be taken from a judgment or final order
that completely disposes of the case.67 As such, no appeal may be taken from an
interlocutory order68 (i.e., "one which refers to something between the commencement
and end of the suit which decides some point or matter but it is not the final decision of
the whole controversy"69). As explained in Sime Darby Employees Association v.
NLRC,70 "[a]n interlocutory order is not appealable until after the rendition of the
judgment on the merits for a contrary rule would delay the administration of justice and
unduly burden the courts."71

An order denying a motion to dismiss is interlocutory in character. Hence, it may not be

the subject of an appeal. The interlocutory nature of an order denying a motion to
dismiss and the remedies for assailing such an order were discussed in Douglas Lu Ym
v. Nabua:72

An order denying a motion to dismiss is an interlocutory order which neither terminates

nor finally disposes of a case, as it leaves something to be done by the court before the
case is finally decided on the merits. As such, the general rule is that the denial of a
motion to dismiss cannot be questioned in a special civil action for certiorariwhich is a
remedy designed to correct errors ofjurisdiction and not errors of judgment. Neither can
a denial of a motion todismiss be the subject of an appeal unless and until a final
judgment or order is rendered.In order to justify the grant of the extraordinary remedy
of certiorari, the denial of the motion to dismiss must have been tainted with grave
abuse of discretion amounting to lack or excess of jurisdiction.73 (Emphasis supplied)

Thus, where a motion to dismiss is denied, the proper recourse is for the movant to file
an answer.74 Nevertheless, where the order denying the motion to dismiss is tainted
with grave abuse of discretion amounting to lack or excess of jurisdiction, the movant
may assail such order via a Rule 65 (i.e., certiorari, prohibition, and/or mandamus)
petition. This is expressly recognized in the third paragraph of Rule 41, Section 1 of the
Rules of Court.75 Following the enumeration in the second paragraph of Rule 41,
Section 1 of the instances when an appeal may not be taken, the third paragraph
specifies that "[in] any of the foregoing circumstances, the aggrieved party may file an
appropriate special civil action as provided in Rule 65."76

Per these rules, AEV is in error for having filed what it itself calls a "Petition for Review
on Certiorari [Appeal by Certiorari under Rule 45 of the Rules of Court]."77 Since AEV
 Page 77 of 228

availed of the improper remedy, this court is well in a position to dismiss the present
petition.

Nevertheless, there have been instances when a petition for review on certiorari under
Rule 45 was treated by this court as a petition for certiorari under Rule 65. As explained
in China Banking Corporation v. Asian Construction and Development Corporation:78

[I]n many instances, the Court has treated a petition for review on certiorariunder Rule
45 as a petition for certiorari under Rule 65 of the Rules of Court, such as in cases
where the subject of the recourse was one of jurisdiction, or the act complained of was
perpetrated by a court with grave abuse of discretion amounting to lack or excess of
jurisdiction.79

In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City Regional Trial
Court, Branch 10 in Civil Case No. CEB-37004 are assailed for having denied AEV’s
motion todismiss despite: first, the second complaint having been filed in a manner
constituting forum shopping; second, the prior judgment on the merits made in Civil
Case No. CEB-34951, thereby violating the principle ofres judicata; and third, the (then)
pendency of Civil Case No. CEB-34951 with respect to the parties that, unlike AEV, were
not discharged from the case, thereby violating the principle of litis pendentia. The same
orders are assailed for having allowed CAGLI’s application for arbitration to continue
despite supposedly clear and unmistakable evidence that AEV is not bound by an
agreement to arbitrate with CAGLI.

As such, the Cebu City, Regional Trial Court, Branch 10’s orders are assailed for having
been made with grave abuse of discretion amounting to lack or excess of jurisdiction in
that the Cebu City Regional Trial Court, Branch 10 chose to continue taking cognizance
of the second complaint, despite there being compelling reasons for its dismissal and
the Cebu City, Regional Trial Court Branch 20’s desistance. Conformably, we treat the
present petition as a petition for certiorari under Rule 65 of the Rules of Court and give
it due course.

The complaint in Civil Case No. CEB-37004 constitutes forum shopping and is barred
by res judicata

The concept of and rationale against forum shopping were explained by this court in
Top Rate Construction & General Services, Inc. v. Paxton Development Corporation:
 Page 78 of 228

FORUM SHOPPING is committed by a party who institutes two or more suits in different
courts, either simultaneously or successively, in order to ask the courts to rule on the
same or related causes or to grant the same or substantially the same reliefs, on the
supposition that one or the other court would make a favorabledisposition or increase
a party's chances of obtaining a favorable decision or action. It is an act of malpractice
for it trifles with the courts, abuses their processes, degrades the administration of
justice and adds to the already congested court dockets. What is critical is the vexation
brought upon the courts and the litigants by a party who asks different courts to rule
on the same or related causes and grant the same or substantially the same reliefs and
in the process creates the possibility of conflicting decisions being rendered by the
different fora upon the same issues, regardless of whether the court in which one of the
suits was brought has no jurisdiction over the action.81

Equally settled is the test for determining forum shopping. As this court explained in
Yap v. Chua:82

To determine whether a party violated the rule against forum shopping, the most
important factor toask is whether the elements of litis pendentiaare present, or whether
a final judgment in one case will amount to res judicatain another; otherwise stated, the
test for determining forum shopping is whether in the two (or more) cases pending, there
is identity of parties, rights or causes of action, and reliefs sought.83

Litis pendentia "refers to that situation wherein another action is pending between the
same parties for the same cause ofaction, such that the second action becomes
unnecessary and vexatious."84 It requires the concurrence of three (3) requisites: "(1)the
identity of parties, or at least such as representing the same interests in both actions;
(2) the identity of rights asserted and relief prayed for,the relief being founded on the
same facts; and (3) the identity of the two cases such that judgment in one, regardless
of which party issuccessful, would amount tores judicatain the other."85

In turn, prior judgment or res judicata bars a subsequent case when the following
requisites concur: "(1) the former judgment is final; (2) it is rendered by a court having
jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on
the merits; (4) there is — between the first and the second actions — identityof parties,
of subject matter, and of causes of action."86

Applying the cited concepts and requisites, we find that the complaint in Civil Case No.
CEB-37004 is barred byres judicata and constitutes forum shopping.
 Page 79 of 228

First, between the first and second complaints, there is identity of parties. The first
complaint was brought by CAGLI as the sole plaintiff against Victor S. Chiongbian,
ATSC, and AEV as defendants. In the second complaint, CAGLI was joined by Benjamin
D. Gothong as (co-)plaintiff. As to the defendants, ATSC was deleted while Chiongbian
and AEV were retained.

While it is true that the parties to the first and second complaints are not absolutely
identical, this court has clarified that, for purposes of forum shopping, "[a]bsolute
identity of parties is not required [and that it] is enough that there is substantial identity
of parties."87

Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in his
personal capacity,"88 Gothong failed to show any personal interest in the reliefs sought
by the second complaint. Ultimately, what is at stake in the second complaint is the
extent to which CAGLI may compel AEV and Chiongbian to arbitrate in order that CAGLI
may then recover the value of its alleged unreturned inventories. This claim for recovery
is pursuant to the agreement evinced in Annex SL-V. Annex SL-V was entered into by
CAGLI and not by Benjamin D. Gothong. While it is true that Benjamin D. Gothong,
along with Bob D. Gothong, signed Annex SL-V, he did so only in a representative, and
not in a personal, capacity. As such, Benjamin D. Gothong cannot claim any right that
personally accrues to him on account of Annex SL-V. From this, it follows that Benjamin
D. Gothong is not a real party in interest — "one who stands to be benefitted or injured
by the judgment in the suit or the party entitled to the avails of the suit"89 — and that
his inclusion in the second complaint is an unnecessary superfluity.

Second, there is identity in subject matter and cause of action. There is identity in
subject matter as both complaints are applications for the same relief. There is identity
in cause ofaction as both complaints are grounded on the right to be paid for or to
receive the value of excess inventories (and the supposed corresponding breach thereof)
as spelled out in Annex SL-V.

The first and second complaints are both applications for arbitration and are founded
on the same instrument — Annex SL-V. Moreover, the intended arbitrations in both
complaintscater to the sameultimate purpose, i.e., that CAGLI may recover the value of
its supposedly unreturned inventories earlier delivered to WLI/WG&A/ATSC.

In both complaints, the supposedpropriety of compelling the defendants to submit

themselves to arbitration are anchored on the same bases: (1) Section 6.8 of the SPA,
which provides that the January 8, 1996 Agreement shall be deemed terminatedbut
that the rights and obligations arising from Annex SL-V shall continue to subsist;90 (2)
 Page 80 of 228

Section 6.5 of the SPA, which requires arbitration as the mode for settling disputes
relating to the SPA;91 and, (3) defendants’ refusal to submit themselves to arbitration
vis-a-vis Republic Act No. 876, which provides that "[a] party aggrieved by the failure,
neglect or refusal of another to perform under an agreement in writing providing for
arbitration may petition the court for an order directing that such arbitration proceed
in the manner provided for in such agreement."92

Both complaints also rely on the same factual averments:93

1. that ASC, CAGLI, and WLI entered into an agreement on January 8, 1996;

2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to acquire certain
[inventories], the total aggregate value of which shall not exceed ₱400 Million";94

3. that after examination, it was ascertained that the value of the transferred inventories
exceeded ₱400 million;

4. that pursuant to Annex SL-V, WG&A paid CAGLI ₱400 million but that the former
failed to return or pay for spare parts representing a value in excess of ₱400 million;

5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP Materials
Management, Ms. Concepcion M. Magat, asking for the return of the excess spare
parts";95

6. that on September 5, 2001, WG&A’s Ms. Magat replied that the matter is beyond her
authority level and that she must elevate it to higher management;

7. that several communications demanding the return of the excess spare parts were
sent to WG&Abut these did not elicit any response; and

8. "[t]hat the issue of excess spare parts, was taken over by events, when on July 31,
2002,"96 the Chiongbians and Gothongs entered into an Escrow Agreement with AEV.

Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court, Branch
20, which dismissed the first complaint with respect to AEV, attained finality when
 Page 81 of 228

CAGLI did not file a motion for reconsideration, appealed, or, in any other manner,
questioned the order.

Fourth, the parties did not dispute that the December 4, 2009 order was issued by a
court having jurisdiction over the subject matter and the parties. Specifically as to
jurisdiction over the parties,jurisdiction was acquired over CAGLI as plaintiff when it
filed the first complaint and sought relief from the Cebu City Regional Trial Court,
Branch 20; jurisdiction over defendants AEV, ATSC, and Victor S.Chiongbian was
acquired with the service of summons upon them. Fifth, the dismissal of the first
complaint with respect to AEV was a judgment on the merits. As explained in Cabreza,
Jr. v. Cabreza:97

A judgment may be considered as one rendered on the merits "when it determines the
rights and liabilities of the parties based on the disclosed facts, irrespective of formal,
technical or dilatoryobjections"; or when the judgment is rendered "aftera determination
of which party is right, as distinguished from a judgment rendered upon some
preliminary or formal or merely technical point."98

Further, as this court clarified in Mendiola v. Court of Appeals,99 "[i]t is not necessary
. . . that there [be] a trial"100 in order that a judgment be considered as one on the
merits.

Prior to issuing the December 4, 2009 order dismissing the first complaint with respect
to AEV, the Cebu City Regional Trial Court, Branch 20 allowed the parties the full
opportunity to establish the facts and to ventilate their arguments relevant to the
complaint. Specifically, the Cebu City Regional Trial Court, Branch 20 admitted: 1)
AEV’s motion to dismiss;101 2) CAGLI’s opposition to the motion to dismiss;102 3)
AEV’s reply and opposition;103 4) CAGLI’s rejoinder;104 and 5) AEV’s surrejoinder.105

Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the following
findings and made a definitive determination that CAGLI had no right to compel AEV to
subject itself to arbitration with respect to CAGLI’s claims under Annex SL-V:

After going over carefully the contentions and arguments of both parties, the court has
found that no contract or document exists binding CAGLI and AEV to arbitrate the
former’s claim. The WLI Letter upon which the claim is based confirms only the
commitment of William Lines, Inc. (WLI) to purchase certain material inventories from
CAGLI. It does not involve AEV. The court has searched in vain for any agreement or
document showing that said commitment was passed on to and assumed by AEV. Such
 Page 82 of 228

agreement or document, if one exists, being an actionable document, should have been
attached to the complaint. While the Agreement of January 8, 1996 and the Share
Purchase Agreement provide for arbitration of disputes, they refer to disputes arising
from or in connection with the Agreements themselves. No reference is made, as
included therein, to the aforesaid commitment of WLI or to any claim that CAGLI may
pursue based thereon or relative thereto. Section 6.8 of the Share Purchase Agreement,
cited by plaintiff CAGLI, does not incorporate therein, expressly or impliedly, the WLI
commitment above-mentioned. It only declares that the rights and obligations of the
parties under the WLI Letter shall survive even after the termination of the Shareholder’s
Agreement. It does not speak of arbitration. Finally, the complaint does not allege the
existence of a contract obliging CAGLI and AEV to arbitrate CAGLI’s claim under the
WLI Letter. Consequently, there is no legal or factual basis for the present complaint for
application for arbitration.106 (Emphasis supplied)

In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court, Branch 10
made much of the Cebu City Regional Trial Court, Branch 20’s pronouncement in the
latter’s December 4, 2009 order that "the [first] complaint fails to state a cause of
action."107 Based on this, the Cebu City Regional Trial Court, Branch 10 concluded
that the dismissal of the first complaint was one made without prejudice, thereby
"leav[ing] the parties free to litigate the matter ina subsequent action, as though the
dismissal [sic] action had not been commenced."108

The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that the
second complaint was not barred by res judicata, the Cebu City Regional Trial Court,
Branch 10 ignored established jurisprudence.

Referring to the earlier cases of Manalo v. Court of Appeals109 and Mendiola v. Court
of Appeals,110 this court emphasized in Luzon Development Bank v. Conquilla111 that
dismissal for failure to state a cause of action may very well be considered a judgment
on the merits and, thereby, operate as res judicata on a subsequent case:

[E]ven a dismissal on the ground of "failure to state a cause of action" may operate as
res judicata on a subsequent case involving the same parties, subject matter, and
causes of action, provided that the order of dismissalactually ruled on the issues
raised.What appears to be essential to a judgment on the merits is that it be a reasoned
decision, which clearly states the facts and the law on which it is based.112 (Emphasis
supplied)

To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive
determination that CAGLI had no right to compel AEV to subject itself to arbitrationvis-
 Page 83 of 228

a-vis CAGLI’s claims under Annex SL-V. This determination was arrived at after due
consideration of the facts established and the arguments advancedby the parties.
Accordingly, the Cebu City Regional Trial Court, Branch 20’s December 4, 2009 order
constituted a judgment on the merits and operated as res judicata on the second
complaint.

In sum, the requisites for res judicata have been satisfied and the second complaint
should, thus, have been dismissed. From this, it follows that CAGLI committed an act
of forum shopping in filing the second complaint. CAGLI instituted two suits in two
regional trial court branches, albeit successively and not simultaneously. It asked both
branches to rule on the exact same cause and to grant the exact same relief. CAGLI did
so after it had obtained an unfavorable decision (at least with respect to AEV) from the
Cebu City Regional Trial Court, Branch 20. These circumstances afford the reasonable
inference that the second complaint was filed in the hopes of a more favorable ruling.

Notwithstanding our pronouncements sustaining AEV’s allegations that CAGLI engaged

in forum shopping and that the second complaint was barred by res judicata, we find
that at the time of the filing of the second complaint, AEV had already been discharged
from the proceedings relating to the first complaint. Thus, asbetween AEV and CAGLI,
the first complaint was no longer pending at the time of the filing of the second
complaint. Accordingly, the second complaint could not have been barred by litis
pendentia.

There is no agreement binding AEV to arbitrate with CAGLI on the latter’s claims arising
from Annex SL-V

For arbitration to be proper, it is imperative thatit be grounded on an agreement between

the parties. This was adequately explained in Ormoc Sugarcane Planters’
Association,Inc. v. Court of Appeals:113

Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:

Sec. 2. Persons and matterssubject to arbitration. – Two or more persons or parties may
submit to the arbitration of one or more arbitrators any controversy existing between
them at the time of the submission and which may be the subject of an action, or the
parties to any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them. Such submission or contract shall be valid, enforceable
and irrevocable, save upon such grounds as exist at law for the revocation of any
contract. . . . (Emphasis ours)
 Page 84 of 228

The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit
to arbitration somefuture dispute, usually stipulated upon in a civil contract between
the parties, and known as an agreement to submit to arbitration, and (b) an agreement
submitting an existing matter of difference to arbitrators, termed the submission
agreement. Article XX of the milling contract is an agreement to submit to
arbitrationbecause it was made in anticipation of a dispute that might arise between
the parties after the contract’s execution.

Except where a compulsory arbitration is provided by statute, the first step toward the
settlement of a difference by arbitration is the entry by the parties into a valid agreement
to arbitrate.An agreement to arbitrate is a contract, the relation ofthe parties is
contractual, and the rights and liabilities of the parties are controlled by the law of
contracts. In an agreement for arbitration, the ordinary elements of a valid contract
must appear, including an agreement toarbitrate some specific thing, and an agreement
to abide by the award, either in express language or by implication.114 (Emphasis
supplied)

In this petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and
Benjamin D. Gothong — has alleged and/or shown that the controversy is properly the
subject of "compulsory arbitration [as] provided by statute."115 Thus, the propriety of
compelling AEV to submit itself to arbitration must necessarilybe founded on contract.

Four (4) distinct contracts have been cited in the present petition:

1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI merged their shipping
enterprises, with WLI (subsequently renamed WG&A) as the surviving entity. Section
11.06 of this Agreement provided for arbitration as the mechanism for settling all
disputes arising out of or in connection with the Agreement.

2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any
other Aboitiz-controlled entity), and which confirmed WLI’s commitment to acquire
certain inventories, worth not more than 400 million, of CAGLI. Annex SL-V stated that
the acquisition was "pursuant to the Agreement."116 It did not contain an arbitration
clause.

3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to
purchasethe Chiongbian and Gothong groups' shares in WG&A’s issued and
outstanding stock. Section 6.5 of the SPA provided for arbitration as the mode of settling
 Page 85 of 228

any dispute arising from the SPA. Section 6.8 of the SPA further provided that the
Agreement of January 8, 1996 shall be deemed terminatedexcept its Annex SL-V.

4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to take custody
of the shares subject of the SPA. Section 14.7 of the Escrow Agreement provided that
all disputes arising from it shall be settled via arbitration.

The obligation for WLI to acquire certain inventories of CAGLI and which is the subject
of the present petition was contained in Annex SL-V. It is therefore this agreement which
deserves foremost consideration. As to this particular agreement, these points must be
underscored: first, that it has no arbitration clause; second, Annex SL-V is only between
WLI and CAGLI.

On the first point, it is clear, pursuant to this court’s pronouncements in Ormoc

Sugarcane Planters’ Association, that neither WLI nor CAGLI can compel arbitration
under Annex SL-V. Plainly, there is no agreement to arbitrate.

It is of no moment that Annex SL-Vstates that it was made "pursuant to the Agreement"
or that Section 11.06 of the January 8, 1996 Agreement provides for arbitration as the
mode of settling disputes arising out of or in connection with the Agreement.

For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely to
acknowledge: (1) the factual context in which Annex SL-V was executed and (2) that it
was that context that facilitated the agreement embodied in it. Absentany other clear or
unequivocal pronouncement integrating Annex SL-V into the January 8, 1996
Agreement, it would be too much of a conjecture to jump to the conclusion that Annex
SL-V is governed by the exact same stipulations which govern the January 8, 1996
Agreement.

Likewise, a reading of the Agreement’s arbitration clause will reveal that it does not
contemplate disputes arising from Annex SL-V.

Section 11.06 of the January 8, 1996 Agreement requires the formation of an arbitration
tribunal composed of four (4) arbitrators. Each of the parties — WLI, CAGLI, and ASC
— shall appoint one (1) arbitrator, and the fourth arbitrator, who shall actas chairman,
shall be appointed by the three (3) arbitrators appointed by the parties. From the
manner by which the arbitration tribunal is to be constituted, the necessary implication
is that the arbitration clause is applicable tothree-party disputes — as will arise from
 Page 86 of 228

the tripartite January 8, 1996 Agreement — and not to two-party disputesas will arise
from the two-party Annex SL-V.

From the second point — that Annex SL-V is only between WLI and CAGLI — it
necessarily follows that none but WLI/WG&A/ATSC and CAGLI are bound by the terms
of Annex SL-V. It is elementary that contracts are characterized by relativity or privity,
that is, that "[c]ontracts take effect only between the parties, their assigns and
heirs."117 As such, one who is not a party to a contract may not seek relief for such
contract’s breach. Likewise, one who is not a party to a contract may not be held liable
for breach of any its terms.

While the principle of privity or relativity of contracts acknowledges that contractual

obligations are transmissible to a party’s assigns and heirs, AEV is not WLI’s successor-
in-interest. In the period relevant to this petition, the transferee of the inventories
transferred by CAGLI pursuant to Annex SL-V assumed three (3) names: (1) WLI, the
original name of the entity that survived the merger under the January 8, 1996
Agreement; (2) WG&A, the name taken by WLI in the wake of the Agreement; and (3)
ATSC, the name taken by WLI/WG&A inthe wake of the SPA. As such, it is now ATSC
that is liable under Annex SL-V.

Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the
Gothong group (viaCAGLI) became stockholders of WLI/WG&A, along with the
Chiongbiangroup (which initially controlled WLI). This continued until, pursuant to the
SPA, the Gothong group and the Chiongbian group transferred their shares to AEV.
With the SPA, AEV became a stockholder of WLI/WG&A, which was subsequently
renamed ATSC. Nonetheless, AEV’s status asATSC’s stockholder does not subject it to
ATSC’s obligations

It is basic that a corporation has a personality separate and distinct from that of its
individual stockholders. Thus, a stockholder does not automatically assume the
liabilities of the corporation of which he is a stockholder. As explained in Philippine
National Bankv. Hydro Resources Contractors Corporation:118

A corporation is an artificial entitycreated by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence. It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entityand as a result of a conscious policy
decision to promote capital formation, a corporation incurs its own liabilities and is
legally responsible for payment of its obligations. In other words, by virtue of the
 Page 87 of 228

separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder. This protection from liability for shareholders is the
principle of limited liability.119

In fact, even the ownership by a single stockholder of all or nearly all the capital stock
of a corporation is not, in and of itself, a ground for disregarding a corporation’s separate
personality. As explained in Secosa v. Heirs of Francisco:120

It is a settled precept in this jurisdiction that a corporation is invested by law with a

personality separate from thatof its stockholders or members. It has a personality
separate and distinct from those of the persons composing it as well as from that of any
other entity to which it may be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not in itself
sufficient ground for disregarding the separate corporate personality.A corporation’s
authority to act and its liability for its actions are separate and apart from the
individuals who own it.

The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be
looked upon as a legal entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such
cases asfraud that may work inequities among members of the corporation internally,
involving no rights of the public or third persons. In both instances, there must have
been fraud and proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
presumed.121 (Emphasis supplied)

AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV liable
for ATSC’s obligations. Moreover, the SPA does not contain any stipulation which makes
AEV assume ATSC’s obligations. It is true that Section 6.8 of the SPA stipulates that
the rights and obligations arising from Annex SL-V are not terminated. But all that
Section 6.8 does is recognize that the obligations under Annex SL-V subsist despite the
termination of the January 8, 1996 Agreement. At no point does the text of Section 6.8
support the position that AEV steps into the shoes of the obligor under Annex SL-V and
assumes its obligations.

Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to arbitration.
While it is true that Section 6.5 mandates arbitration as the mode for settling disputes
 Page 88 of 228

between the parties to the SPA, Section 6.5 does not indiscriminatelycover any and all
disputes which may arise between the parties to the SPA. Rather, Section 6.5 is limited
to "dispute[s] arising between the parties relating tothis Agreement [i.e., the SPA]."122
To belabor the point, the obligation which is subject of the present dispute pertains to
Annex SL-V, not to the SPA. That the SPA, in Section 6.8, recognizes the subsistence of
Annex SL-Vis merely a factual recognition. It does not create new obligations and does
not alter or modify the obligations spelled out in Annex SL-V.

AEV was drawn into the present controversy on account of its having entered into the
SPA. This SPA made AEV a stockholder of WLI/WG&A/ATSC. Even then, AEV retained
a personality separate and distinct from WLI/WG&A/ATSC. The SPA did not render AEV
personally liable for the obligations of the corporation whose stocks it held.

The obligation animating CAGLI’s desire to arbitrate is rooted in Annex SL-V. Annex SL-
V is a contractentirely different from the SPA. It created distinct obligations for
distinctparties. AEV was never a party to Annex SL-V. Rather than pertaining to AEV,
Annex SL-V pertained to a different entity: WLI (renamed WG&A then renamed ATSC).
AEV is, thus, not bound by Annex SL-V.

On one hand, Annex SL-V does not stipulate that disputes arising from it are to be
settled via arbitration.On the other hand, the SPA requires arbitration as the mode for
settling disputes relating to it and recognizes the subsistence of the obligations under
Annex SL-V. But as a separate contract, the mere mention of Annex SL-V in the SPA
does not suffice to place Annex SL-V under the ambit of the SPA or to render it subject
to the SPA’s terms, such as the requirement to arbitrate.

WHEREFORE, the petition is GRANTED. The assailed orders dated May 5, 2011 and
June 24,2011 of the Regional Trial Court, Cebu City, Branch 10 in Civil Case No. CEB-
37004 are declared VOID. The Regional Trial Court, Cebu City, Branch 10 is ordered to
DISMISSCivil Case No. CEB-37004.

SO ORDERED.
 Page 89 of 228

G.R. NO. 149237 June 11, 2006

CHINA BANKING CORPORATION, Petitioner, v. DYNE-SEM ELECTRONICS

CORPORATION, Respondent.

CORONA, J.:

On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total
of P8,939,000 from petitioner China Banking Corporation. The loan was evidenced by
six promissory notes.1

The borrowers failed to pay when the obligations became due. Petitioner consequently
instituted a complaint for sum of money2 on June 25, 1987 against them. The complaint
sought payment of the unpaid promissory notes plus interest and penalties.

Summons was not served on Dynetics, however, because it had already closed down.
Lim, on the other hand, filed his answer on December 15, 1987 denying that "he
promised to pay [the obligations] jointly and severally to [petitioner]."3

On January 7, 1988, the case was scheduled for pre-trial with respect to Lim. The case
against Dynetics was archived.

On September 23, 1988, an amended complaint4 was filed by petitioner impleading

respondent Dyne-Sem Electronics Corporation (Dyne-Sem) and its stockholders Vicente
Chuidian, Antonio Garcia and Jacob Ratinoff. According to petitioner, respondent was
formed and organized to be Dynetics' alter ego as established by the following
circumstances:

'Dynetics, Inc. and respondent are both engaged in the same line of business of
manufacturing, producing, assembling, processing, importing, exporting, buying,
distributing, marketing and testing integrated circuits and semiconductor devices;

'[t]he principal office and factory site of Dynetics, Inc. located at Avocado Road, FTI
Complex, Taguig, Metro Manila, were used by respondent as its principal office and
factory site;
 Page 90 of 228

'[r]espondent acquired some of the machineries and equipment of Dynetics, Inc. from
banks which acquired the same through foreclosure;

'[r]espondent retained some of the officers of Dynetics, Inc.5

xxx xxx xxx

On December 28, 1988, respondent filed its answer, alleging that:

5.1 [t]he incorporators as well as present stockholders of [respondent] are totally

different from those of Dynetics, Inc., and not one of them has ever been a stockholder
or officer of the latter;

5.2 [n]ot one of the directors of [respondent] is, or has ever been, a director, officer, or
stockholder of Dynetics, Inc.;

5.3 [t]he various facilities, machineries and equipment being used by [respondent] in its
business operations were legitimately and validly acquired, under arms-length
transactions, from various corporations which had become absolute owners thereof at
the time of said transactions; these were not just "taken over" nor "acquired from
Dynetics" by [respondent], contrary to what plaintiff falsely and maliciously alleges;

5.4 [respondent] acquired most of its present machineries and equipment as second-
hand items to keep costs down;

5.5 [t]he present plant site is under lease from Food Terminal, Inc., a government-
controlled corporation, and is located inside the FTI Complex in Taguig, Metro Manila,
where a number of other firms organized in 1986 and also engaged in the same or
similar business have likewise established their factories; practical convenience, and
nothing else, was behind [respondent's] choice of plant site;

5.6 [respondent] operates its own bonded warehouse under authority from the Bureau
of Customs which has the sole and absolute prerogative to authorize and assign
customs bonded warehouses; again, practical convenience played its role here since the
warehouse in question was virtually lying idle and unused when said Bureau decided
to assign it to [respondent] in June 1986.6
 Page 91 of 228

On February 28, 1989, the trial court issued an order archiving the case as to Chuidian,
Garcia and Ratinoff since summons had remained unserved.

After hearing, the court a quo rendered a decision on December 27, 1991 which read:

xxx [T]he Court rules that Dyne-Sem Electronics Corporation is not an alter ego of
Dynetics, Inc. Thus, Dyne-Sem Electronics Corporation is not liable under the
promissory notes.

xxx xxx xxx

WHEREFORE, judgment is hereby rendered ordering Dynetics, Inc. and Elpidio O. Lim,
jointly and severally, to pay plaintiff.

xxx xxx xxx

Anent the complaint against Dyne-Sem and the latter's counterclaim, both are hereby
dismissed, without costs.

SO ORDERED.7

From this adverse decision, petitioner appealed to the Court of Appeals8 but the
appellate court dismissed the appeal and affirmed the trial court's decision.9 It found
that respondent was indeed not an alter ego of Dynetics. The two corporations had
different articles of incorporation. Contrary to petitioner's claim, no merger or
absorption took place between the two. What transpired was a mere sale of the assets
of Dynetics to respondent. The appellate court denied petitioner's motion for
reconsideration.10

Hence, this Petition for Review 11 with the following assigned errors:

VI.
 Page 92 of 228

Issues

What is the quantum of evidence needed for the trial court to determine if the veil of
corporat[e] fiction should be pierced?

[W]hether or not the Regional Trial Court of Manila Branch 15 in its Decision dated
December 27, 1991 and the Court of Appeals in its Decision dated February 28, 2001
and Resolution dated July 27, 2001, which affirmed en toto [Branch 15, Manila Regional
Trial Court's decision,] have ruled in accordance with law and/or applicable
[jurisprudence] to the extent that the Doctrine of Piercing the Veil of Corporat[e] Fiction
is not applicable in the case at bar?12

We find no merit in the petition.

The question of whether one corporation is merely an alter ego of another is purely one
of fact. So is the question of whether a corporation is a paper company, a sham or
subterfuge or whether petitioner adduced the requisite quantum of evidence warranting
the piercing of the veil of respondent's corporate entity. This Court is not a trier of facts.
Findings of fact of the Court of Appeals, affirming those of the trial court, are final and
conclusive. The jurisdiction of this Court in a Petition for Review on Certiorari is limited
to reviewing only errors of law, not of fact, unless it is shown, inter alia, that: (a) the
conclusion is grounded entirely on speculations, surmises and conjectures; (b) the
inference is manifestly mistaken, absurd and impossible; (c) there is grave abuse of
discretion; (d) the judgment is based on a misapplication of facts; (e) the findings of fact
of the trial court and the appellate court are contradicted by the evidence on record and
(f) the Court of Appeals went beyond the issues of the case and its findings are contrary
to the admissions of both parties.13

We have reviewed the records and found that the factual findings of the trial and
appellate courts and consequently their conclusions were supported by the evidence on
record.

The general rule is that a corporation has a personality separate and distinct from that
of its stockholders and other corporations to which it may be connected.14 This is a
fiction created by law for convenience and to prevent injustice.15
 Page 93 of 228

Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may exist
to warrant the disregard of its independent being and the piercing of the corporate
veil.16 In Martinez v. Court of Appeals,17 we held:

The veil of separate corporate personality may be lifted when such personality is used
to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a
shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation 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; or when the
corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or
where necessary to achieve equity or for the protection of the creditors. In such cases,
the corporation will be considered as a mere association of persons. The liability will
directly attach to the stockholders or to the other corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be

proven clearly and convincingly.18

In this case, petitioner failed to prove that Dyne-Sem was organized and controlled, and
its affairs conducted, in a manner that made it merely an instrumentality, agency,
conduit or adjunct of Dynetics, or that it was established to defraud Dynetics' creditors,
including petitioner.

The similarity of business of the two corporations did not warrant a conclusion that
respondent was but a conduit of Dynetics. As we held in Umali v. Court of Appeals,19
"the mere fact that the businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personalities, absent sufficient showing that
the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights."

Likewise, respondent's acquisition of some of the machineries and equipment of

Dynetics was not proof that respondent was formed to defraud petitioner. As the Court
of Appeals found, no merger20 took place between Dynetics and respondent Dyne-Sem.
What took place was a sale of the assets21 of the former to the latter. Merger is legally
distinct from a sale of assets.22 Thus, where one corporation sells or otherwise transfers
all its assets to another corporation for value, the latter is not, by that fact alone, liable
for the debts and liabilities of the transferor.
 Page 94 of 228

Petitioner itself admits that respondent acquired the machineries and equipment not
directly from Dynetics but from the various corporations which successfully bidded for
them in an auction sale. The contracts of sale executed between the winning bidders
and respondent showed that the assets were sold for considerable amounts.23 The
Court of Appeals thus correctly ruled that the assets were not "diverted" to respondent
as an alter ego of Dynetics.24 The machineries and equipment were transferred and
disposed of by the winning bidders in their capacity as owners. The sales were therefore
valid and the transfers of the properties to respondent legal and not in any way in
contravention of petitioner's rights as Dynetics' creditor.

Finally, it may be true that respondent later hired Dynetics' former Vice-President
Luvinia Maglaya and Assistant Corporate Counsel Virgilio Gesmundo. From this,
however, we cannot conclude that respondent was an alter ego of Dynetics. In fact, even
the overlapping of incorporators and stockholders of two or more corporations will not
necessarily lead to such inference and justify the piercing of the veil of corporate
fiction.25 Much more has to be proven.

Premises considered, no factual and legal basis exists to hold respondent Dyne-Sem
liable for the obligations of Dynetics to petitioner.

WHEREFORE, the petition is hereby DENIED.The assailed Court of Appeals' decision

and resolution in CA-G.R. CV No. 40672 are hereby AFFIRMED.

Costs against petitioner.

SO ORDERED.
 Page 95 of 228

G.R. No. 198967 March 07, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON,

Respondent.

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the Court of Appeals Decision1 dated June 8, 2011 and
Resolution2 dated October 7, 2011 in CA -G.R. SP No. 115485, which affirmed in toto
the decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with
Royal Class Venture Phils., Inc. (Royal Class Venture) as an accounting clerk.3
Eventually, he was promoted to the position of accounting supervisor, with a salary of
Php13,000.00 a month, until he was allegedly dismissed from employment on December
20, 2000.4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1,
Dagupan City, of the NLRC a Complaint for Illegal Dismissal, with prayers for
backwages, reinstatement, salaries and 13th month pay, moral and exemplary damages
and attorney's fees against Royal Class Venture.5

Royal Class Venture did not make an appearance in the case despite its receipt of
summons.6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor of
the complainant Uson and ordering therein respondent Royal Class Venture to reinstate
him to his former position and pay his backwages, 13th month pay as well as moral and
exemplary damages and attorney's fees.
 Page 96 of 228

Royal Class Venture, as the losing party, did not file an appeal of the decision.9
Consequently, upon Uson's motion, a Writ of Execution10 dated February 15, 2002 was
issued to implement the Labor Arbiter's decision.

On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still
unsatisfied, a Second Alias Writ of Execution12 was issued on September 11, 2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution
dated September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002, Uson
filed a Motion for Alias Writ of Execution and to Hold Directors and Officers of
Respondent Liable for Satisfaction of the Decision.13 The motion quoted from a portion
of the Sheriffs Return, which states:

On September 12, 2002, the undersigned proceeded at the stated present business
office address of the respondent which is at Minien East, Sta. Barbara, Pangasinan to
serve the writ of execution. Upon arrival, I found out that the establishment erected
thereat is not [in] the respondent's name but JOEL and SONS CORPORATION, a family
corporation owned by the Guillermos of which, Jose Emmanuel F. Guillermo the
General Manager of the respondent, is one of the stockholders who received the writ
using his nickname "Joey," [and who] concealed his real identity and pretended that he
[was] the brother of Jose, which [was] contrary to the statement of the guard-on-duty
that Jose and Joey [were] one and the same person. The former also informed the
undersigned that the respondent's (sic) corporation has been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the
respondent has an account at the Bank of Philippine Islands Magsaysay Branch, A.B.
Fernandez Ave., Dagupan City, the undersigned immediately served a notice of
garnishment, thus, the bank replied on the same day stating that the respondent [does]
not have an account with the branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order15 granting
the motion filed by Uson. The order held that officers of a corporation are jointly and
severally liable for the obligations of the corporation to the employees and there is no
denial of due process in holding them so even if the said officers were not parties to the
case when the judgment in favor of the employees was rendered.16 Thus, the Labor
Arbiter pierced the veil of corporate fiction of Royal Class Venture and held herein
petitioner Jose Emmanuel Guillermo (Guillermo), in his personal capacity, jointly and
severally liable with the corporation for the enforcement of the claims of Uson.17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside
the Order of December 26, 2002.18 The same, however, was not granted as, this time,
 Page 97 of 228

in an Order dated November 24, 2003, Labor Arbiter Niña Fe S. Lazaga-Rafols sustained
the findings of the labor arbiters before her and even castigated Guillenno for his
unexplained absence in the prior proceedings despite notice, effectively putting
responsibility on Guillermo for the case's outcome against him.19

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order,20
but the same was promptly denied by the Labor Arbiter in an Order dated January 7,
2004.21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution,22 to which
Guillermo filed a Comment and Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for the
Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments posed in his
Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with
Prayer for a (Writ of) Preliminary Injunction dated June 10, 2004.25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied
his prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of
Appeals, assailing the NLRC decision.

On June 8, 2011, the Court of Appeals rendered its assailed Decision28 which denied
Guillermo's petition and upheld all the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as President
and General Manager of Royal Class Venture, which was how the Labor Arbiter acquired
jurisdiction over the company.29 But Guillermo subsequently refused to receive all
notices of hearings and conferences as well as the order to file Royal Class Venture's
position paper.30 Then, it was learned during execution that Royal Class Venture had
been dissolved.31 However, the Court of Appeals held that although the judgment had
become final and executory, it may be modified or altered "as when its execution
becomes impossible or unjust."32 It also noted that the motion to hold officers and
directors like Guillermo personally liable, as well as the notices to hear the same, was
 Page 98 of 228

sent to them by registered mail, but no pleadings were submitted and no appearances
were made by anyone of them during the said motion's pendency.33 Thus, the court
held Guillermo liable, citing jurisprudence that hold the president of the corporation
liable for the latter's obligation to illegally dismissed employees.34 Finally, the court
dismissed Guillermo's allegation that the case is an intra-corporate controversy, stating
that jurisdiction is determined by the allegations in the complaint and the character of
the relief sought.35

From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after its
Decision had become final and executory, an act which he claims to be unsupported in
law and jurisprudence.38 He contends that the decision had become final, immutable
and unalterable and that any amendment thereto is null and void.39 Guillermo assails
the so-called "piercing the veil" of corporate fiction which allegedly discriminated against
him when he alone was belatedly impleaded despite the existence of other directors and
officers in Royal Class Venture.40 He also claims that the Labor Arbiter has no
jurisdiction because the case is one of an intra-corporate controversy, with the
complainant Uson also claiming to be a stockholder and director of Royal Class
Venture.41

In his Comment,42 Uson did not introduce any new arguments but merely cited
verbatim the disquisitions of the Court of Appeals to counter Guillermo's assertions in
his petition.

To resolve the case, the Court must confront the issue of whether an officer of a
corporation may be included as judgment obligor in a labor case for the first time only
after the decision of the Labor Arbiter had become final and executory, and whether the
twin doctrines of "piercing the veil of corporate fiction" and personal liability of company
officers in labor cases apply.

The petition is denied.

 Page 99 of 228

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C.
Ransom Labor Union-CCLU v. NLRC,44 persons who were not originally impleaded in
the case were, even during execution, held to be solidarity liable with the employer
corporation for the latter's unpaid obligations to complainant-employees. These
included a newly-formed corporation which was considered a mere conduit or alter ego
of the originally impleaded corporation, and/or the officers or stockholders of the latter
corporation.45 Liability attached, especially to the responsible officers, even after final
judgment and during execution, when there was a failure to collect from the employer
corporation the judgment debt awarded to its workers.46 In Naguiat v. NLRC,47 the
president of the corporation was found, for the first time on appeal, to be solidarily liable
to the dismissed employees. Then, in Reynoso v. Court of Appeals,48 the veil of corporate
fiction was pierced at the stage of execution, against a corporation not previously
impleaded, when it was established that such corporation had dominant control of the
original party corporation, which was a smaller company, in such a manner that the
latter's closure was done by the former in order to defraud its creditors, including a
former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since
been tempered, at least in the aspects of the lifting of the corporate veil and the
assignment of personal liability to directors, trustees and officers in labor cases. The
subsequent cases of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v.
NLRC,51 have all established, save for certain exceptions, the primacy of Section 3152
of the Corporation Code in the matter of assigning such liability for a corporation's
debts, including judgment obligations in labor cases. According to these cases, a
corporation is still an artificial being invested by law with a personality separate and
distinct from that of its stockholders and from that of other corporations to which it may
be connected.53 It is not in every instance of inability to collect from a corporation that
the veil of corporate fiction is pierced, and the responsible officials are made liable.
Personal liability attaches only when, as enumerated by the said Section 31 of the
Corporation Code, there is a wilfull and knowing assent to patently unlawful acts of the
corporation, there is gross negligence or bad faith in directing the affairs of the
corporation, or there is a conflict of interest resulting in damages to the corporation.54
Further, in another labor case, Pantranco Employees Association (PEA-PTGWO), et al.
v. NLRC, et al.,55 the doctrine of piercing the corporate veil is held to apply only in three
(3) basic areas, namely: ( 1) defeat of public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation; (2) fraud cases or when the
corporate entity is used to justify a wrong, protect fraud, or defend a crime; or (3) 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. 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.56 Indeed, in Reahs Corporation v. NLRC,57
the conferment of liability on officers for a corporation's obligations to labor is held to
be an exception to the general doctrine of separate personality of a corporation.
 Page 100 of 228

It also bears emphasis that in cases where personal liability attaches, not even all
officers are made accountable. Rather, only the "responsible officer," i.e., the person
directly responsible for and who "acted in bad faith" in committing the illegal dismissal
or any act violative of the Labor Code, is held solidarily liable, in cases wherein the
corporate veil is pierced.58 In other instances, such as cases of so-called corporate tort
of a close corporation, it is the person "actively engaged" in the management of the
corporation who is held liable.59 In the absence of a clearly identifiable officer(s) directly
responsible for the legal infraction, the Court considers the president of the corporation
as such officer.60

The common thread running among the aforementioned cases, however, is that the veil
of corporate fiction can be pierced, and responsible corporate directors and officers or
even a separate but related corporation, may be impleaded and held answerable
solidarily in a labor case, even after final judgment and on execution, so long as it is
established that such persons have deliberately used the corporate vehicle to unjustly
evade the judgment obligation, or have resorted to fraud, bad faith or malice in doing
so. When the shield of a separate corporate identity is used to commit wrongdoing and
opprobriously elude responsibility, the courts and the legal authorities in a labor case
have not hesitated to step in and shatter the said shield and deny the usual protections
to the offending party, even after final judgment. The key element is the presence of
fraud, malice or bad faith. Bad faith, in this instance, does not connote bad judgment
or negligence but imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty through some motive or interest or ill
will; it partakes of the nature of fraud.61

As the foregoing implies, there is no hard and fast rule on when corporate fiction may
be disregarded; instead, each case must be evaluated according to its peculiar
circumstances.62 For the case at bar, applying the above criteria, a finding of personal
and solidary liability against a corporate officer like Guillermo must be rooted on a
satisfactory showing of fraud, bad

faith or malice, or the presence of any of the justifications for disregarding the corporate
fiction. As stated in McLeod,63 bad faith is a question of fact and is evidentiary, so that
the records must first bear evidence of malice before a finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom, and
Naguiat cases, the case at bar involves an apparent family corporation. As in those two
cases, the records of the present case bear allegations and evidence that Guillermo, the
officer being held liable, is the person responsible in the actual running of the company
and for the malicious and illegal dismissal of the complainant; he, likewise, was shown
to have a role in dissolving the original obligor company in an obvious "scheme to avoid
 Page 101 of 228

liability" which jurisprudence has always looked upon with a suspicious eye in order to
protect the rights of labor.64

Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged that
Uson was "illegally dismissed by the President/General Manager of respondent
corporation (herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the
practice of the said President/General Manager of dictating and undervaluing the shares
of stock of the corporation."65 The statement is proof that Guillermo was the responsible
officer in charge of running the company as well as the one who dismissed Uson from
employment. As this sworn allegation is uncontroverted - as neither the company nor
Guillermo appeared before the Labor Arbiter despite the service of summons and notices
- such stands as a fact of the case, and now functions as clear evidence of Guillermo's
bad faith in his dismissal of Uson from employment, with the motive apparently being
anger at the latter's reporting of unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as President
and General Manager of the company, who received the summons to the case, and who
also subsequently and without justifiable cause refused to receive all notices and orders
of the Labor Arbiter that followed.66 This makes Guillermo responsible for his and his
company's failure to participate in the entire proceedings before the said office. The fact
is clearly narrated in the Decision and Orders of the Labor Arbiter, Uson's Motions for
the Issuance of Alias Writs of Execution, as well as in the Decision of the NLRC and the
assailed Decision of the Court of Appeals,67 which Guillermo did not dispute in any of
his belated motions or pleadings, including in his petition for certiorari before the Court
of Appeals and even in the petition currently before this Court.68 Thus, again, the same
now stands as a finding of fact of the said lower tribunals which binds this Court and
which it has no power to alter or revisit.69 Guillermo's knowledge of the case's filing and
existence and his unexplained refusal to participate in it as the responsible official of
his company, again is an indicia of his bad faith and malicious intent to evade the
judgment of the labor tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and
helped incorporate a new firm, located in the same address as the former, wherein he is
again a stockl1older. This is borne by the Sherif11s Return which reported: that at Royal
Class Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a
new establishment named "Joel and Sons Corporation," a family corporation owned by
the Guillermos in which Jose Emmanuel F. Guillermo is again one of the stockholders;
that Guillermo received the writ of execution but used the nickname "Joey" and denied
being Jose Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that
the guard on duty confirmed that Jose and Joey are one and the same person; and that
the respondent corporation Royal Class Venture had been dissolved.70 Again, the facts
contained in the Sheriffs Return were not disputed nor controverted by Guillermo, either
 Page 102 of 228

in the hearings of Uson's Motions for Issuance of Alias Writs of Execution, in subsequent
motions or pleadings, or even in the petition before this Court. Essentially, then, the
facts form part of the records and now stand as further proof of Guillermo's bad faith
and malicious intent to evade the judgment obligation.

The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and
frustrate the execution of the judgment award, which this Court, in the interest of
justice, will not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the Court
sustains the finding of the appellate court that the nature of an action and the
jurisdiction of a tribunal are determined by the allegations of the complaint at the time
of its filing, irrespective of whether or not the plaintiff is entitled to recover upon all or
some of the claims asserted therein.71 Although Uson is also a stockholder and director
of Royal Class Venture, it is settled in jurisprudence that not all conflicts between a
stockholder and the corporation are intra-corporate; an examination of the complaint
must be made on whether the complainant is involved in his capacity as a stockholder
or director, or as an employee.72 If the latter is found and the dispute does not meet
the test of what qualities as an intra--corporate controversy, then the case is a labor
case cognizable by the NLRC and is not within the jurisdiction of any other tribunal.73
In the case at bar, Uson's allegation was that he was maliciously and illegally dismissed
as an Accounting Supervisor by Guillermo, the Company President and General
Manager, an allegation that was not even disputed by the latter nor by Royal Class
Venture. It raised no intra-corporate relationship issues between him and the
corporation or Guillermo; neither did it raise any issue regarding the regulation of the
corporation. As correctly found by the appellate court, Uson's complaint and redress
sought were centered alone on his dismissal as an employee, and not upon any other
relationship he had with the company or with Guillermo. Thus, the matter is clearly a
labor dispute cognizable by the labor tribunals.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June 8,
2011 and Resolution dated October 7, 2011 in CA- G.R. SP No. 115485 are AFFIRMED.

SO ORDERED.
 Page 103 of 228

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., Petitioner, v. THE NATIONAL LABOR

RELATIONS, COMMISSION,(First Division); and Norberto Marabe, Rodolfo
Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo
Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares,
Ferdinand Torres, Felipe Basilan, and Ruben Robalos, Respondents.

HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges
of fraud exist; where public convenience is defeated; where a wrong is sought to be
justified thereby, the corporate fiction or the notion of legal entity should come to
naught. The law in these instances will regard the corporation as a mere association of
persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation’s subsidiary

liability for damages, the corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The piercing of the corporate veil
comes into play.

This special civil action ostensibly raises the question of whether the National Labor
Relations Commission committed grave abuse of discretion when it issued a "break-
open order" to the sheriff to be enforced against personal property found in the premises
of petitioner’s sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355
Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business.
Private respondents were employed by said company as laborers, carpenters and
riggers.

On November, 1981, private respondents were served individual written notices of

termination of employment by petitioner, effective on November 30, 1981. It was stated
in the individual notices that their contracts of employment had expired and the project
in which they were hired had been completed.
 Page 104 of 228

Public respondent found it to be, the fact, however, that at the time of the termination
of private respondent’s employment, the project in which they were hired had not yet
been finished and completed. Petitioner had to engage the services of sub-contractors
whose workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month
pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or
three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on the ground that the said decision had
already become final and executory. 2

On October 16, 1986, the NLRC Research and Information Department made the finding
that private respondents’ back wages amounted to P199,800.00. 3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff
to execute the Decision, dated December 19, 1984. The writ was partially satisfied
through garnishment of sums from petitioner’s debtor, the Metropolitan Waterworks
and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to
the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate private respondents
to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ
of execution on petitioner through the security guard on duty but the service was
refused on the ground that petitioner no longer occupied the premises.
 Page 105 of 228

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued
a second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:chanrob1es virtual 1aw library

1. All the employees inside petitioner’s premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and
not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties
he had levied upon. 4

The said special sheriff recommended that a, "break-open order" be issued to enable
him to enter petitioner’s premises so that he could proceed with the public auction sale
of the aforesaid personal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were
owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-
Open Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified
copies of the General Informations Sheet, dated May 15, 1987, submitted by petition or
to the Securities Exchange Commission (SEC) and the General Information Sheet, dated
May 15, 1987, submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:
 Page 106 of 228

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

 Page 107 of 228

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila." 5

On the other hand, the General Information Sheet of HPPI revealed the following:

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

 Page 108 of 228

Teodulo R. Dino 100.00

Virgilio O. Casino 100 00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office
 Page 109 of 228

355 Maysan Road, Valenzuela, Metro Manila." 6

On February 1, 1990, HPPI filed an Opposition to private respondents’ motion for

issuance of a break-open order, contending that HPPI is a corporation which is separate
and distinct from petitioner. HPPI also alleged that the two corporations are engaged in
two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was
then engaged in constitution.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents’
motion for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside
the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction
sale of the properties already levied upon. It dismissed the third-party claim for lack of
merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered
the execution of its decision despite a third-party claim on the levied property. Petitioner
further contends, that the doctrine of piercing the corporate veil should not have been
applied, in this case, in the absence of any showing that it created HPPI in order to
evade its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and
separate from petitioner’s construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of
officers and subscribers. 7

We find petitioner’s contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate

and distinct from its stockholders and from other corporations to which it may be
connected. 8 But, this separate and distinct personality of a corporation is merely a
 Page 110 of 228

fiction created by law for convenience and to promote justice. 9 So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to defeat the labor laws, 10 this separate
personality of the corporation may be disregarded or the veil of corporate fiction pierced.
11 This is true likewise when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation. 12

The conditions under which the juridical entity may be disregarded vary according to
the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that will
justify the application of the doctrine of piercing the corporate veil, to wit:

"1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business." 13

The SEC en banc explained the "instrumentality rule" which the courts have applied in
disregarding the separate juridical personality of corporations as follows:

"Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
 Page 111 of 228

"1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of:

The absence of any one of these elements prevents ‘piercing the corporate veil’. In
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant’s
relationship to that operation." 14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact. 15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is
at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

"Both information sheets were filed by the same Virgilio O. Casiño as the corporate
secretary of both corporations. It would also not be amiss to note that both corporations
had the same president, the same board of directors, the same corporate officers, and
substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents. 16
 Page 112 of 228

Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17
where we had the occasion to rule:

"Respondent court’s findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July l, 1957, up to December 7, 1962, when the latter
finally ceased to operate, were not disputed by petitioner. It is very clear that the latter
corporation was a continuation and successor of the first entity . . . Both predecessors
and successor were owned and controlled by petitioner Eduardo Claparols and there
was no break in the succession and continuity of the same business. This ‘avoiding-the-
liability’ scheme is very patent, considering that 90% of the subscribed shares of stock
of the Claparols Steel Corporation (the second corporation) was owned by Respondent.
. . Claparols himself, and an the assets of the dissolved Claparols Steel and Nail Plant
were turned over to the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate
fiction whose veil in the present case could, and should, be pierced as it was deliberately
and maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a
break-open order after the third-party claim of HPPI was dismissed for lack of merit by
the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that:

"Should the losing party, his agent or representative, refuse or prohibit the Sheriff or
his representative entry to the place where the property subject of execution is located
or kept, the judgment creditor may apply to the Commission or Labor Arbiter concerned
for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice
and hearing were complied with. Petitioner and the third-party claimant were given the
opportunity to submit evidence in support of their claim.
 Page 113 of 228

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-
judicial agencies supported by substantial evidence are binding on this Court and are
entitled to great respect, in the absence of showing of grave abuse of a discretion. 18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC,
dated April 23, 1992 and December 3. 1992. are AFFIRMED.

SO ORDERED.
 Page 114 of 228

G.R. No. 147993 July 21, 2006

ENRIQUEZ SECURITY SERVICES, INC., petitioner, vs. VICTOR A.

CABOTAJE, respondent.

CORONA, J.:

Sometime in January 1979, respondent Victor A. Cabotaje was employed as a security

guard by Enriquez Security and Investigation Agency (ESIA). On November 13, 1985,
petitioner Enriquez Security Services, Inc. (ESSI) was incorporated. Respondent
continued to work as security guard in petitioner’s agency.

On reaching the age of 60 in July 1997,1 respondent applied for retirement.

Petitioner acknowledged that respondent was entitled to retirement benefits but

opposed his claim that the computation of such benefits must be reckoned from
January 1979 when he started working for ESIA. It claimed that the benefits must be
computed only from November 13, 1985 when ESSI was incorporated.

Respondent consequently filed a complaint in the National Labor Relations Commission

(NLRC) seeking the payment of retirement benefits under Republic Act No. (RA) 7641,
otherwise known as the Retirement Pay Law.2

On January 15, 1999, labor arbiter Eduardo Carpio decided in respondent’s favor:

Complainant is entitled to retirement pay. This entitlement was not denied by

respondents. xxx The computation of this benefits shall cover the entire period of his
employment from January 1979 up to July 16, 1997 based on his latest monthly salary
of P5,383.15 per the payroll sheet submitted by respondents. While respondents claim
that respondent corporation was merely registered with the DOTC on November 13,
1985, they did not deny however that complainant was an employee of the then Enriquez
Security and Investigation Agency, and that complainant’s services with the said
security agency up to the present respondent corporation was uninterrupted. The
obligation of the new company involves not only to absorb the workers of the dissolved
company, but also to include the length of service earned by the absorbed employee
with their former employer as well. To rule otherwise would be manifestly less than fair,
certainly less than just and equitable.
 Page 115 of 228

xxx xxx xxx

WHEREFORE, judgment is hereby rendered ordering respondents to pay complainant

the grand total amount of P228,581.00 representing his retirement benefits and other
money claims.

SO ORDERED.3

On appeal, the NLRC set aside the labor arbiter’s award of one-month salary for every
year of service for being excessive. It ruled that under RA 7641, respondent Cabotaje
was entitled to retirement pay equivalent only to one-half month salary for every year of
service. Thus:

WHEREFORE, the assailed decision is hereby set aside and a new one entered ordering
respondents to pay complainant the amount of P76,710.60 representing his retirement
benefits.

SO ORDERED.4

On March 15, 2000, the NLRC denied petitioner’s motion for reconsideration.5

On May 25, 2000, petitioner filed a special civil action for certiorari6 with the Court of
Appeals.

On September 26, 2000, the appellate court affirmed the NLRC decision.7 It also denied
the motion for reconsideration on May 8, 2001.8

Hence, this petition for review on certiorari9 on the following issues:

1. [w]hether or not the Retirement [Pay] Law has retroactive effect.

 Page 116 of 228

2. [w]hether the whole 5 days service incentive leave or just a portion thereof equivalent
to 1/12 should be included in the ½ month salary for purposes of computing the
retirement pay.

3. [w]hether or not the length of service of a retired employee in a dissolved company

(his former employer) should be included in his length of service with his last employer
for purposes of computing the retirement pay.10

We find no merit in the petition.

First. Petitioner’s contention that RA 7641 cannot be applied retroactively has long been
settled in the Guidelines for Effective Implementation of RA 7641 issued on October 24,
1996 by the Department of Labor and Employment. Paragraph B of the guidelines
provides:

In reckoning the length of service, the period of employment with the same employer
before the effectivity date of the law on January 7, 1993 should be included.

Thus, in Rufina Patis Factory v. Lucas, Sr.,11 we held:

RA 7641 is undoubtedly a social legislation. The law has been enacted as a labor
protection measure and as a curative statute that – absent a retirement plan devised
by, an agreement with, or a voluntary grant from, an employer – can respond, in part at
least, to the financial well-being of workers during their twilight years soon following
their life of labor. There should be little doubt about the fact that the law can apply to
labor contracts still existing at the time the statute has taken effect, and that its benefits
can be reckoned not only from the date of the law’s enactment but retroactively to the
time said employment contracts have started. (emphasis ours)

Second. Petitioner’s insistence that only 1/12 of the service incentive leave (SIL) should
be included in the computation of the retirement benefit has no basis. Section 1, RA
7641 provides:

x x x Unless the parties provide for broader inclusions, the term one-half (1/2) month
salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and
the cash equivalent of not more than five (5) days of service incentive leave. x x x
 Page 117 of 228

Section 5.2, Rule II of the Implementing Rules of Book VI of the Labor Code further
clarifies what comprises the "1/2 month salary" due a retiring employee:

5.2 Components of One-half (1/2) Month Salary. – For the purpose of determining the
minimum retirement pay due an employee under this Rule, the term "one-half month
salary" shall include all the following:

(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x;

(b) The cash equivalent of not more than five (5) days of service incentive leave;

(c) One-twelfth of the 13th month pay due an employee;

(d) All other benefits that the employer and employee may agree upon that should be
included in the computation of the employee’s retirement pay.

The foregoing rules are clear that the whole 5 days of SIL are included in the
computation of a retiring employees’ pay.

Third. It is a well-entrenched doctrine that the Supreme Court does not pass upon
questions of fact in an appeal by certiorari under Rule 45.12 It is not our function to
assess and evaluate the evidence all over again13 where the findings of the quasi-
judicial agency and the appellate court on the matter coincide.

The consistent rulings of the labor arbiter, the NLRC and the appellate court should be
respected and petitioner’s veil of corporate fiction should likewise be pierced. These are
based on the following uncontroverted facts: (1) respondent worked with ESIA and
petitioner ESSI; (2) his employment with both security agencies was continuous and
uninterrupted; (3) both agencies were owned by the Enriquez family and (4) petitioner
ESSI maintained its office in the same place where ESIA previously held office.14

The attempt to make the security agencies appear as two separate entities, when in
reality they were but one, was a devise to defeat the law and should not be permitted.
Although respect for corporate personality is the general rule, there are exceptions. In
 Page 118 of 228

appropriate cases, the veil of corporate fiction may be pierced as when it is used as a
means to perpetrate a social injustice or as a vehicle to evade obligations. Petitioner was
thus correctly ordered to pay respondent’s retirement under RA 7641, computed from
January 1979 up to the time he applied for retirement in July 1997.

WHEREFORE, the petition is hereby DENIED. Theassailed decision and resolution of

the Court of Appeals are AFFIRMED.

Costs against petitioner.

SO ORDERED.
 Page 119 of 228

G.R. No. 191525 December 13, 2017

INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME),

PETITIONER, V. LITTON AND COMPANY, INC., RESPONDENT.

SERENO, C.J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Court of Appeals (CA) Decision[1] and Resolution[2] in CA-G.R. SP No.
107727.
The CA affirmed the Judgment[3] and Order[4] of the Regional Trial Court (RTC) of
Manila in Special Civil Action No. 06-115547 reinstating the Order[5] of the Metropolitan
Trial Court (MeTC) of Manila in favor of Litton and Company, Inc. (Litton).

THE FACTS

The facts, as culled from the records, are as follows:

Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed
the latter rental arrears as well as his share of the payment of realty taxes.[6]

Consequently, Litton filed a complaint for unlawful detainer against Santos before the
MeTC of Manila. The MeTC ruled in Litton's favor and ordered Santos to vacate A.I.D.
Building and Litton Apartments and to pay various sums of money representing unpaid
arrears, realty taxes, penalty, and attorney's fees.[7]

It appears however that the judgment was not executed. Litton subsequently filed an
action for revival of judgment, which was granted by the RTC.[8] Santos then appealed
the RTC decision to the CA, which nevertheless affirmed the RTC.[9] The said CA
decision became final and executory on 22 March 1994.[10]

On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property
covered by Transfer Certificate of Title (TCT) No. 187565 and registered in the name of
International Academy of Management and Economics Incorporated (I/AME), in order
to execute the judgment against Santos.[11] The annotations on TCT No. 187565
indicated that such was "only up to the extent of the share of Emmanuel T. Santos."[12]
 Page 120 of 228

I/AME filed with MeTC a "Motion to Lift or Remove Annotations Inscribed in TCT No.
187565 of the Register of Deeds of Makati City."[13] I/AME claimed that it has a separate
and distinct personality from Santos; hence, its properties should not be made to answer
for the latter's liabilities. The motion was denied in an Order dated 29 October 2004.

Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and
ordered the cancellation of the annotations of levy as well as the writ of execution. Litton
then elevated the case to the RTC, which in turn reversed the Order granting I/AME's
motion for reconsideration and reinstated the original Order dated 29 October 2004.

I/AME then filed a petition with the CA to contest the judgment of the RTC, which was
eventually denied by the appellate court.

THE CA RULING

The CA upheld the Judgment and Order of the RTC and held that no grave abuse of
discretion was committed when the trial court pierced the corporate veil of I/AME.[14]

It took note of how Santos had utilized I/AME to insulate the Makati real property
covered by TCT No. 187565 from the execution of the judgment rendered against him,
for the following reasons:

First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the
.President, was representing I/AME as the vendee.[15] However, records show that it
was only in 1985 that I/AME was organized as a juridical entity.[16] Obviously, Santos
could not have been President of a non-existent corporation at that time.[17]

Second, the CA noted that the subject real property was transferred to I/AME during
the pendency of the appeal for the revival of the judgment in the ejectment case in the
CA.[18]

Finally, the CA observed that the Register of Deeds of Makati City issued TCT No.
187565 only on 17 November 1993, fourteen (14) years after the execution of the Deed
of Absolute Sale and more than eight (8) years after I/AME was incorporated. [19]
 Page 121 of 228

Thus, the CA concluded that Santos merely used I/AME as a shield to protect his
property from the coverage of the writ of execution; therefore, piercing the veil of
corporate fiction is proper.[20]

THE ISSUES

The issues boil down to the alleged denial of due process when the court pierced the
corporate veil of I/AME and its property was made to answer for the liability of Santos.

OUR RULING

We deny the petition.

There was no violation of due process against I/AME

Petitioner avers that its right to due process was violated when it was dragged into the
case and its real property made an object of a writ of execution in a judgment against
Santos. It argues that since it was not impleaded in the main case, the court a quo never
acquired jurisdiction over it. Indeed, compliance with the recognized modes of
acquisition of jurisdiction cannot be dispensed with even in piercing the veil of
corporation.[21]

In a petition for review on certiorari under Rule 45, only questions of law shall be
entertained. This Court considers the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate fiction as a
question of fact which ordinarily cannot be the subject of a petition for review on
certiorari under Rule 45. We will only take cognizance of factual issues if the findings of
the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.[22] Once the CA affirms the factual findings of the trial court,
such findings are deemed final and conclusive and thus, may not be reviewed on appeal,
unless the judgment of the CA depends on a misapprehension of facts, which if properly
considered, would justify a different conclusion.[23] Such exception however, is not
applicable in this case.

The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one
in accord on the matters presented before this Court.
 Page 122 of 228

In general, corporations, whether stock or non-stock, are treated as separate and

distinct legal entities from the natural persons composing them. The privilege of being
considered a distinct and separate entity is confined to legitimate uses, and is subject
to equitable limitations to prevent its being exercised for fraudulent, unfair or illegal
purposes.[24] However, once equitable limitations are breached using the coverture of
the corporate veil, courts may step in to pierce the same.

As we held in Lanuza, Jr. v. BF Corporation:[25]

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."

When [the] corporate veil is pierced, the corporation and persons who are normally
treated as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.

The piercing of the corporate veil is premised on the fact that the corporation concerned
must have been properly served with summons or properly subjected to the jurisdiction
of the court a quo. Corollary thereto, it cannot be subjected to a writ of execution meant
for another in violation of its right to due process.[26]

There exists, however, an exception to this rule: if it is shown "by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings."[27]

The resistance of the Court to offend the right to due process of a corporation that is a
nonparty in a main case, may disintegrate not only when its director, officer,
shareholder, trustee or member is a party to the main case, but when it finds facts
which show that piercing of the corporate veil is merited.[28]
 Page 123 of 228

Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing
of its corporate veil cannot argue violation of due process.[29]

In this case, the Court confirms the lower courts' findings that Santos had an existing
obligation based on a court judgment that he owed monthly rentals and unpaid realty
taxes under a lease contract he entered into as lessee with the Littons as lessor. He was
not able to comply with this particular obligation, and in fact, refused to comply
therewith.

This Court agrees with the CA that Santos used I/AME as a means to defeat judicial
processes and to evade his obligation to Litton.[30] Thus, even while I/AME was not
impleaded in the main case and yet was so named in a writ of execution to satisfy a
court judgment against Santos, it is vulnerable to the piercing of its corporate veil. We
will further expound on this matter.

Piercing the Corporate Veil may Apply to Non-stock Corporations

Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to
stock corporations, and not to non-stock, nonprofit corporations such as I/AME since
there are no stockholders to hold liable in such a situation but instead only members.
Hence, they do not have investments or shares of stock or assets to answer for possible
liabilities. Thus, no one in a non-stock corporation can be held liable in case the
corporate veil is disregarded or pierced.[31]

The CA disagreed. It ruled that since the law does not make a distinction between a
stock and non-stock corporation, neither should there be a distinction in case the
doctrine of piercing the veil of corporate fiction has to be applied. While I/AME is an
educational institution, the CA further ruled, it still is a registered corporation
conducting its affairs as such.[32]

This Court agrees with the CA.

In determining the propriety of applicability of piercing the veil of corporate fiction, this
Court, in a number of cases, did not put in issue whether a corporation is a stock or
non-stock corporation. In Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc.,[33] we
considered but ultimately refused to pierce the corporate veil of a non-stock non-profit
corporation which sought to institute an action for reconveyance of real property on
behalf of its members. This Court held that the non-stock corporation had no
personality to institute a class suit on behalf of its members, considering that the non-
 Page 124 of 228

stock corporation was not an assignee or transferee of the real property in question, and
did not have an identity that was one and the same as its members.

In another case, this Court did not put in issue whether the corporation is a non-stock,
non-profit, non-governmental corporation in considering the application of the doctrine
of piercing of corporate veil. In Republic of the Philippines v. Institute for Social
Concern,[34] while we did not allow the piercing of the corporate veil, this Court affirmed
the finding of the CA that the Chairman of the Institute for Social Concern cannot be
held jointly and severally liable with the aforesaid non-governmental organization (NGO)
at the time the Memorandum of Agreement was entered into with the Philippine
Government. We found no fraud in that case committed by the Chairman that would
have justified the piercing of the corporate veil of the NGO.[35]

In the United States, from which we have adopted our law on corporations, non-profit
corporations are not immune from the doctrine of piercing the corporate veil. Their
courts view piercing of the corporation as an equitable remedy, which justifies said
courts to scrutinize any organization however organized and in whatever manner it
operates. Moreover, control of ownership does not hinge on stock ownership.

As held in Barineau v. Barineau:[36]

[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself
preclude a court from applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the substance of the
organization, and its decision is not controlled by the statutory framework under which
the corporation was formed and operated. While it may appear to be impossible for a
person to exercise ownership control over a nonstock, not-for-profit corporation, a
person can be held personally liable under the alter ego theory if the evidence shows
that the person controlling the corporation did in fact exercise control, even though
there was no stock ownership.

In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal
Reserve System,[37] the U.S. Court allowed the piercing of the corporate veil of the
Foundation headed by the plaintiff, in order to avoid inequitable results. Plaintiff was
found to be the sole trustee, the sole member of the board, and the sole financial
contributor to the Foundation. In the end, the Court found that the plaintiff used the
Foundation to avoid paying attorneys' fees.
 Page 125 of 228

The concept of equitable ownership, for stock or non-stock corporations, in piercing of

the corporate veil scenarios, may also be considered. An equitable owner is an individual
who is a non-shareholder defendant, who exercises sufficient control or considerable
authority over the corporation to the point of completely disregarding the corporate form
and acting as though its assets are his or her alone to manage and distribute.[38]

Given the foregoing, this Court sees no reason why a non-stock corporation such as
I/AME, may not be scrutinized for purposes of piercing the corporate veil or fiction.

Piercing the Corporate Veil may Apply to Natural Persons

The petitioner also insists that the piercing of the corporate veil cannot be applied to a
natural person - in this case, Santos - simply because as a human being, he has no
corporate veil shrouding or covering his person.[39]

a) When the Corporation is the Alter Ego of a Natural Person

As cited in Sulo ng Bayan, Inc. v. Araneta, Inc.,[40] "[t]he doctrine of alter ego is based
upon the misuse of a corporation by an individual for wrongful or inequitable purposes,
and in such case the court merely disregards the corporate entity and holds the
individual responsible for acts knowingly and intentionally done in the name of the
corporation." This, Santos has done in this case. Santos formed I/AME, using the non-
stock corporation, to evade paying his judgment creditor, Litton.

The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. This Court has held that the "corporate mask may be lifted
and the corporate veil may be pierced when a corporation is just but the alter ego of a
person or of another corporation.”[41]

We have considered a deceased natural person as one and the same with his corporation
to protect the succession rights of his legal heirs to his estate. In Cease v. Court of
Appeals,[42] the predecessor-in-interest organized a close corporation which acquired
properties during its existence. When he died intestate, trouble ensued amongst his
children on whether or not to consider his company one and the same with his person.
The Court agreed with the trial court when it pierced the corporate veil of the decedent's
corporation. It found that said corporation was his business conduit and alter ego. Thus,
the acquired properties were actually properties of the decedent and as such, should be
divided among the decedent's legitimate children in the partition of his estate.[43]
 Page 126 of 228

In another instance, this Court allowed the piercing of the corporate veil against another
natural person, in Arcilla v. Court of Appeals.[44] The case stemmed from a complaint
for sum of money against Arcilla for his failure to pay his loan from the private
respondent. Arcilla, in his defense, alleged that the loan was in the name of his family
corporation, CSAR Marine Resources, Inc. He further argued that the CA erred in
holding CSAR Marine Resources liable to the private respondent since the latter was not
impleaded as a party in the case. This Court allowed the piercing of the corporate veil
and held that Arcilla used "his capacity as President, x x x [as] a sanctuary for a defense
x x x to avoid complying with the liability adjudged against him x x x.''[45] We held that
his liability remained attached even if he was impleaded as a party, and not the
corporation, to the collection case and even if he ceased to be corporate president.[46]
Indeed, even if Arcilla had ceased to be corporate president, he remained personally
liable for the judgment debt to pay his personal loan, for we treated him and the
corporation as one and the same. CSAR Marine was deemed his alter ego.

We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was
adjudged liable to pay on a judgment against him; (2) he became President of a
corporation; (3) he formed a corporation to conceal assets which were supposed to pay
for the judgment against his favor; (4) the corporation which has Santos as its President,
is being asked by the court to pay on the judgment; and (5) he may not use as a defense
that he is no longer President of I/AME (although a visit to the website of the school
shows he is the current President).[47]

This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the
natural person - is the alter ego of I/AME. Santos falsely represented himself as
President of I/AME in the Deed of Absolute Sale when he bought the Makati real
property, at a time when I/AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of MeTC showing Santos and I/AME as being one and the same
person:

(1) Santos is the conceptualizer and implementor of I/AME;

(2) Santos' contribution is P1,200,000.00 (One Million Two Hundred Thousand Pesos)
out of the P1,500,000.00 (One Million Five Hundred Thousand Pesos), making him the
majority contributor of I/AME; and,

(3) The building being occupied by I/AME is named after Santos using his known
nickname (to date it is called, the "Noli Santos International Tower").[48]
 Page 127 of 228

This Court deems I/AME and Santos as alter egos of each other based on the former's
own admission in its pleadings before the trial court. In its Answer (to Amended Petition)
with the RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case
No. 06-115547, I/AME admitted the allegations found in paragraphs 2, 4 and 5 of the
amended petition of Litton, particularly paragraph number 4 which states:

4. Respondent, International Academy of Management and Economics Inc. (hereinafter

referred to as Respondent I/AME), is a corporation organized and existing under
Philippine laws with address at 1061 Metropolitan Avenue, San Antonio Village, Makati
City, where it may be served with summons and other judicial processes. It is the
corporate entity used by Respondent Santos as his alter ego for the purpose of shielding
his assets from the reach of his creditors, one of which is herein Petitioner.[49]
(Emphases ours)

Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to
evade the execution on the Makati property, thus frustrating the satisfaction of the
judgment won by Litton.

b) Reverse Piercing of the Corporate Veil

This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a
money judgment against its erstwhile President, Arcilla.

We borrow from American parlance what is called reverse piercing or reverse corporate
piercing or piercing the corporate veil "in reverse."

As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,[50] "in a
traditional veil-piercing action, a court disregards the existence of the corporate entity
so a claimant can reach the assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against
a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing)

and makes the corporation liable for the debt of the shareholders."[51]

It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider
reverse piercing occurs when a party with a claim against an individual or corporation
 Page 128 of 228

attempts to be repaid with assets of a corporation owned or substantially controlled by

the defendant.[52] In contrast, in insider reverse piercing, the controlling members will
attempt to ignore the corporate fiction in order to take advantage of a benefit available
to the corporation, such as an interest in a lawsuit or protection of personal assets.[53]

Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment

creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order to
make its Makati real property answer for a judgment against Santos, who formerly
owned and still substantially controls I/AME.

In the U.S. case Acree v. McMahan,[54] the American court held that "[o]utsider reverse
veil-piercing extends the traditional veil-piercing doctrine to permit a third-party
creditor to pierce the veil to satisfy the debts of an individual out of the corporation's
assets."

The Court has pierced the corporate veil in a reverse manner in the instances when the
scheme was to avoid corporate assets to be included in the estate of a decedent as in
the Cease case and when the corporation was used to escape a judgment to pay a debt
as in the Arcilla case.

In a 1962 Philippine case, this Court also employed what we now call reverse-piercing
of the corporate veil. In Palacio v. Fely Transportation Co.,[55] we found that the
president and general manager of the private respondent company formed the
corporation to evade his subsidiary civil liability resulting from the conviction of his
driver who ran over the child of the petitioner, causing injuries and medical expenses.
The Court agreed with the plaintiffs that the president and general manager, and Fely
Transportation, may be regarded as one and the same person. Thus, even if the
president and general manager was not a party to the case, we reversed the lower court
and declared both him and the private respondent company, jointly and severally liable
to the plaintiffs. Thus, this Court allowed the outsider-plaintiffs to pierce the corporate
veil of Fely Transportation to run after its corporate assets and pay the subsidiary civil
liability of the company's president and general manager.

This notwithstanding, the equitable remedy of reverse corporate piercing or reverse

piercing was not meant to encourage a creditor's failure to undertake such remedies
that could have otherwise been available, to the detriment of other creditors.[56]

Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead
to disastrous consequences for both stock and non-stock corporations. We are aware
 Page 129 of 228

that ordinary judgment collection procedures or other legal remedies are preferred over
that which would risk damage to third parties (for instance, innocent stockholders or
voluntary creditors) with unprotected interests in the assets of the beleaguered
corporation.[57]

Thus, this Court would recommend the application of the current 1997 Rules on Civil
Procedure on Enforcement of Judgments. Under the current Rules of Court on Civil
Procedure, when it comes to satisfaction by levy, a judgment obligor is given the option
to immediately choose which property or part thereof may be levied upon to satisfy the
judgment. If the judgment obligor does not exercise the option, personal properties, if
any, shall be first levied and then on real properties if the personal properties are
deemed insufficient to answer for the judgment.[58]

In the instant case, it may be possible for this Court to recommend that Litton run after
the other properties of Santos that could satisfy the money judgment - first personal,
then other real properties other than that of the school. However, if we allow this, we
frustrate the decades-old yet valid MeTC judgment which levied on the real property
now titled under the name of the school. Moreover, this Court will unwittingly condone
the action of Santos in hiding all these years behind the corporate form to evade paying
his obligation under the judgment in the court a quo. This we cannot countenance
without being a party to the injustice.

Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution
of the Makati real property where the school now stands is applied.

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA Decision
in CA-G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12 March 2010
are hereby AFFIRMED. The MeTC Order dated 29 October 2004 is hereby REINSTATED.

Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with

dispatch the MeTC Order dated 29 October 2004 against Santos.

SO ORDERED.
 Page 130 of 228

G.R. No. 126297 February 02, 2010

PROFESSIONAL SERVICES, INC., PETITIONER, VS. THE COURT OF

APPEALS AND NATIVIDAD AND ENRIQUE AGANA, RESPONDENTS.

G.R. NO. 126467

NATIVIDAD [SUBSTITUTED BY HER CHILDREN MARCELINO AGANA III, ENRIQUE

AGANA, JR., EMMA AGANA-ANDAYA, JESUS AGANA AND RAYMUND AGANA] AND
ENRIQUE AGANA, PETITIONERS, VS. THE COURT OF APPEALS AND JUAN FUENTES,
RESPONDENTS.

G.R. NO. 127590

MIGUEL AMPIL, PETITIONER, VS. NATIVIDAD AND ENRIQUE AGANA,
RESPONDENTS.

CORONA, J.:

With prior leave of court,[1] petitioner Professional Services, Inc. (PSI) filed a second
motion for reconsideration[2] urging referral thereof to the Court en banc and seeking
modification of the decision dated January 31, 2007 and resolution dated February 11,
2008 which affirmed its vicarious and direct liability for damages to respondents
Enrique Agana and the heirs of Natividad Agana (Aganas).

Manila Medical Services, Inc. (MMSI),[3] Asian Hospital, Inc. (AHI),[4] and Private
Hospital Association of the Philippines (PHAP)[5] all sought to intervene in these cases
invoking the common ground that, unless modified, the assailed decision and resolution
will jeopardize the financial viability of private hospitals and jack up the cost of health
care.

The Special First Division of the Court granted the motions for intervention of MMSI,
AHI and PHAP (hereafter intervenors),[6] and referred en consulta to the Court en banc
the motion for prior leave of court and the second motion for reconsideration of PSI.[7]

Due to paramount public interest, the Court en banc accepted the referral[8] and heard
the parties on oral arguments on one particular issue: whether a hospital may be held
liable for the negligence of physicians-consultants allowed to practice in its premises.[9]
 Page 131 of 228

To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil) and Dr. Juan
Fuentes (Dr. Fuentes), was impleaded by Enrique Agana and Natividad Agana (later
substituted by her heirs), in a complaint[10] for damages filed in the Regional Trial Court
(RTC) of Quezon City, Branch 96, for the injuries suffered by Natividad when Dr. Ampil
and Dr. Fuentes neglected to remove from her body two gauzes[11] which were used in
the surgery they performed on her on April 11, 1984 at the Medical City General
Hospital. PSI was impleaded as owner, operator and manager of the hospital.

In a decision[12] dated March 17, 1993, the RTC held PSI solidarily liable with Dr. Ampil
and Dr. Fuentes for damages.[13] On appeal, the Court of Appeals (CA), absolved Dr.
Fuentes but affirmed the liability of Dr. Ampil and PSI, subject to the right of PSI to
claim reimbursement from Dr. Ampil.[14]

On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA
decision.[15] PSI filed a motion for reconsideration[16] but the Court denied it in a
resolution dated February 11, 2008.[17]

The Court premised the direct liability of PSI to the Aganas on the following facts and
law:

First, there existed between PSI and Dr. Ampil an employer-employee relationship as
contemplated in the December 29, 1999 decision in Ramos v. Court of Appeals[18] that
"for purposes of allocating responsibility in medical negligence cases, an employer-
employee relationship exists between hospitals and their consultants."[19] Although the
Court in Ramos later issued a Resolution dated April 11, 2002[20] reversing its earlier
finding on the existence of an employment relationship between hospital and doctor, a
similar reversal was not warranted in the present case because the defense raised by
PSI consisted of a mere general denial of control or responsibility over the actions of Dr.
Ampil.[21]

Second, by accrediting Dr. Ampil and advertising his qualifications, PSI created the
public impression that he was its agent.[22] Enrique testified that it was on account of
Dr. Ampil's accreditation with PSI that he conferred with said doctor about his wife's
(Natividad's) condition.[23] After his meeting with Dr. Ampil, Enrique asked Natividad
to personally consult Dr. Ampil.[24] In effect, when Enrigue and Natividad engaged the
services of Dr. Ampil, at the back of their minds was that the latter was a staff member
of a prestigious hospital. Thus, under the doctrine of apparent authority applied in
Nogales, et al. v. Capitol Medical Center, et al.,[25] PSI was liable for the negligence of
Dr. Ampil.
 Page 132 of 228

Finally, as owner and operator of Medical City General Hospital, PSI was bound by its
duty to provide comprehensive medical services to Natividad Agana, to exercise
reasonable care to protect her from harm,[26] to oversee or supervise all persons who
practiced medicine within its walls, and to take active steps in fixing any form of
negligence committed within its premises.[27] PSI committed a serious breach of its
corporate duty when it failed to conduct an immediate investigation into the reported
missing gauzes.[28]

PSI is now asking this Court to reconsider the foregoing rulings for these reasons:

The declaration in the 31 January 2007 Decision vis-a-vis the 11 February 2009
Resolution that the ruling in Ramos vs. Court of Appeals (G.R. No. 134354, December
29, 1999) that "an employer-employee relations exists between hospital and their
consultants" stays should be set aside for being inconsistent with or contrary to the
import of the resolution granting the hospital's motion for reconsideration in Ramos vs.
Court of Appeals (G.R. No. 134354, April 11, 2002), which is applicable to PSI since the
Aganas failed to prove an employer-employee relationship between PSI and Dr. Ampil
and PSI proved that it has no control over Dr. Ampil. In fact, the trial court has found
that there is no employer-employee relationship in this case and that the doctor's are
independent contractors.

II

Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did not primarily
and specifically look to the Medical City Hospital (PSI) for medical care and support;
otherwise stated, respondents Aganas did not select Medical City Hospital (PSI) to
provide medical care because of any apparent authority of Dr. Miguel Ampil as its agent
since the latter was chosen primarily and specifically based on his qualifications and
being friend and neighbor.

III

PSI cannot be liable under doctrine of corporate negligence since the proximate cause
of Mrs. Agana's injury was the negligence of Dr. Ampil, which is an element of the
principle of corporate negligence.[29]
 Page 133 of 228

In their respective memoranda, intervenors raise parallel arguments that the Court's
ruling on the existence of an employer-employee relationship between private hospitals
and consultants will force a drastic and complex alteration in the long-established and
currently prevailing relationships among patient, physician and hospital, with
burdensome operational and financial consequences and adverse effects on all three
parties.[30]

The Aganas comment that the arguments of PSI need no longer be entertained for they
have all been traversed in the assailed decision and resolution.[31]

After gathering its thoughts on the issues, this Court holds that PSI is liable to the
Aganas, not under the principle of respondeat superior for lack of evidence of an
employment relationship with Dr. Ampil but under the principle of ostensible agency for
the negligence of Dr. Ampil and, pro hac vice, under the principle of corporate negligence
for its failure to perform its duties as a hospital.

While in theory a hospital as a juridical entity cannot practice medicine,[32] in reality it

utilizes doctors, surgeons and medical practitioners in the conduct of its business of
facilitating medical and surgical treatment.[33] Within that reality, three legal
relationships crisscross: (1) between the hospital and the doctor practicing within its
premises; (2) between the hospital and the patient being treated or examined within its
premises and (3) between the patient and the doctor. The exact nature of each
relationship determines the basis and extent of the liability of the hospital for the
negligence of the doctor.

Where an employment relationship exists, the hospital may be held vicariously liable
under Article 2176[34] in relation to Article 2180[35] of the Civil Code or the principle
of respondeat superior. Even when no employment relationship exists but it is shown
that the hospital holds out to the patient that the doctor is its agent, the hospital may
still be vicariously liable under Article 2176 in relation to Article 1431[36] and Article
1869[37] of the Civil Code or the principle of apparent authority.[38] Moreover,
regardless of its relationship with the doctor, the hospital may be held directly liable to
the patient for its own negligence or failure to follow established standard of conduct to
which it should conform as a corporation.[39]

This Court still employs the "control test" to determine the existence of an employer-
employee relationship between hospital and doctor. In Calamba Medical Center, Inc. v.
National Labor Relations Commission, et al.[40] it held:
 Page 134 of 228

Under the "control test", an employment relationship exists between a physician and a
hospital if the hospital controls both the means and the details of the process by which
the physician is to accomplish his task.

xx xx xx

As priorly stated, private respondents maintained specific work-schedules, as

determined by petitioner through its medical director, which consisted of 24-hour shifts
totaling forty-eight hours each week and which were strictly to be observed under pain
of administrative sanctions.

That petitioner exercised control over respondents gains light from the undisputed fact
that in the emergency room, the operating room, or any department or ward for that
matter, respondents' work is monitored through its nursing supervisors, charge nurses
and orderlies. Without the approval or consent of petitioner or its medical director, no
operations can be undertaken in those areas. For control test to apply, it is not essential
for the employer to actually supervise the performance of duties of the employee, it being
enough that it has the right to wield the power. (emphasis supplied)

Even in its December 29, 1999 decision[41] and April 11, 2002 resolution[42] in Ramos,
the Court found the control test decisive.

In the present case, it appears to have escaped the Court's attention that both the RTC
and the CA found no employment relationship between PSI and Dr. Ampil, and that the
Aganas did not question such finding. In its March 17, 1993 decision, the RTC found
"that defendant doctors were not employees of PSI in its hospital, they being merely
consultants without any employer-employee relationship and in the capacity of
independent contractors."[43] The Aganas never questioned such finding.

PSI, Dr. Ampil and Dr. Fuentes appealed[44] from the RTC decision but only on the
issues of negligence, agency and corporate liability. In its September 6, 1996 decision,
the CA mistakenly referred to PSI and Dr. Ampil as employer-employee, but it was clear
in its discussion on the matter that it viewed their relationship as one of mere apparent
agency.[45]

The Aganas appealed from the CA decision, but only to question the exoneration of Dr.
Fuentes.[46] PSI also appealed from the CA decision, and it was then that the issue of
employment, though long settled, was unwittingly resurrected.
 Page 135 of 228

In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil had no
employer-employee relationship, such finding became final and conclusive even to this
Court.[47] There was no reason for PSI to have raised it as an issue in its petition. Thus,
whatever discussion on the matter that may have ensued was purely academic.

Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this
particular instance, the concurrent finding of the RTC and the CA that PSI was not the
employer of Dr. Ampil is correct. Control as a determinative factor in testing the
employer-employee relationship between doctor and hospital under which the hospital
could be held vicariously liable to a patient in medical negligence cases is a requisite
fact to be established by preponderance of evidence. Here, there was insufficient
evidence that PSI exercised the power of control or wielded such power over the means
and the details of the specific process by which Dr. Ampil applied his skills in the
treatment of Natividad. Consequently, PSI cannot be held vicariously liable for the
negligence of Dr. Ampil under the principle of respondeat superior.

There is, however, ample evidence that the hospital (PSI) held out to the patient
(Natividad)[48] that the doctor (Dr. Ampil) was its agent. Present are the two factors that
determine apparent authority: first, the hospital's implied manifestation to the patient
which led the latter to conclude that the doctor was the hospital's agent; and second,
the patient's reliance upon the conduct of the hospital and the doctor, consistent with
ordinary care and prudence.[49]

Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the condition
of his wife; that after the meeting and as advised by Dr. Ampil, he "asked [his] wife to go
to Medical City to be examined by [Dr. Ampil]"; and that the next day, April 3, he told
his daughter to take her mother to Dr. Ampil.[50] This timeline indicates that it was
Enrique who actually made the decision on whom Natividad should consult and where,
and that the latter merely acceded to it. It explains the testimony of Natividad that she
consulted Dr. Ampil at the instigation of her daughter.[51]

Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:

Atty. Agcaoili

On that particular occasion, April 2, 1984, what was your reason for choosing Dr. Ampil
to contact with in connection with your wife's illness?
 Page 136 of 228

A. First, before that, I have known him to be a specialist on that part of the body as a
surgeon, second, I have known him to be a staff member of the Medical City which is a
prominent and known hospital. And third, because he is a neighbor, I expect more than
the usual medical service to be given to us, than his ordinary patients.[52] (emphasis
supplied)

Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil was
significantly influenced by the impression that Dr. Ampil was a staff member of Medical
City General Hospital, and that said hospital was well known and prominent. Enrique
looked upon Dr. Ampil not as independent of but as integrally related to Medical City.

PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is of
record that PSI required a "consent for hospital care"[53] to be signed preparatory to the
surgery of Natividad. The form reads:

Permission is hereby given to the medical, nursing and laboratory staff of the Medical
City General Hospital to perform such diagnostic procedures and to administer such
medications and treatments as may be deemed necessary or advisable by the physicians
of this hospital for and during the confinement of xxx. (emphasis supplied)

By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a
physician of its hospital, rather than one independently practicing in it; that the
medications and treatments he prescribed were necessary and desirable; and that the
hospital staff was prepared to carry them out.

PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was not the
exclusive basis of the Aganas' decision to have Natividad treated in Medical City General
Hospital, meaning that, had Dr. Ampil been affiliated with another hospital, he would
still have been chosen by the Aganas as Natividad's surgeon.[54]

The Court cannot speculate on what could have been behind the Aganas' decision but
would rather adhere strictly to the fact that, under the circumstances at that time,
Enrique decided to consult Dr. Ampil for he believed him to be a staff member of a
prominent and known hospital. After his meeting with Dr. Ampil, Enrique advised his
wife Natividad to go to the Medical City General Hospital to be examined by said doctor,
and the hospital acted in a way that fortified Enrique's belief.
 Page 137 of 228

This Court must therefore maintain the ruling that PSI is vicariously liable for the
negligence of Dr. Ampil as its ostensible agent.

Moving on to the next issue, the Court notes that PSI made the following admission in
its Motion for Reconsideration:

51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is not liable for
Dr. Ampil's acts during the operation. Considering further that Dr. Ampil was personally
engaged as a doctor by Mrs. Agana, it is incumbent upon Dr. Ampil, as "Captain of the
Ship", and as the Agana's doctor to advise her on what to do with her situation vis-a-vis
the two missing gauzes. In addition to noting the missing gauzes, regular check-ups
were made and no signs of complications were exhibited during her stay at the hospital,
which could have alerted petitioner PSI's hospital to render and provide post-operation
services to and tread on Dr. Ampil's role as the doctor of Mrs. Agana. The absence of
negligence of PSI from the patient's admission up to her discharge is borne by the finding
of facts in this case. Likewise evident therefrom is the absence of any complaint from
Mrs. Agana after her discharge from the hospital which had she brought to the hospital's
attention, could have alerted petitioner PSI to act accordingly and bring the matter to
Dr. Ampil's attention. But this was not the case. Ms. Agana complained ONLY to Drs.
Ampil and Fuentes, not the hospital. How then could PSI possibly do something to fix
the negligence committed by Dr. Ampil when it was not informed about it at
all.[55](emphasis supplied)

PSI reiterated its admission when it stated that had Natividad Agana "informed the
hospital of her discomfort and pain, the hospital would have been obliged to act on
it."[56]

The significance of the foregoing statements is critical.

First, they constitute judicial admission by PSI that while it had no power to control the
means or method by which Dr. Ampil conducted the surgery on Natividad Agana, it had
the power to review or cause the review of what may have irregularly transpired within
its walls strictly for the purpose of determining whether some form of negligence may
have attended any procedure done inside its premises, with the ultimate end of
protecting its patients.

Second, it is a judicial admission that, by virtue of the nature of its business as well as
its prominence[57] in the hospital industry, it assumed a duty to "tread on" the "captain
 Page 138 of 228

of the ship" role of any doctor rendering services within its premises for the purpose of
ensuring the safety of the patients availing themselves of its services and facilities.

Third, by such admission, PSI defined the standards of its corporate conduct under the
circumstances of this case, specifically: (a) that it had a corporate duty to Natividad even
after her operation to ensure her safety as a patient; (b) that its corporate duty was not
limited to having its nursing staff note or record the two missing gauzes and (c) that its
corporate duty extended to determining Dr. Ampil's role in it, bringing the matter to his
attention, and correcting his negligence.

And finally, by such admission, PSI barred itself from arguing in its second motion for
reconsideration that the concept of corporate responsibility was not yet in existence at
the time Natividad underwent treatment;[58] and that if it had any corporate
responsibility, the same was limited to reporting the missing gauzes and did not include
"taking an active step in fixing the negligence committed."[59] An admission made in
the pleading cannot be controverted by the party making such admission and is
conclusive as to him, and all proofs submitted by him contrary thereto or inconsistent
therewith should be ignored, whether or not objection is interposed by a party.[60]

Given the standard of conduct that PSI defined for itself, the next relevant inquiry is
whether the hospital measured up to it.

PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil assumed
the personal responsibility of informing Natividad about the two missing gauzes.[61] Dr.
Ricardo Jocson, who was part of the group of doctors that attended to Natividad, testified
that toward the end of the surgery, their group talked about the missing gauzes but Dr.
Ampil assured them that he would personally notify the patient about it.[62]
Furthermore, PSI claimed that there was no reason for it to act on the report on the two
missing gauzes because Natividad Agana showed no signs of complications. She did not
even inform the hospital about her discomfort.[63]

The excuses proffered by PSI are totally unacceptable.

To begin with, PSI could not simply wave off the problem and nonchalantly delegate to
Dr. Ampil the duty to review what transpired during the operation. The purpose of such
review would have been to pinpoint when, how and by whom two surgical gauzes were
mislaid so that necessary remedial measures could be taken to avert any jeopardy to
Natividad's recovery. Certainly, PSI could not have expected that purpose to be achieved
by merely hoping that the person likely to have mislaid the gauzes might be able to
 Page 139 of 228

retrace his own steps. By its own standard of corporate conduct, PSI's duty to initiate
the review was non-delegable.

While Dr. Ampil may have had the primary responsibility of notifying Natividad about
the missing gauzes, PSI imposed upon itself the separate and independent responsibility
of initiating the inquiry into the missing gauzes. The purpose of the first would have
been to apprise Natividad of what transpired during her surgery, while the purpose of
the second would have been to pinpoint any lapse in procedure that led to the gauze
count discrepancy, so as to prevent a recurrence thereof and to determine corrective
measures that would ensure the safety of Natividad. That Dr. Ampil negligently failed to
notify Natividad did not release PSI from its self-imposed separate responsibility.

Corollary to its non-delegable undertaking to review potential incidents of negligence

committed within its premises, PSI had the duty to take notice of medical records
prepared by its own staff and submitted to its custody, especially when these bear
earmarks of a surgery gone awry. Thus, the record taken during the operation of
Natividad which reported a gauze count discrepancy should have given PSI sufficient
reason to initiate a review. It should not have waited for Natividad to complain.

As it happened, PSI took no heed of the record of operation and consequently did not
initiate a review of what transpired during Natividad's operation. Rather, it shirked its
responsibility and passed it on to others - to Dr. Ampil whom it expected to inform
Natividad, and to Natividad herself to complain before it took any meaningful step. By
its inaction, therefore, PSI failed its own standard of hospital care. It committed
corporate negligence.

It should be borne in mind that the corporate negligence ascribed to PSI is different from
the medical negligence attributed to Dr. Ampil. The duties of the hospital are distinct
from those of the doctor-consultant practicing within its premises in relation to the
patient; hence, the failure of PSI to fulfill its duties as a hospital corporation gave rise
to a direct liability to the Aganas distinct from that of Dr. Ampil.

All this notwithstanding, we make it clear that PSI's hospital liability based on ostensible
agency and corporate negligence applies only to this case, pro hac vice. It is not intended
to set a precedent and should not serve as a basis to hold hospitals liable for every form
of negligence of their doctors-consultants under any and all circumstances. The ruling
is unique to this case, for the liability of PSI arose from an implied agency with Dr. Ampil
and an admitted corporate duty to Natividad.[64]
 Page 140 of 228

Other circumstances peculiar to this case warrant this ruling,[65] not the least of which
being that the agony wrought upon the Aganas has gone on for 26 long years, with
Natividad coming to the end of her days racked in pain and agony. Such wretchedness
could have been avoided had PSI simply done what was logical: heed the report of a
guaze count discrepancy, initiate a review of what went wrong and take corrective
measures to ensure the safety of Nativad. Rather, for 26 years, PSI hemmed and hawed
at every turn, disowning any such responsibility to its patient. Meanwhile, the options
left to the Aganas have all but dwindled, for the status of Dr. Ampil can no longer be
ascertained.[66]

Therefore, taking all the equities of this case into consideration, this Court believes P15
million would be a fair and reasonable liability of PSI, subject to 12% p.a. interest from
the finality of this resolution to full satisfaction.

WHEREFORE, the second motion for reconsideration is DENIED and the motions for
intervention are NOTED.

Professional Services, Inc. is ORDERED pro hac vice to pay Natividad (substituted by
her children Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya, Jesus
Agana and Raymund Agana) and Enrique Agana the total amount of P15 million, subject
to 12% p.a. interest from the finality of this resolution to full satisfaction.

No further pleadings by any party shall be entertained in this case.

Let the long-delayed entry of judgment be made in this case upon receipt by all
concerned parties of this resolution.

SO ORDERED.
 Page 141 of 228

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.

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.

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
 Page 142 of 228

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
 Page 143 of 228

administrative agency tasked to enforce the 60-40 ownership requirement in favor of

Filipino citizens in the Constitution and various statutes, has consistently adopted this
particular definition in its numerous opinions. Movants point out that with the 28 June
2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and
1987 Constitutions. There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently
wrong and utterly baseless to claim that the Court in defining the term "capital" in its
28 June 2011 Decision modified, reversed, or set aside the purported long-standing
definition of the term "capital," which supposedly refers to the total outstanding shares
of stock, whether voting or non-voting. To repeat, until the present case there has never
been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition
of the term "capital" as referring to both voting and non-voting shares (combined total
of common and preferred shares) are, in the first place, conflicting and inconsistent.
There is no basis whatsoever to the claim that the SEC and the DOJ have consistently
and uniformly adopted a definition of the term "capital" contrary to the definition that
this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term
"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether
the term "capital" includes "both preferred and common stocks." The issue was raised
in relation to a stock-swap transaction between a Filipino and a Japanese corporation,
both stockholders of a domestic corporation that owned lands in the Philippines. Then
Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of
the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although
when the non-voting stock is added, Filipinos would own 60% of the combined voting
and non-voting stock. This ownership structure is remarkably similar to the current
ownership structure of PLDT. Minister Mendoza ruled:

xxxx
 Page 144 of 228

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,
 Page 145 of 228

MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to vote shall be
deemed as of Philippine nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in
the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their
respective board of directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of
the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. At the same time, these opinions highlight
the conflicting, contradictory, and inconsistent positions taken by the DOJ and the SEC
on the definition of the term "capital" found in the economic provisions of the
Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules
and regulations because only the SEC en banc can adopt rules and regulations. As
expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot
delegate to any of its individual Commissioner or staff the power to adopt any rule or
regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial
body, and not any of its legal officers, that is empowered to issue opinions and approve
rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of
the Commission except its review or appellate authority and its power to adopt, alter
and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or
staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the
Financing Company Act and other existing laws. Pursuant thereto the Commission shall
have, among others, the following powers and functions:
 Page 146 of 228

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?

 Page 147 of 228

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:

Correct, Your Honor.

 Page 148 of 228

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.
 Page 149 of 228

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
 Page 150 of 228

which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage in
certain economic activities applies not only to voting control of the corporation, but also
to the beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we
stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in
the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various
opinions which respondents relied upon, is merely preliminary and an opinion only of
such officers. To repeat, any such opinion does not constitute an SEC rule or regulation.
In fact, many of these opinions contain a disclaimer which expressly states: "x x x the
foregoing opinion is based solely on facts disclosed in your query and relevant only to
the particular issue raised therein and shall not be used in the nature of a standing rule
binding upon the Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law
are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
 Page 151 of 228

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 Appeals17 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.
 Page 152 of 228

Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a
just and humane society, and establish a Government that shall embody our ideals and
aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy
under the rule of law and a regime of truth, justice, freedom, love, equality, and peace,
do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as
State policy the development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and
operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens
of the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress may prescribe,
 Page 153 of 228

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.
 Page 154 of 228

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
 Page 155 of 228

capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of
the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a

written certificate to the effect that such business or economic activity x x x would not
conflict with the Constitution or laws of the Philippines."27 Thus, a "non-Philippine
national" cannot own and operate a reserved economic activity like a public utility. This
means, of course, that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus

Investments Code of 1987 was a reiteration of the meaning of such term as provided in
Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of
the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x
 Page 156 of 228

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,
 Page 157 of 228

which limits the ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of
the nature of business and area of investment. The FIA spells out the procedures by
which non-Philippine nationals can invest in the Philippines. Among the key features of
this law is the concept of a negative list or the Foreign Investments Negative List.32
Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment

Negative List]. - The Foreign Investment Negative List shall have two 2 component lists:
A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by

mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from
the Department of National Defense [DND] to engage in such activity, such as the
manufacture, repair, storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinance, explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing,
underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals."
Foreign Investment Negative List A consists of "areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws," where foreign equity
participation in any enterprise shall be limited to the maximum percentage expressly
prescribed by the Constitution and other specific laws. In short, to own and operate a
public utility in the Philippines one must be a "Philippine national" as defined in the
FIA. The FIA is abundant notice to foreign investors to what extent they can invest in
public utilities in the Philippines.
 Page 158 of 228

To repeat, among the areas of investment covered by the Foreign Investment Negative
List A is the ownership and operation of public utilities, which the Constitution
expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino
citizens. In other words, Negative List A of the FIA reserves the ownership and operation
of public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1)
a citizen of the Philippines; x x x or (3) a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation
organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding
and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of
the Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments
Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for
more than four decades, the statutory definition of the term "Philippine national" has
been uniform and consistent: it means a Filipino citizen, or a domestic corporation at
least 60% of the voting stock is owned by Filipinos. Likewise, these same statutes have
uniformly and consistently required that only "Philippine nationals" could own and
operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991,
x x x? And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years
ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:
 Page 159 of 228

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine
nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as
a citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of the
voting stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act
of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x only
Philippine nationals can own and operate a public utility and the Philippine national, if
it is a corporation, x x x sixty percent (60%) of the capital stock of that corporation must
be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:
 Page 160 of 228

And even prior to the Omnibus Investments Act of 1987, under the Omnibus
Investments Act of 1981, the same rules apply: x x x only a Philippine national can own
and operate a public utility and a Philippine national, if it is a corporation, sixty percent
(60%) of its x x x voting stock, must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign
Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – only a
Philippine national can own and operate a public utility, and a Philippine national, if it
is a corporation, x x x at least sixty percent (60%) of the voting stock must be owned by
citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA
which categorically prescribe that certain economic activities, like the ownership and
operation of public utilities, are reserved to corporations "at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the
 Page 161 of 228

Philippines." Foreign Investment Negative List A refers to "activities reserved to

Philippine nationals by mandate of the Constitution and specific laws." The FIA is the
basic statute regulating foreign investments in the Philippines. Government agencies
tasked with regulating or monitoring foreign investments, as well as counsels of foreign
investors, should start with the FIA in determining to what extent a particular foreign
investment is allowed in the Philippines. Foreign investors and their counsels who
ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on
opinions of SEC legal officers that obviously contradict the FIA do so also at their own
peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal officers
that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a nationalized or
partially nationalized business in the Philippines. This shows that SEC legal officers are
not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining
the eligibility of a corporation to engage in partially nationalized industries. The following
are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine

Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato

S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &

Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De
Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.
 Page 162 of 228

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).
 Page 163 of 228

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All
other areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by
the Constitution to engage in certain economic activities applies not only to voting
control of the corporation, but also to the beneficial ownership of the corporation. To
repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is held by "a trustee of funds for pension or other employee retirement or
separation benefits," the trustee is a Philippine national if "at least sixty percent (60%)
of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of
the Implementing Rules of the FIA provides that "for stocks to be deemed owned and
held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet
the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies

not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and across
the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation. Under the Corporation Code, capital stock35 consists of all
classes of shares issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as stated in the articles
of incorporation.36
 Page 164 of 228

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
 Page 165 of 228

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations
of the Constitutional Commission to support his claim that the term "capital" refers to
the total outstanding shares of stock, whether voting or non-voting, the following
excerpts of the deliberations reveal otherwise. It is clear from the following exchange
that the term "capital" refers to controlling interest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in
Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we
base the equity requirement, is it on the authorized capital stock, on the subscribed
capital stock, or on the paid-up capital stock of a corporation"? Will the Committee
please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from
the UP Law Center who provided us a draft. The phrase that is contained here which we
adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a

corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

 Page 166 of 228

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."

 Page 167 of 228

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and

underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in
the corporation.

The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII
of the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest" in
public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-
cry of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of
the 1987 Constitution who adopted the exact formulation embodied in the 1935 and
1973 Constitutions on foreign equity limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that
the deletion of the phrase "controlling interest" and replacement of the word "stock" with
the term "capital" were intended specifically to extend the scope of the entities qualified
to operate public utilities to include associations without stocks. The framers’ omission
of the phrase "controlling interest" did not mean the inclusion of all shares of stock,
whether voting or non-voting. The OSG reiterated essentially the Court’s declaration
that the Constitution reserved exclusively to Philippine nationals the ownership and
operation of public utilities consistent with the State’s policy to "develop a self-reliant
and independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the
total outstanding capital stock, treated as a single class regardless of the actual
classification of shares, grossly contravenes the intent and letter of the Constitution that
the "State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos." We illustrated the glaring anomaly which would result in
defining the term "capital" as the total outstanding capital stock of a corporation, treated
as a single class of shares regardless of the actual classification of shares, to wit:
 Page 168 of 228

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.
 Page 169 of 228

During the Oral Arguments, the OSG emphasized that there was never a question on
the intent of the framers of the Constitution to limit foreign ownership, and assure
majority Filipino ownership and control of public utilities. The OSG argued, "while the
delegates disagreed as to the percentage threshold to adopt, x x x the records show they
clearly understood that Filipino control of the public utility corporation can only be and
is obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete

the phrase "two thirds of whose voting stock or controlling interest," and instead
substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will
read: "No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least SIXTY PERCENT OF
WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40
percent for foreigners. It is only in this Section 15 with respect to public utilities that
the committee proposal was increased to two-thirds. I think it would be better to
harmonize this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

 Page 170 of 228

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
 Page 171 of 228

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.
 Page 172 of 228

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.

 Page 173 of 228

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.
 Page 174 of 228

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is
approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or
any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such
citizens." May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."
 Page 175 of 228

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,
 Page 176 of 228

which is generally outside the province of the Court’s jurisdiction, but well within the
SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the
purely legal and threshold issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit of
the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC
to perform its statutory duty to investigate whether "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has been
complied with [by PLDT] as required by x x x the Constitution."51 Such plea clearly
negates SEC’s argument that it was not impleaded.
 Page 177 of 228

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
 Page 178 of 228

resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates
the constitutional limit on foreign ownership of PLDT; (2) whether the sale of common
shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3)
whether the total percentage of the PLDT common shares with voting rights complies
with the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues indisputably call
for an examination of the parties’ respective evidence, and thus are clearly within the
jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be
heard, in the proceedings before the SEC where the factual issues will be thoroughly
threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule
on the factual issues raised by Gamboa, except the single and purely legal issue on the
definition of the term "capital" in Section 11, Article XII of the Constitution. The Court
confined the resolution of the instant case to this threshold legal issue in deference to
the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental
legal issue in this case even without the participation of PLDT since defining the term
"capital" in Section 11, Article XII of the Constitution does not, in any way, depend on
whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete
resolution of the purely legal question in this case.55 In fact, the Court, by treating the
petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition
of the term "capital" in Section 11, Article XII of the Constitution in determining whether
PLDT committed any violation of the said constitutional provision. The dispositive
portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which is
the administrative agency tasked to enforce the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC
to investigate any violation by PLDT of the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property or
denial of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s
misimpression. Due process will be afforded to PLDT when it presents proof to the SEC
that it complies, as it claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines
 Page 179 of 228

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.
 Page 180 of 228

In any event, the experience of our neighboring countries cannot be used as argument
to decide the present case differently for two reasons. First, the governments of our
neighboring countries have, as claimed by Dr. Villegas, taken over ownership and
control of their strategic public utilities like the telecommunications industry. Second,
our Constitution has specific provisions limiting foreign ownership in public utilities
which the Court is sworn to uphold regardless of the experience of our neighboring
countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines
appears to be more liberal in allowing foreign investors to own 40 percent of public
utilities, unlike in other Asian countries whose governments own and operate such
industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period
of the application and imposition of appropriate sanctions against PLDT if found
violating Section 11, Article XII of the Constitution.

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
 Page 181 of 228

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.

Filipinos have only to remind themselves of how this country was exploited under the
Parity Amendment, which gave Americans the same rights as Filipinos in the
exploitation of natural resources, and in the ownership and control of public utilities,
in the Philippines. To do this the 1935 Constitution, which contained the same 60
percent Filipino ownership and control requirement as the present 1987 Constitution,
had to be amended to give Americans parity rights with Filipinos. There was bitter
opposition to the Parity Amendment62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled public utilities that
became Filipino-controlled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic
suicide happened when control of public utilities and mining corporations passed to
Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present Constitution.
Worse, movants’ interpretation opens up our national economy to effective control not
only by Americans but also by all foreigners, be they Indonesians, Malaysians or
Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved
Filipinos theoretical parity – the same rights as Americans to exploit natural resources,
and to own and control public utilities, in the United States of America. Here, movants’
 Page 182 of 228

interpretation would effectively mean a unilateral opening up of our national economy

to all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.

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

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further

pleadings shall be entertained.

SO ORDERED.
 Page 183 of 228

G.R. No. 183905 April 16, 2009

GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner, vs. THE HON.

COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE, MANUEL M.
LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S.
MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO, Respondents.

G.R. No. 184275 April 16, 2009

SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS ENRIQUE G.
MARTINEZ IN HIS CAPACITY AS OFFICER-IN-CHARGE OF THE SECURITIES AND
EXCHANGE COMMISSION and HUBERT G. GUEVARA IN HIS CAPACITY AS DIRECTOR
OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF SECURITIES Petitioners, vs.
ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F.
FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES
Respondents.

TINGA, J.:

These are the undisputed facts.

The annual stockholders’ meeting (annual meeting) of the Manila Electric Company
(Meralco) was scheduled on 27 May 2008.1 In connection with the annual meeting,
proxies2 were required to be submitted on or before 17 May 2008, and the proxy
validation was slated for five days later, or 22 May.3

In view of the resignation of Camilo Quiason,4 the position of corporate secretary of

Meralco became vacant.5 On 15 May 2008, the board of directors of Meralco designated
Jose Vitug6 to act as corporate secretary for the annual meeting.7 However, when the
proxy validation began on 22 May, the proceedings were presided over by respondent
Anthony Rosete (Rosete), assistant corporate secretary and in-house chief legal counsel
of Meralco.8 Private respondents nonetheless argue that Rosete was the acting corporate
secretary of Meralco.9 Petitioner Government Service Insurance System (GSIS), a major
shareholder in Meralco, was distressed over the proxy validation proceedings, and the
resulting certification of proxies in favor of the Meralco management.10

On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay
City, docketed as R-PSY-08-05777-C4 seeking the declaration of certain proxies as
invalid.11 Three days
 Page 184 of 228

later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the
complaint.12 On the same day, GSIS filed an Urgent Petition13 with the Securities and
Exchange Commission (SEC) seeking to restrain Rosete from "recognizing, counting and
tabulating, directly or indirectly, notionally or actually or in whatever way, form, manner
or means, or otherwise honoring the shares covered by" the proxies in favor of
respondents Manuel Lopez,14 Felipe Alfonso,15 Jesus Francisco,16 Oscar Lopez,
Christian Monsod,17 Elpidio Ibañez,18 Francisco Giles-Puno19 "or any officer
representing MERALCO Management," and to annul and declare invalid said proxies.20
GSIS also prayed for the issuance of a Cease and Desist Order (CDO) to restrain the use
of said proxies during the annual meeting scheduled for the following day.21 A CDO22
to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008,
the same day the complaint was filed. During the annual meeting held on the following
day, Rosete announced that the meeting would push through, expressing the opinion
that the CDO is null and void.23

On 28 May 2008, the SEC issued a Show Cause Order (SCO)24 against private
respondents, ordering them to appear before the Commission on 30 May 2008 and
explain why they should not be cited in contempt. On 29 May 2008, respondents filed
a petition for certiorari with prohibition25 with the Court of Appeals, praying that the
CDO and the SCO be annulled. The petition was docketed as CA-G.R. SP No. 103692.

Many developments involving the Court of Appeals’ handling of CA-G.R. SP No. 103692
and the conduct of several of its individual justices are recounted in our Resolution
dated 9 September 2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding Justice
Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).26 On 23 July 2008, the Court of
Appeals Eighth Division promulgated a decision in the case with the following dispositive
portion:

WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the
SEC is hereby DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping by
respondent GSIS, and due to splitting of causes of action by respondent GSIS.
Consequently, the SEC’s undated cease and desist order and the SEC’s May 28, 2008
show cause order are hereby DECLARED VOID AB INITIO and without legal effect and
their implementation are hereby permanently restrained.

The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being
considered, out of equitable considerations, as an election contest in the RTC, because
the prescriptive period of 15 days from the May 27, 2008 Meralco election to file an
election contest in the RTC had already run its course, pursuant to Sec. 3, Rule 6 of the
 Page 185 of 228

interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No.

8799, due to deliberate act of GSIS in filing a complaint in the SEC instead of the RTC.

Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the
Chief Justice and three (3) copies to the Office of the Court Administrator:

(1) for sanction by the Supreme Court against the "GSIS LAW OFFICE" for unauthorized
practice of law,

(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella
Elamparo-Tayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS
lawyers for violation of Sec. 27 of Rule 138 of the Revised Rules of Court, pursuant to
Santayana v. Alampay, A.C. No. 5878, March 21, 2005 454 SCRA 1, and pursuant to
Land Bank of the Philippines v. Raymunda Martinez, G.R. No. 169008, August 14, 2007:

(a) for violating express provisions of law and defying public policy in deliberately
displacing the Office of the Government Corporate Counsel (OGCC) from its duty as the
exclusive lawyer of GSIS, a government owned and controlled corporation (GOCC), by
admittedly filing and defending cases as well as appearing as counsel for GSIS, without
authority to do so, the authority belonging exclusively to the OGCC;

(b) for violating the lawyer’s oath for failing in their duty to act as faithful officers of the
court by engaging in forum shopping;

(c) for violating express provisions of law most especially those on jurisdiction which are
mandatory; and

(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately
splitting causes of action in order to file multiple complaints: (i) in the RTC of Pasay City
and (ii) in the SEC, in order to ensure a favorable order.27

The promulgation of the said decision provoked a searing controversy, as detailed in our
Resolution in A.M. No. 08-8-11-CA. Nonetheless, the appellate court’s decision spawned
three different actions docketed with their own case numbers before this Court. One of
them, G.R. No. 183933, was initiated by a Motion for Extension of Time to File Petition
for Review filed by the Office of the Solicitor General (OSG) in behalf of the SEC,
Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert
 Page 186 of 228

Guevarra in his capacity as Director of the Compliance and Enforcement Department of

the SEC.28 However, the OSG did not follow through with the filing of the petition for
review adverted to; thus, on 19 January 2009, the Court resolved to declare G.R. No.
183933 closed and terminated.29

The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R.
No. 183905 pertains to a petition for certiorari and prohibition filed by GSIS, against
the Court of Appeals, and respondents Rosete, Lopez, Alfonso, Francisco, Monsod,
Ibañez and Puno, all of whom serve in different corporate capacities with Meralco or
First Philippines Holdings Corporation, a major stockholder of Meralco and an affiliate
of the Lopez Group of Companies. This petition seeks of the Court to declare the 23 July
2008 decision of the Court of Appeals null and void, affirm the SEC’s jurisdiction over
the petition filed before it by GSIS, and pronounce that the CDO and the SCO orders
are valid. This petition was filed in behalf of GSIS by the "GSIS Law Office;" it was signed
by the Chief Legal Counsel and Assistant Legal Counsel of GSIS, and three self-identified
"Attorney[s]," presumably holding lawyer positions in GSIS.30

The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its
petitioners the SEC, Commissioner Martinez in his capacity as OIC of the SEC, and
Hubert Guevarra in his capacity as Director of the Compliance and Enforcement
Department of the SEC – the same petitioners in the aborted petition for review initially
docketed as G.R. No. 183933. Unlike what was adverted to in the motion for extension
filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one
for certiorari under Rule 65 as indicated on page 3 thereof,31 and not a petition for
review. Interestingly, save for the first page which leaves the docket number blank, all
86 pages of this petition for certiorari carry a header wrongly identifying the pleading as
the non-existent petition for review under G.R. No. 183933. This petition seeks the
"reversal" of the assailed decision of the Court of Appeals, the recognition of the
jurisdiction of the SEC over the petition of GSIS, and the affirmation of the CDO and
SCO.

II.

Private respondents seek the expunction of the petition filed by the SEC in G.R. No.
184275. We agree that the petitioners therein, namely: the SEC, Commissioner Marquez
and Guevarra, are not real parties-in-interest to the dispute and thus bereft of capacity
to file the petition. By way of simple illustration, to argue otherwise is to say that the
trial court judge, the National Labor Relations Commission, or any quasi-judicial agency
has the right to seek the review of an appellate court decision reversing any of their
rulings. That prospect, as any serious student of remedial law knows, is zero.
 Page 187 of 228

The Court, through the Resolution of the Third Division dated 2 September 2008, had
resolved to treat the petition in G.R. No. 184275 as a petition for review on certiorari,
but withheld giving due course to it.32 Under Section 1 of Rule 45, which governs
appeals by certiorari, the right to file the appeal is restricted to "a party," meaning that
only the real parties-in-interest who litigated the petition for certiorari before the Court
of Appeals are entitled to appeal the same under Rule 45. The SEC and its two officers
may have been designated as respondents in the petition for certiorari filed with the
Court of Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as
real parties-in-interest. Under the provision, the judge, court, quasi-judicial agency,
tribunal, corporation, board, officer or person to whom grave abuse of discretion is
imputed (the SEC and its two officers in this case) are denominated only as public
respondents. The provision further states that "public respondents shall not appear in
or file an answer or comment to the petition or any pleading therein."33 Justice
Regalado explains:

[R]ule 65 involves an original special civil action specifically directed against the person,
court, agency or party a quo which had committed not only a mistake of judgment but
an error of jurisdiction, hence should be made public respondents in that action brought
to nullify their invalid acts. It shall, however be the duty of the party litigant, whether
in an appeal under Rule 45 or in a special civil action in Rule 65, to defend in his behalf
and the party whose adjudication is assailed, as he is the one interested in sustaining
the correctness of the disposition or the validity of the proceedings.

xxx The party interested in sustaining the proceedings in the lower court must be joined
as a co-respondent and he has the duty to defend in his own behalf and in behalf of the
court which rendered the questioned order. While there is nothing in the Rules that
prohibit the presiding judge of the court involved from filing his own answer and
defending his questioned order, the Supreme Court has reminded judges of the lower
courts to refrain from doing so unless ordered by the Supreme Court.34 The judicial
norm or mode of conduct to be observed in trial and appellate courts is now prescribed
in the second paragraph of this section.

xxx

A person not a party to the proceedings in the trial court or in the Court of Appeals
cannot maintain an action for certiorari in the Supreme Court to have the judgment
reviewed.35

Rule 65 does recognize that the SEC and its officers should have been designated as
public respondents in the petition for certiorari filed with the Court of Appeals. Yet their
 Page 188 of 228

involvement in the instant petition is not as original party-litigants, but as the quasi-
judicial agency and officers exercising the adjudicative functions over the dispute
between the two contending factions within Meralco. From the onset, neither the SEC
nor Martinez or Guevarra has been considered as a real party-in-interest. Section 2,
Rule 3 of the 1997 Rules of Civil Procedure provides that every action must be
prosecuted or defended in the name of the real party in interest, that is "the party who
stands to be benefited or injured by the judgment in the suit, or the party entitled to the
avails of the suit." It would be facetious to assume that the SEC had any real interest
or stake in the intra-corporate dispute within Meralco.

We find our ruling in Hon. Santiago v. Court of Appeals36 quite apposite to the question
at hand. Petitioner therein, a trial court judge, had presided over an expropriation case.
The litigants had arrived at an amicable settlement, but the judge refused to approve
the same, even declaring it invalid. The matter was elevated to the Court of Appeals,
which promptly reversed the trial court and approved the amicable settlement. The
judge took the extraordinary step of filing in his own behalf a petition for review on
certiorari with this Court, assailing the decision of the Court of Appeals which had
reversed him. In disallowing the judge’s petition, the Court explained:

While the issue in the Court of Appeals and that raised by petitioner now is whether the
latter abused his discretion in nullifying the deeds of sale and in proceeding with the
expropriation proceeding, that question is eclipsed by the concern of whether Judge
Pedro T. Santiago may file this petition at all.

And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal
by certiorari from a judgment of the Court of Appeals by filing with this Court a petition
for review on certiorari. But petitioner judge was not a party either in the expropriation
proceeding or in the certiorari proceeding in the Court of Appeals. His being named as
respondent in the Court of Appeals was merely to comply with the rule that in original
petitions for certiorari, the court or the judge, in his capacity as such, should be named
as party respondent because the question in such a proceeding is the jurisdiction of the
court itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules
of Court, Moran, Vol. II, 1979 ed., p. 471). "In special proceedings, the judge whose order
is under attack is merely a nominal party; wherefore, a judge in his official capacity,
should not be made to appear as a party seeking reversal of a decision that is
unfavorable to the action taken by him. A decent regard for the judicial hierarchy bars
a judge from suing against the adverse opinion of a higher court,. . . ." (Alcasid v.
Samson, 102 Phil. 785, 740 [1957])

ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the
petitioner.37
 Page 189 of 228

Justice Isagani Cruz added, in a Concurring Opinion in Santiago: "The judge is not an
active combatant in such proceeding and must leave it to the parties themselves to argue
their respective positions and for the appellate court to rule on the matter without his
participation."38

Note that in Santiago, the Court recognized the good faith of the judge, who perceived
the amicable settlement "as a manifestly iniquitous and illegal contract."39 The SEC
could have similarly felt in good faith that the assailed Court of Appeals decision had
unduly impaired its prerogatives or caused some degree of hurt to it. Yet assuming that
there are rights or prerogatives peculiar to the SEC itself that the appellate court had
countermanded, these can be vindicated in the petition for certiorari filed by GSIS,
whose legal capacity to challenge the Court of Appeals decision is without question.
There simply is no plausible reason for this Court to deviate from a time-honored rule
that preserves the purity of our judicial and quasi-judicial offices to accommodate the
SEC’s distrust and resentment of the appellate court’s decision. The expunction of the
petition in G.R. No. 184275 is accordingly in order.

At this point, only one petition remains—the petition for certiorari filed by GSIS in G.R.
No. 183905. Casting off the uncritical and unimportant aspects, the two main issues
for adjudication are as follows: (1) whether the SEC has jurisdiction over the petition
filed by GSIS against private respondents; and (2) whether the CDO and SCO issued by
the SEC are valid.

II.

It is our resolute inclination that this case, which raises interesting questions of law, be
decided solely on the merits, without regard to the personalities involved or the well-
reported drama preceding the petition. To that end, the Court has taken note of reports
in the media that GSIS and the Lopez group have taken positive steps to divest or
significantly reduce their respective interests in Meralco.40 These are developments that
certainly ease the tension surrounding this case, not to mention reason enough for the
two groups to make an internal reassessment of their respective positions and interests
in relation to this case. Still, the key legal questions raised in the petition do not depend
at all on the identity of any of the parties, and would obtain the same denouement even
if this case was lodged by unknowns as petitioners against similarly obscure
respondents.

With the objective to resolve the key questions of law raised in the petition, some of the
issues raised diminish as peripheral. For example, petitioners raise arguments tied to
 Page 190 of 228

the behavior of individual justices of the Court of Appeals, particularly former Justice
Vicente Roxas, in relation to this case as it was pending before the appellate court. The
Court takes cognizance of our Resolution in A.M. No. 08-8-11-CA dated 9 September
2008, which duly recited the various anomalous or unbecoming acts in relation to this
case performed by two of the justices who decided the case in behalf of the Court of
Appeals—former Justice Roxas (the ponente) and Justice Bienvenido L. Reyes (the
Chairman of the 8th Division) – as well as three other members of the Court of Appeals.
At the same time, the consensus of the Court as it deliberated on A.M. No. 08-8-11-CA
was to reserve comment or conclusion on the assailed decision of the Court of Appeals,
in recognition of the reality that however stigmatized the actions and motivations of
Justice Roxas are, the decision is still the product of the Court of Appeals as a collegial
judicial body, and not of one or some rogue justices. The penalties levied by the Court
on these appellate court justices, in our estimation, redress the unwholesome acts
which they had committed. At the same time, given the jurisprudential importance of
the questions of law raised in the petition, any result reached without squarely
addressing such questions would be unsatisfactory, perhaps derelict even.

III.

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To
recall, SEC has sought to enjoin the use and annul the validation, of the proxies issued
in favor of several of the private respondents, particularly in connection with the annual
meeting.

A.

Jurisdiction is conferred by no other source but law. Both sides have relied upon
provisions of Rep. Act No. 8799, otherwise known as the Securities Regulation Code
(SRC), its implementing rules (Amended Implementing Rules or AIRR-SRC), and other
related rules to support their competing contentions that either the SEC or the trial
courts has exclusive original jurisdiction over the dispute.

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are
Section 53.1 and Section 20.1, which we cite:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The

Commission may, in its discretion, make such investigations as it deems necessary to
determine whether any person has violated or is about to violate any provision of this
Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered
 Page 191 of 228

securities association, clearing agency, other self-regulatory organization, and may

require or permit any person to file with it a statement in writing, under oath or
otherwise, as the Commission shall determine, as to all facts and circumstances
concerning the matter to be investigated. The Commission may publish information
concerning any such violations, and to investigate any fact, condition, practice or matter
which it may deem necessary or proper to aid in the enforcement of the provisions of
this Code, in the prescribing of rules and regulations thereunder, or in securing
information to serve as a basis for recommending further legislation concerning the
matters to which this Code relates: xxx (emphasis supplied)

SEC. 20. Proxy Solicitations. – 20.1. Proxies must be issued and proxy solicitation must
be made in accordance with rules and regulations to be issued by the Commission;

The argument, stripped of extravagance, is that since proxy solicitations following

Section 20.1 have to be made in accordance with rules and regulations issued by the
SEC, it is the SEC under Section 53.1 that has the jurisdiction to investigate alleged
violations of the rules on proxy solicitations. The GSIS petition invoked AIRR-AIRR-SRC
Rule 20, otherwise known as "The Proxy Rule," which enumerates the requirements as
to form of proxy and delivery of information to security holders. According to GSIS, the
information statement Meralco had filed with the SEC in connection with the annual
meeting did not contain any proxy form as required under AIRR-SRC Rule 20.

On the other hand, private respondents argue before us that under Section 5.2 of the
SRC, the SEC’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree
No. 902-A was transferred to the courts of general jurisdiction or the appropriate
regional trial court. The two particular classes of cases in the enumeration under
Section 5 of Presidential Decree No. 902-A which private respondents especially refer to
are as follows:

xxx

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

between and among stockholders, members, or associates; or association of which they
are stockholders, members, or associates, respectively;

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

managers of corporations, partnerships, or associations;
 Page 192 of 228

xxx

In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies

(Interim Rules) promulgated by this Court in 2001, most pertinently, Section 2 of Rule
6 (on Election Contests), which defines "election contests" as follows:

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving

title or claim to any elective office in a stock or nonstock corporation, the validation of
proxies, the manner and validity of elections and the qualifications of candidates,
including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a nonstock
corporation where the articles of incorporation or bylaws so provide. (emphasis supplied)

The correct answer is not clear-cut, but there is one. In private respondents’ favor, the
provisions of law they cite pertain directly and exclusively to the statutory jurisdiction
of trial courts acquired by virtue of the transfer of jurisdiction following the passage of
the SRC. In contrast, the SRC provisions relied upon by GSIS do not immediately or
directly establish that body’s jurisdiction over the petition, since it necessitates the
linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us.

On the other hand, the distinction between "proxy solicitation" and "proxy validation"
cannot be dismissed offhand. The right of a stockholder to vote by proxy is generally
established by the

Corporation Code,41 but it is the SRC which specifically regulates the form and use of
proxies, more particularly the procedure of proxy solicitation, primarily through Section
20.42 AIRR-SRC Rule 20 defines the terms solicit and solicitation:

The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy

B. any request to execute or not to execute, or to revoke, a proxy; or

 Page 193 of 228

C. the furnishing of a form of proxy or other communication to security holders under

circumstance reasonably calculated to result in the procurement, withholding or
revocation of a proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The
former involves the securing and submission of proxies, while the latter concerns the
validation of such secured and submitted proxies. GSIS raises the sensible point that
there was no election yet at the time it filed its petition with the SEC, hence no proper
election contest or controversy yet over which the regular courts may have jurisdiction.
And the point ties its cause of action to alleged irregularities in the proxy solicitation
procedure, a process that precedes either the validation of proxies or the annual meeting
itself.

Under Section 20.1, the solicitation of proxies must be in accordance with rules and
regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1,
the SEC has the discretion "to make such investigations as it deems necessary to
determine whether any person has violated" any rule issued by it, such as AIRR-SRC
Rule 4. The investigatory power of the SEC established by Section 53.1 is central to its
regulatory authority, most crucial to the public interest especially as it may pertain to
corporations with publicly traded shares. For that reason, we are not keen on pursuing
private respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-
corporate controversy solely within the jurisdiction of the trial courts to decide. It is
possible that an intra-corporate controversy may animate a disgruntled shareholder to
complain to the SEC a corporation’s violations of SEC rules and regulations, but that
motive alone should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially so since such powers are exercisable on a motu proprio
basis.

At the same time, Meralco raises the substantial point that nothing in the SRC
empowers the SEC to annul or invalidate improper proxies issued in contravention of
Section 20. It cites that the penalties defined by the SEC itself for violation of Section
20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the first offense, and
pecuniary fines for succeeding offenses.43 Indeed, if the SEC does not have the power
to invalidate proxies solicited in violation of its promulgated rules, serious questions
may be raised whether it has the power to adjudicate claims of violation in the first
place, since the relief it may extend does not directly redress the cause of action of the
complainant seeking the exclusion of the proxies.

There is an interesting point, which neither party raises, and it concerns Section 6(g) of
Presidential Decree No. 902-A, which states:
 Page 194 of 228

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers:

xxx

(g) To pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders or members;

xxx

As promulgated then, the provision would confer on the SEC the power to adjudicate
controversies relating not only to proxy solicitation, but also to proxy validation. Should
the proposition hold true up to the present, the position of GSIS would have merit,
especially since Section 6 of Presidential Decree No. 902-A was not expressly repealed
or abrogated by the SRC.44

Yet a closer reading of the provision indicates that such power of the SEC then was
incidental or ancillary to the "exercise of such jurisdiction." Note that Section 6 is
immediately preceded by Section 5, which originally conferred on the SEC "original and
exclusive jurisdiction to hear and decide cases" involving "controversies in the election
or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations." The cases referred to in Section 5 were transferred from
the jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically
Section 5.2. Thus, the SEC’s power to pass upon the validity of proxies in relation to
election controversies has effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether
or not the cause of action of GSIS before the SEC is intimately tied to an election
controversy, as defined under Section 5(c) of Presidential Decree No. 902-A. To answer
that, we need to properly ascertain the scope of the power of trial courts to resolve
controversies in corporate elections.

B.

Shares of stock in corporations may be divided into voting shares and non-voting shares,
which are generally issued as "preferred" or "redeemable" shares.45 Voting rights are
 Page 195 of 228

exercised during regular or special meetings of stockholders; regular meetings to be held

annually on a fixed date, while special meetings may be held at any time necessary or
as provided in the by-laws, upon due notice.46 The Corporation Code provides for a
whole range of matters which can be voted upon by stockholders, including a limited
set on which even non-voting stockholders are entitled to vote on.47 On any of these
matters which may be voted upon by stockholders, the proxy device is generally
available.48

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-related controversies is
specifically confined to "controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships, or associations." Evidently,
the jurisdiction of the regular courts over so-called election contests or controversies
under Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders are
authorized to participate under Section 24 of the Corporation Code.49

This qualification allows for a useful distinction that gives due effect to the statutory
right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular
courts over election contests or controversies. The power of the SEC to investigate
violations of its rules on proxy solicitation is unquestioned when proxies are obtained
to vote on matters unrelated to the cases enumerated under Section 5 of Presidential
Decree No. 902-A. However, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly raised the violation
of the SEC rules on proxy solicitation, should be properly seen as an election controversy
within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2
of the SRC in relation to Section 5(c) of Presidential Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such
controversies in the election of corporate directors must be seen as intended to confine
to one body the adjudication of all related claims and controversy arising from the
election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the
Interim Rules broadly defines the term "election contest" as encompassing all plausible
incidents arising from the election of corporate directors, including: (1) any controversy
or dispute involving title or claim to any elective office in a stock or nonstock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the
qualifications of candidates, including the proclamation of winners. If all matters
anteceding the holding of such election which affect its manner and conduct, such as
the proxy solicitation process, are deemed within the original and exclusive jurisdiction
of the SEC, then the prospect of overlapping and competing jurisdictions between that
body and the regular courts becomes frighteningly real. From the language of Section
5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the
qualification of voting shares, or the validity of votes cast in favor of a candidate for
 Page 196 of 228

election to the board of directors are properly cognizable and adjudicable by the regular
courts exercising original and exclusive jurisdiction over election cases. Questions
relating to the proper solicitation of proxies used in such election are indisputably
related to such issues, yet if the position of GSIS were to be upheld, they would be
resolved by the SEC and not the regular courts, even if they fall within "controversies in
the election" of directors.

The Court recognizes that GSIS’s position flirts with the abhorrent evil of split
jurisdiction,50 allowing as it does both the SEC and the regular courts to assert
jurisdiction over the same controversies surrounding an election contest. Should the
argument of GSIS be sustained, we would be perpetually confronted with the spectacle
of election controversies being heard and adjudicated by both the SEC and the regular
courts, made possible through a mere allegation that the anteceding proxy solicitation
process was errant, but the competing cases filed with one objective in mind – to affect
the outcome of the election of the board of directors. There is no definitive statutory
provision that expressly mandates so untidy a framework, and we are disinclined to
construe the SRC in such a manner as to pave the way for the splitting of jurisdiction.

Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or
investigatory power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive
rule on jurisdiction, expressly granting as it does "original and exclusive jurisdiction"
first to the SEC, and now to the regular courts. The fact that the jurisdiction of the
regular courts under Section 5(c) is confined to the voting on election of officers, and
not on all matters which may be voted upon by stockholders, elucidates that the power
of the SEC to regulate proxies remains extant and could very well be exercised when
stockholders vote on matters other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco
is undisputed. The controversy was engendered by the looming annual meeting, during
which the stockholders of Meralco were to elect the directors of the corporation. GSIS
very well knew of that fact. On 17 March 2008, the Meralco board of directors adopted
a board resolution stating:

RESOLVED that the board of directors of the Manila Electric Company (MERALCO)
delegate, as it hereby delegates to the Nomination & Governance Committee the
authority to approve and adopt appropriate rules on: (1) nomination of candidates for
election to the board of directors; (2) appreciation of ballots during the election of
members of the board of directors; and (3) validation of proxies for regular or special
meetings of the stockholders.51
 Page 197 of 228

In addition, the Information Statement/Proxy form filed by First Philippine Holdings

Corporation with the SEC pursuant to Section 20 of the SRC, states:

REASON FOR SOLICITATION OF VOTES

The Solicitor is soliciting proxies from stockholders of the Company for the purpose of
electing the directors named under the subject headed ‘Directors’ in this Statement as
well as to vote the matters in the agenda of the meeting as provided for in the Information
Statement of the Company. All of the nominees are current directors of the Company.52

Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to
the solicitation or validation of proxies bore no relation at all to the scheduled election
of the board of directors of Meralco during the annual meeting. GSIS very well knew
that the controversy falls within the contemplation of an election controversy properly
within the jurisdiction of the regular courts. Otherwise, it would have never filed its
original petition with the RTC of Pasay. GSIS may have withdrawn its petition with the
RTC on a new assessment made in good faith that the controversy falls within the
jurisdiction of the SEC, yet the reality is that the reassessment is precisely wrong as a
matter of law.

IV.

The lack of jurisdiction of the SEC over the subject matter of GSIS’s petition necessarily
invalidates the CDO and SDO issued by that body. However, especially with respect to
the CDO, there is need for this Court to squarely rule on the question pertaining to its
validity, if only for jurisprudential value and for the guidance of the SEC.

To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with
the SEC on 26 May 2008. The CDO, six (6) pages in all with three (3) pages devoted to
the tenability of granting the injunctive relief, was issued on the very same day, 26 May
2008, without notice or hearing. The CDO bore the signature of Commissioner Jesus
Martinez, identified therein as "Officer-in-Charge," and nobody else’s.

The provisions of the SRC relevant to the issuance of a CDO are as follows:

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,
 Page 198 of 228

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:

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

xxx

[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged
or is about to engage in any act or practice constituting a violation of any provision of
this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-regulatory organization,
it may issue an order to such person to desist from committing such act or practice:
Provided, however, That the Commission shall not charge any person with violation of
the rules of an Exchange or other self regulatory organization unless it appears to the
Commission that such Exchange or other self-regulatory organization is unable or
unwilling to take action against such person. After finding that such person has engaged
in any such act or practice and that there is a reasonable likelihood of continuing,
further or future violations by such person, the Commission may issue ex-parte a cease
and desist order for a maximum period of ten (10) days, enjoining the violation and
compelling compliance with such provision. The Commission may transmit such
evidence as may be available concerning any violation of any provision of this Code, or
any rule, regulation or order thereunder, to the Department of Justice, which may
institute the appropriate criminal proceedings under this Code.

SEC. 64. Cease and Desist Order. – 64.1. The Commission, after proper investigation or
verification, motu proprio, or upon verified complaint by any aggrieved party, may issue
a cease and desist order without the necessity of a prior hearing if in its judgment the
act or practice, unless restrained, will operate as a fraud on investors or is otherwise
likely to cause grave or irreparable injury or prejudice to the investing public.

64.2. Until the Commission issues a cease and desist order, the fact that an
investigation has been initiated or that a complaint has been filed, including the
contents of the complaint, shall be confidential. Upon issuance of a cease and desist
order, the Commission shall make public such order and a copy thereof shall be
immediately furnished to each person subject to the order.
 Page 199 of 228

64.3. Any person against whom a cease and desist order was issued may, within five (5)
days from receipt of the order, file a formal request for a lifting thereof. Said request
shall be set for hearing by the Commission not later than fifteen (15) days from its filing
and the resolution thereof shall be made not later than ten (10) days from the
termination of the hearing. If the Commission fails to resolve the request within the time
herein prescribed, the cease and desist order shall automatically be lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first,
allocated by Section 5(i), is predicated on a necessity "to prevent fraud or injury to the
investing public". No other requisite or detail is tied to this CDO authorized under
Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that "any
person has engaged or is about to engage in any act or practice constituting a violation
of any provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency or other self-regulatory
organization." The provision additionally requires a finding that "there is a reasonable
likelihood of continuing [or engaging in] further or future violations by such person."
The maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a
determination of an act or practice, which unless restrained, "will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the
investing public". Section 64.1 plainly provides three segregate instances upon which
the SEC may issue the CDO under this provision: (1) after proper investigation or
verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to
the CDO may file a formal request for the lifting thereof, which the SEC must hear within
fifteen (15) days from filing and decide within ten (10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1.
Both require a common finding of a need to prevent fraud or injury to the investing
public. At the same time, no mention is made whether the CDO defined under Section
5(i) may be issued ex-parte, while the CDO under Section 64.1 requires "grave and
irreparable" injury, language absent in Section 5(i). Notwithstanding the similarities
between Section 5(i) and Section 64.1, it remains clear that the CDO issued under
Section 53.3 is a distinct creation from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the
constitutional provision on due process, which requires both prior notice and prior
 Page 200 of 228

hearing.53 Yet interestingly, the CDO as contemplated in Section 53.3 or in Section 64,
may be issued "ex-parte" (under Section 53.3) or "without necessity of hearing" (under
Section 64.1). Nothing in these provisions impose a requisite hearing before the CDO
may be issued thereunder. Nonetheless, there are identifiable requisite actions on the
part of the SEC that must be undertaken before the CDO may be issued either under
Section 53.3 or Section 64. In the case of Section 53.3, the SEC must make two findings:
(1) that such person has engaged in any such act or practice, and (2) that there is a
reasonable likelihood of continuing, (or engaging in) further or future violations by such
person. In the case of Section 64, the SEC must adjudge that the act, unless restrained,
will operate as a fraud on investors or is otherwise likely to cause grave or irreparable
injury or prejudice to the investing public."

Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section
5.1, Section 53.3 or Section 64 of the SRC. The CDO actually refers and cites all three
provisions, yet it is apparent that a singular CDO could not be founded on Section 5.1,
Section 53.3 and Section 64 collectively. At the very least, the CDO under Section 53.3
and under Section 64 have their respective requisites and terms.

GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it
was seeking the CDO under Section 5.1, Section 53.3, or Section 64. Considering that
injunctive relief generally avails upon the showing of a clear legal right to such relief,
the inability or unwillingness to lay bare the precise statutory basis for the prayer for
injunction is an obvious impediment to a successful application. Nonetheless, the error
of the SEC in granting the CDO without stating which kind of CDO it was issuing is
more unpardonable, as it is an act that contravenes due process of law.

We have particularly required, in administrative proceedings, that the body or tribunal

"in all controversial questions, render its decision in such a manner that the parties to
the proceeding can know the various issues involved, and the reason for the decision
rendered."54 This requirement is vital, as its fulfillment would afford the adverse party
the opportunity to interpose a reasoned and intelligent appeal that is responsive to the
grounds cited against it. The CDO extended by the SEC fails to provide the needed
reasonable clarity of the rationale behind its issuance.

The subject CDO first refers to Section 64, citing its provisions, then stating:
"[p]rescinding from the aforequoted, there can be no doubt whatsoever that the
Commission is in fact mandated to take up, if expeditiously, any verified complaint
praying for the provisional remedy of a cease and desist order."55 The CDO then
discusses the nature of the right of GSIS to obtain the CDO, as well as "the urgent and
paramount necessity to prevent serious damage because the stockholders’ meeting is
 Page 201 of 228

scheduled on May 28, 2008 x x x" Had the CDO stopped there, the unequivocal
impression would have been that the order is based on Section 64.

But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full,
ratiocinating that under these provisions, the SEC had "the power to issue cease and
desist orders to prevent fraud or injury to the public and such other measures necessary
to carry out the Commission’s role as regulator."56 Immediately thence, the CDO cites
Section 53.3 as providing "that whenever it shall appear to the Commission that nay
person has engaged or is about to engage in any act or practice constituting a violation
of any provision, any rule, regulation or order thereunder, the Commission may issue
ex-parte a cease and desist order for a maximum period of ten (10) days, enjoining the
violation and compelling compliance therewith."57

The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave
the impression that it is grounded on all three provisions, and that may very well have
been the intention of the SEC. Assuming that is so, it is legally impermissible for the
SEC to have utilized both Section 53.3 and Section 64 as basis for the CDO at the same
time. The CDO under Section 53.3 is premised on distinctly different requisites than the
CDO under Section 64. Even more crucially, the lifetime of the CDO under Section 53.3
is confined to a definite span of ten (10) days, which is not the case with the CDO under
Section 64. This CDO under Section 64 may be the object of a formal request for lifting
within five (5) days from its issuance, a remedy not expressly afforded to the CDO under
Section 53.3.

Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have
an intelligent or adequate basis to respond to the same. Such respondent would not
know whether the CDO would have a determinate lifespan of ten (10) days, as in Section
53.3, or would necessitate a formal request for lifting within five (5) days, as required
under Section 64.1. This lack of clarity is to the obvious prejudice of the respondent,
and is in clear defiance of the constitutional right to due process of law. Indeed, the
veritable mélange that the assailed CDO is, with its jumbled mixture of premises and
conclusions, the antithesis of due process.

Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity
would have been offered on what Section of the SRC it is based. However, the CDO is
precisely silent as to its lifetime, thereby precluding much needed clarification. In view
of the statutory differences among the three CDOs under the SRC, it is essential that
the SEC, in issuing such injunctive relief, identify the exact provision of the SRC on
which the CDO is founded. Only by doing so could the adversely affected party be able
to properly evaluate whatever his responses under the law.
 Page 202 of 228

To make matters worse for the SEC, the fact that the CDO was signed, much less
apparently deliberated upon, by only by one commissioner likewise renders the order
fatally infirm.

The SEC is a collegial body composed of a Chairperson and four (4) Commissioners.58
In order to constitute a quorum to conduct business, the presence of at least three (3)
Commissioners is required.59 In the leading case of GMCR v. Bell,60 we definitively
explained the nature of a collegial body, and how the act of one member of such body,
even if the head, could not be considered as that of the entire body itself. Thus:

We hereby declare that the NTC is a collegial body requiring a majority vote out of the
three members of the commission in order to validly decide a case or any incident
therein. Corollarily, the vote alone of the chairman of the commission, as in this case,
the vote of Commissioner Kintanar, absent the required concurring vote coming from
the rest of the membership of the commission to at least arrive at a majority decision,
is not sufficient to legally render an NTC order, resolution or decision.

Simply put, Commissioner Kintanar is not the National Telecommunications

Commission. He alone does not speak for and in behalf of the NTC. The NTC acts
through a three-man body, and the three members of the commission each has one vote
to cast in every deliberation concerning a case or any incident therein that is subject to
the jurisdiction of the NTC. When we consider the historical milieu in which the NTC
evolved into the quasi-judicial agency it is now under Executive Order No. 146 which
organized the NTC as a three-man commission and expose the illegality of all
memorandum circulars negating the collegial nature of the NTC under Executive Order
No. 146, we are left with only one logical conclusion: the NTC is a collegial body and was
a collegial body even during the time when it was acting as a one-man regime.61

We can adopt a virtually word-for-word observation with respect to former

Commissioner Martinez and the SEC. Simply put, Commissioner Martinez is not the
SEC. He alone does not speak for and in behalf of the SEC. The SEC acts through a five-
person body, and the five members of the commission each has one vote to cast in every
deliberation concerning a case or any incident therein that is subject to the jurisdiction
of the SEC.

GSIS attempts to defend former Commissioner Martinez’s action, but its argument is
without merit. It cites SEC Order No. 169, Series of 2008, whereby Martinez was
designated as "Officer-in-Charge of the Commission for the duration of the official travel
of the Chairperson to Paris, France, to attend the 33rd Annual Conference of the
[IOSCO] from May 26-30, 2008."62 As officer-in-charge (OIC), Martinez was "authorized
 Page 203 of 228

to sign all documents and papers and perform all other acts and deeds as may be
necessary in the day-to-day operation of the Commission".

It is clear that Martinez was designated as OIC because of the official travel of only one
member, Chairperson Fe Barin. Martinez was not commissioned to act as the SEC itself.
At most, he was to act in place of Chairperson Barin in the exercise of her duties as
Chairperson of the SEC. Under Section 4.3 of the SRC, the Chairperson is the chief
executive officer of the SEC, and thus empowered to "execute and administer the
policies, decisions, orders and resolutions approved by the Commission," as well as to
"have the general executive direction and supervision of the work and operation of the
Commission."63 It is in relation to the exercise of these duties of the Chairperson, and
not to the functions of the Commission, that Martinez was "authorized to sign all
documents and papers and perform all other acts and deeds as may be necessary in the
day-to-day operation of the Commission."

GSIS likewise cites, as authority for Martinez’s unilateral issuance of the CDO, Section
4.6 of the SRC, which states that the SEC "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." Reliance
on this provision is inappropriate. First, there is no convincing demonstration that the
SEC had delegated to Martinez the authority to issue the CDO. The SEC Order
designating Martinez as OIC only authorized him to exercise the functions of the absent
Chairperson, and not of the Commission. If the Order is read as enabling Martinez to
issue the CDO in behalf of the Commission, it would be akin to conceding that the SEC
Chairperson, acting alone, can issue the CDO in behalf of the SEC itself. That again
contravenes our holding in GMCR v. Bell.

In addition, it is clear under Section 4.6 that the ability to delegate functions to a single
commissioner does not extend to the exercise of the review or appellate authority of the
SEC. The issuance of the CDO is an act of the SEC itself done in the exercise of its
original jurisdiction to review actual cases or controversies. If it has not been clear to
the SEC before, it should be clear now that its power to issue a CDO can not, under the
SRC, be delegated to an individual commissioner.

V.

In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-
11-CA constitute sufficient basis to nullify the assailed decision of the Court of Appeals,
still it remains clear that the reliefs GSIS seeks of this Court have no basis in law.
 Page 204 of 228

Notwithstanding the black mark that stains the appellate court’s decision, the first
paragraph of its fallo, to the extent that it dismissed the complaint of GSIS with the SEC
for lack of jurisdiction and consequently nullified the CDO and SDO, defies unbiased
scrutiny and deserves affirmation.

A.

In its dispositive portion, the Court of Appeals likewise pronounced that the complaint
filed by GSIS with the SEC should be barred from being considered "as an election
contest in the RTC", given that the fifteen (15) day prescriptive period to file an election
contest with the RTC, under Section 3, Rule 6 of the Interim Rules, had already run its
course.64 Yet no such relief was requested by private respondents in their petition for
certiorari filed with the Court of Appeals65 . Without disputing the legal predicates
surrounding this pronouncement, we note that its tenor, if not the text, unduly suggests
an unwholesome pre-emptive strike. Given our observations in A.M. No. 08-8-11-CA of
the "undue interest" exhibited by the author of the appellate court decision, such
declaration is best deleted. Nonetheless, we do trust that any court or tribunal that may
be confronted with that premise adverted to by the Court of Appeals would know how
to properly treat the same.

B.

Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.

Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter
of GSIS66 is unique among government owned or controlled corporations with original
charter in that it allocates a role for its internal legal counsel that is in conjunction with
or complementary to the Office of the Government Corporate Counsel (OGCC), which is
the statutory legal counsel for GOCCs. Section 47 of GSIS charter reads:

SEC. 47. Legal Counsel.—The Government Corporate Counsel shall be the legal adviser
and consultant of GSIS, but GSIS may assign to the Office of the Government Corporate
Counsel (OGCC) cases for legal action or trial, issues for legal opinions, preparation and
review of contracts/agreements and others, as GSIS may decide or determine from time
to time: Provided, however, That the present legal services group in GSIS shall serve as
its in-house legal counsel.
 Page 205 of 228

The GSIS may, subject to approval by the proper court, deputize any personnel of the
legal service group to act as special sheriff in the enforcement of writs and processes
issued by the court, quasi-judicial agencies or administrative bodies in cases involving
GSIS.67

The designation of the OGCC as the legal counsel for GOCCs is set forth by statute,
initially by Rep. Act No. 3838, then reiterated by the Administrative Code of 1987.68
Given that the designation is statutory in nature, there is no impediment for Congress
to impose a different role for the OGCC with respect to particular GOCCs it may charter.
Congress appears to have done so with respect to GSIS, designating the OGCC as a
"legal adviser and consultant," rather than as counsel to GSIS. Further, the law clearly
vests unto GSIS the discretion, rather than the duty, to assign cases to the OGCC for
legal action, while designating the present legal services group of GSIS as "in-house legal
counsel." This situates GSIS differently from the Land Bank of the Philippines, whose
own in-house lawyers have persistently argued before this Court to no avail on their
alleged right to file petitions before us instead of the OGCC.69 Nothing in the Land Bank
charter70 vested it with the discretion to choose when to assign cases to the OGCC,
notwithstanding the establishment of its own Legal Department.71

Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of
GSIS even if it performs such a role for other GOCCs. To bind Congress to perform in
that manner would be akin to elevating the OGCC’s statutory role to irrepealable status,
and it is basic that Congress is barred from passing irrepealable laws.72

C.

We close by acknowledging that the surrounding circumstances behind these petitions

are unfortunate, given the events as narrated in A.M. No. 08-8-11-CA. While due
punishment has been meted on the errant magistrates, the corporate world may very
well be reminded that the members of the judiciary are not to be viewed or treated
asmere pawns or puppets in the internecine fights businessmen and their associates
wage against other businessmen in the quest for corporate dominance. In the end, the
petitions did afford this Court to clarify consequential points of law, points rooted in
principles which will endure long after the names of the participants in these cases have
been forgotten.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the
petitioner to bring forth the suit.
 Page 206 of 228

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second
and third paragraphs of the fallo of the assailed decision dated 23 July 2008 of the
Court of Appeals, including subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the
second paragraph, are hereby DELETED.

No pronouncements as to costs.

SO ORDERED.
 Page 207 of 228

G.R. No. 195580 January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., AND MCARTHUR MINING, INC., Petitioners, v.
REDMONT CONSOLIDATED MINES CORP., Respondent.

VELASCO JR., J.:

Beforethe Court is the Motion for Reconsideration of its April 21, 2014 Decision, which
denied the Petition for Review on Certiorari under Rule 45 jointly interposed by
petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed the
October 1, 2010 Decision and February 15, 2011 Resolution of the Court of Appeals
(CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court’s ruling that
petitioners, being foreign corporations,are not entitled to Mineral Production Sharing
Agreements (MPSAs). In reaching its conclusion, this Court upheld with approval the
appellate court’s finding that there was doubt as to petitioners’ nationality since a 100%
Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns60% of the
common stocks of the petitioners by owning equity interest of petitioners’ other majority
corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-

movants argued, in the main, that the Court’s Decision was not in accord with law and
logic.In its September 2, 2014 Comment, on the other hand, respondent Redmont
Consolidated Mines Corp. (Redmont) countered that petitioners’ motion for
reconsideration is nothing but a rehash of their arguments and should, thus, be denied
outright for being pro-forma. Petitioners have interposed on September 30, 2014 their
Reply to the respondent’s Comment.

After considering the parties’ positions, as articulated in their respective submissions,

We resolve to deny the motion for reconsideration.

I.
The case has not been rendered moot and academic
 Page 208 of 228

Petitioners have first off criticized the Court for resolving in its Decision a substantive
issue, which, as argued, has supposedly been rendered moot by the fact that petitioners’
applications for MPSAs had already been converted to an application for a Financial
Technical Assistance Agreement (FTAA), as petitioners have in fact been granted an
FTAA. Further, the nationality issue, so petitioners presently claim, had been rendered
moribund by the fact that MBMI had already divested itself and sold all its shareholdings
in the petitioners, as well as in their corporate stockholders, to a Filipino corporation—
DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmont avers that the present case has not been
rendered moot by the supposed issuance of an FTAA in petitioners’ favor as this FTAA
was subsequently revoked by the Office of the President (OP) and is currently a subject
of a petition pending in the Court’s First Division. Redmont likewise contends that the
supposed sale of MBMI’s interest in the petitioners and in their “holding companies” is
a question of fact that is outside the Court’s province to verify in a Rule 45 certiorari
proceedings. In any case, assuming that the controversy has been rendered moot,
Redmont claims that its resolution on the merits is still justified by the fact that
petitioners have violated a constitutional provision, the violation is capable of repetition
yet evading review, and the present case involves a matter of public concern.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to
one for FTAAs and the issuance by the OP of an FTAA in petitioners’ favor are irrelevant.
The OP itself has already cancelled and revoked the FTAA thus issued to petitioners.
Petitioners curiously have omitted this critical fact in their motion for reconsideration.
Furthermore, the supposed sale by MBMI of its shares in the petitioner-corporations
and in their holding companies is not only a question of fact that this Court is without
authority to verify, it also does not negate any violation of the Constitutional provisions
previously committed before any such sale.

We can assume for the nonce that the controversy had indeed been rendered moot by
these two events. As this Court has time and again declared, the “moot and academic”
principle is not a magical formula that automatically dissuades courts in resolving a
case.1 The Court may still take cognizance of an otherwise moot and academic case, if
it finds that (a) there is a grave violation of the Constitution; (b) the situation is of
exceptional character and paramount public interest is involved; (c) the constitutional
issue raised requires formulation of controlling principles to guide the bench, the bar,
and the public; and (d) the case is capable of repetition yet evading review.2] The Court’s
April 21, 2014 Decision explained in some detail that all four (4) of the foregoing
circumstances are present in the case. If only to stress a point, we will do so again.
 Page 209 of 228

First, allowing the issuance of MPSAs to applicants that are owned and controlled by a
100% foreign-owned corporation, albeit through an intricate web of corporate layering
involving alleged Filipino corporations, is tantamount to permitting a blatant violation
of Section 2, Article XII of the Constitution. The Court simply cannot allow this breach
and inhibit itself from resolving the controversy on the facile pretext that the case had
already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it

appear that there is compliance with the minimum Filipino ownership in the
Constitution is deftly exceptional in character. More importantly, the case is of
paramount public interest, as the corporate layering employed by petitioners was
evidently designed to circumvent the constitutional caveat allowing only Filipino citizens
and corporations 60%-owned by Filipino citizens to explore, develop, and use the
country’s natural resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to
go around the Filipino ownership requirement in the Constitution and pertinent laws,
require the establishment of a definite principle that will ensure that the Constitutional
provision reserving to Filipino citizens or “corporations at least sixty per centum of
whose capital is owned by such citizens” be effectively enforced and complied with. The
case, therefore, is an opportunity to establish a controlling principle that will “guide the
bench, the bar, and the public.”

Lastly, the petitioners’ actions during the lifetime and existence of the instant case that
gave rise to the present controversy are capable of repetition yet evading review because,
as shown by petitioners’ actions, foreign corporations can easily utilize dummy Filipino
corporations through various schemes and stratagems to skirt the constitutional
prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Rule is justified by the circumstances of the case to
determine the nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their

nationality is erroneous and allegedly without basis in the Constitution, the Foreign
Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and the Rules issued
by the Securities and Exchange Commission (SEC). These laws and rules supposedly
espouse the application of the Control Test in verifying the Philippine nationality of
 Page 210 of 228

corporate entities for purposes of determining compliance with Sec. 2, Art. XII of the
Constitution that only “corporations or associations at least sixty per centum of whose
capital is owned by such [Filipino] citizens” may enjoy certain rights and privileges, like
the exploration and development of natural resources.

The application of the Grandfather Rule in the

present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the
Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court foreclose the
application of the Control Test in determining which corporations may be considered as
Philippine nationals. Instead, to borrow Justice Leonen’s term, the Court used the
Grandfather Rule as a “supplement” to the Control Test so that the intent underlying
the averted Sec.2, Art. XII of the Constitution be given effect. The following excerpts of
the April 21, 2014 Decision cannot be clearer:

In ending, the “control test” is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court, there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity
ownership in the corporation, then it may apply the “grandfather rule.”(emphasis
supplied)

With that, the use of the Grandfather Rule as a “supplement” to the Control Test is not
proscribed by the Constitution or the Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of

the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development,
and utilization of natural resources to Filipino citizens and “corporations or associations
at least sixty per centum of whose capital is owned by such citizens.” Similarly, Section
3(aq) of the Philippine Mining Act of 1995considers a “corporation xxx registered in
accordance with law at least sixty per cent of the capital of which is owned by citizens
of the Philippines” as a person qualified to undertake a mining operation. Consistent
with this objective, the Grandfather Rule was originally conceived to look into the
citizenship of the individuals who ultimately own and control the shares of stock of a
 Page 211 of 228

corporation for purposes of determining compliance with the constitutional requirement

of Filipino ownership.It cannot, therefore, be denied that the framers of the Constitution
have not foreclosed the Grandfather Rule as a tool in verifying the nationality of
corporations for purposes of ascertaining their right to participate in nationalized or
partly nationalized activities. The following excerpts from the Record of the 1986
Constitutional Commission suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.

MR. VILLEGAS: That is right.

x xxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a

corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by
which the percentage of Filipino equity in a corporation engaged in nationalized and/or
partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate shareholders are present,
by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder.”4 Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the
ultimate ownership in a corporation is observed by the Bureau of Internal Revenue (BIR)
in applying Section 127 (B)5 of the National Internal Revenue Code on taxes imposed
on closely held corporations, in relation to Section 96 of the Corporation Code6 on close
corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares held:
 Page 212 of 228

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to
run continuously along the chain of ownership until it finally reaches the individual
stockholders. This is in consonance with the “grandfather rule” adopted in the
Philippines under Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which
provides that notwithstanding the fact that all the issued stock of a corporation are held
by not more than twenty persons, among others, a corporation is nonetheless not to be
deemed a close corporation when at least two thirds of its voting stock or voting rights
is owned or controlled by another corporation which is not a close corporation.7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31),the SEC
applied the Grandfather Rule even if the corporation engaged in mining operation passes
the 60-40 requirement of the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML
owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine individual
citizens who are actually MML’s controlled nominees; (2) MEDC, in turn,owns 60%
equity in MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of
PHILSAGA, while MML owns the remaining 40%. You provide the following figure to
illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept “Philippine citizens.”
Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x This
enumeration is exhaustive. In other words, there can be no other Philippine citizens
other than those falling within the enumeration provided by the Constitution. Obviously,
only natural persons are susceptible of citizenship. Thus, for purposes of the
Constitutional and statutory restrictions on foreign participation in the exploitation of
mineral resources, a corporation investing in a mining joint venture can never be
considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose
Petroleum [Inc.]. The Court held that a corporation investing in another corporation
engaged in a nationalized activity cannot beconsidered as a citizen for purposes of the
Constitutional provision restricting foreign exploitation of natural resources:

xxxx
 Page 213 of 228

Accordingly, we opine that we must look into the citizenship of the individual
stockholders, i.e. natural persons, of that investor-corporation in order to determine if
the Constitutional and statutory restrictions are complied with. If the shares of stock of
the immediate investor corporation is in turn held and controlled by another
corporation, then we must look into the citizenship of the individual stockholders of the
latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation. This is the strict application of the grandfather rule,
which the Commission has been consistently applying prior to the 1990s.

Indeed, the framers of the Constitution intended for the “grandfather rule” to apply in
case a 60%-40% Filipino-Foreign equity corporation invests in another corporation
engaging in an activity where the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 %
foreign owned, while it is only 12.96% owned by Philippine citizens. Thus, the
constitutional requirement of 60% ownership by Philippine citizens is violated.
(emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur

Mining Inc., et al.,8 the SEC en banc applied the Grandfather Rule despite the fact that
the subject corporations ostensibly have satisfied the 60-40 Filipino equity requirement.
The SEC en banc held that to attain the Constitutional objective of reserving to Filipinos
the utilization of natural resources, one should not stop where the percentage of the
capital stock is 60%. Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI,
provided practically all the funds of the remaining appellee-corporations. The records
disclose that: (1) Olympic Mines and Development Corporation (“OMDC”), a domestic
corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the
authorized capital stock of Madridejos; however, OMDC paid nothing for this
subscription while MBMI paid P2,803,900.00 out of its total subscription cost of
P3,331,000.00; (2) Palawan Alpha South Resource Development Corp. (“Palawan
Alpha”), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares,
respectively, out of the authorized capital stock of Patricia Louise; however, Palawan
Alpha paid nothing for this subscription while MBMI paid P2,796,000.00 out of its total
subscription cost of P3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331
 Page 214 of 228

shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC
paid nothing for this subscription while MBMI paid P2,794,000.00 out of its total
subscription cost of P3,331,000.00; and (4) Falcon Ridge Resources Management Corp.
(“Falcon Ridge”), another domestic corporation, and MBMI subscribed to 5,997 and
3,998 shares, respectively, out of the authorized capital stock of San Juanico; however,
Falcon Ridge paid nothing for this subscription while MBMI paid P2,500,000.00 out of
its total subscription cost of P3,998,000.00. Thus, pursuant to the afore-quoted DOJ
Opinion, the Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the
constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
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.

The method employed in the Grandfather Rule of attributing the shareholdings of a

given corporate shareholder to the second or even the subsequent tier of ownership
hews with the rule that the “beneficial ownership” of corporations engaged in
nationalized activities must reside in the hands of Filipino citizens. Thus, even if the 60-
40 Filipino equity requirement appears to have been satisfied, the Department of Justice
(DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may distort the
actual economic or beneficial ownership of a mining corporation may be struck down as
violative of the constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining
service contract with a foreign company granting the latter a share of not more than
40% from the proceeds of the operations?

xxxx
 Page 215 of 228

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or

partnership registered with the [SEC] at least 60% of the capital of which is owned by
Filipino citizens and possessing x x x. The sixty percent Philippine equity requirement
in mineral resource exploitation x x x is intended to insure, among other purposes, the
conservation of indigenous natural resources, for Filipino posterity x x x. I think it is
implicit in this provision, even if it refers merely to ownership of stock in the corporation
holding the mining concession, that beneficial ownership of the right to dispose, exploit,
utilize, and develop natural resources shall pertain to Filipino citizens, and that the
nationality requirement is not satisfied unless Filipinos are the principal beneficiaries
in the exploitation of the country’s natural resources. This criterion of beneficial
ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which limits
the service fee in service contracts to 40% of the proceeds of the operation, thereby
implying that the 60-40 benefit-sharing ration is derived from the 60-40 equity
requirement in the Constitution.

xxxx

It is obvious that while payments to a service contractor may be justified as a service

fee, and therefore, properly deductible from gross proceeds, the service contract could
be employed as a means of going about or circumventing the constitutional limit on
foreign equity participation and the obvious constitutional policy to insure that Filipinos
retain beneficial ownership of our mineral resources. Thus, every service contract
scheme has to be evaluated in its entirety, on a case to case basis, to determine
reasonableness of the total “service fee” x x x like the options available to the contractor
to become equity participant in the Philippine entity holding the concession, or to
acquire rights in the processing and marketing stages. x x x (emphasis supplied)

The “beneficial ownership” requirement was subsequently used in tandem with the
“situs of control” to determine the nationality of a corporation in DOJ Opinion No. 84,
S. of 1988, through the Grandfather Rule, despite the fact that both the investee and
investor corporations purportedly satisfy the 60-40 Filipino equity requirement:9

This refers to your request for opinion on whether or not there may be an investment in
real estate by a domestic corporation (the investing corporation) seventy percent (70%)
of the capital stock of which is owned by another domestic corporation with at least
60%-40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of the capital
stock is owned by a foreign corporation.

xxxx
 Page 216 of 228

This Department has had the occasion to rule in several opinions that it is implicit in
the constitutional provisions, even if it refers merely to ownership of stock in the
corporation holding the land or natural resource concession, that the nationality
requirement is not satisfied unless it meets the criterion of beneficial ownership, i.e.
Filipinos are the principal beneficiaries in the exploration of natural resources (Op. No.
144, s. 1977; Op. No. 130, s. 1985), and that in applying the same “the primordial
consideration is situs of control, whether in a stock or non-stock corporation” (Op. No.
178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58),
obviously to insure that corporations and associations allowed to acquire agricultural
land or to exploit natural resources “shall be controlled by Filipinos.” Accordingly, any
arrangement which attempts to defeat the constitutional purpose should be eschewed
(Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with
the sixty per centum requirement is being monitored by SEC under the “Grandfather
Rule” a method by which the percentage of Filipino equity in corporations engaged in
nationalized and/or partly nationalized areas of activities provided for under the
Constitution and other national laws is accurately computed, and the diminution if said
equity prevented (SEC Memo, S. 1976). The “Grandfather Rule” is applied specifically in
cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate stockholders could
diminish the effective control of Filipinos.

Applying the “Grandfather Rule” in the instant case, the result is as follows: xxx the
total foreign equity in the investing corporation is 58% while the Filipino equity is only
42%, in the investing corporation, subject of your query, is disqualified from investing
in real estate, which is a nationalized activity, as it does not meet the 60%-40% Filipino-
Foreign equity requirement under the Constitution.

This pairing of the concepts “beneficial ownership” and the “situs of control” in
determining what constitutes “capital” has been adopted by this Court in Heirs of
Gamboa v. Teves.10In its October 9, 2012 Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is 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.” (emphasis supplied)
 Page 217 of 228

In emphasizing the twin requirements of “beneficial ownership” and “control” in

determining compliance with the required Filipino equity in Gamboa, the en banc Court
explicitly cited with approval the SEC en banc’s application in Redmont Consolidated
Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of SEC, has adopted the Grandfather 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.
xxx(emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel
Communications, Inc.,11 denied the foreign creditors’ proposal to convert part of
Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly, the
conversion of the debts to common shares by the foreign creditors would be done, both
directly and indirectly, in order to meet the control test principle under the FIA. Under
the proposed structure, the foreign creditors would own 40% of the outstanding capital
stock of the telecommunications company on a direct basis, while the remaining 40%
of shares would be registered to a holding company that shall retain, on a direct basis,
the other 60% equity reserved for Filipino citizens. Nonetheless, the Court found the
proposal non-compliant with the Constitutional requirement of Filipino ownership as
the proposed structure would give more than 60% of the ownership of the common
shares of Bayantel to the foreign corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made by

respondent Bayantel is that its shareholders shall relinquish the agreed-upon amount
of common stock[s] as payment to Unsecured Creditors as per the Term Sheet.
Evidently, the parties intend to convert the unsustainable portion of respondent’s debt
into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control over
77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed
by the Filipinization provision of the Constitution. Therefore, the Court of Appeals acted
correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis
supplied)
 Page 218 of 228

As shown by the quoted legislative enactments, administrative rulings, opinions, and

this Court’s decisions, the Grandfather Rule not only finds basis, but more importantly,
it implements the Filipino equity requirement, in the Constitution.

Application of the Grandfather Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in

determining compliance with the minimum Filipino equity requirement vis-à-vis the
Control Test. This confusion springs from the erroneous assumption that the use of one
method forecloses the use of the other.

As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014
Decision, the Control Test can be, as it has been, applied jointly with the Grandfather
Rule to determine the observance of foreign ownership restriction in nationalized
economic activities. The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be applied alternative to
each other. Rather, these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of
public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that the Grandfather Rule
may be applied. Put in another manner, if the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is immediately considered foreign-owned, in
which case, the need to resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as to who has
the “beneficial ownership” and “control” of the corporation. In that instance, there is no
need for a dissection or further inquiry on the ownership of the corporate shareholders
in both the investing and investee corporation or the application of the Grandfather
Rule.12As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently
met by the subject or investee corporation, a resort to the Grandfather Rule is necessary
if doubt exists as to the locus of the “beneficial ownership” and “control.” In this case, a
further investigation as to the nationality of the personalities with the beneficial
ownership and control of the corporate shareholders in both the investing and investee
corporations is necessary.
 Page 219 of 228

As explained in the April 21, 2012 Decision, the “doubt” that demands the application
of the Grandfather Rule in addition to or in tandem with the Control Test is not confined
to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the
corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various
indicia that the “beneficial ownership” and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion
No. 165, Series of 1984, which applied the pertinent provisions of the Anti-Dummy Law
in relation to the minimum Filipino equity requirement in the Constitution, “significant
indicators of the dummy status” have been recognized in view of reports “that some
Filipino investors or businessmen are being utilized or [are] allowing themselves to be
used as dummies by foreign investors” specifically in joint ventures for national resource
exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological
support for the joint venture;

3. That the foreign investors, while being minority stockholders, manage the company
and prepare all economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of
Linear Works Realty Development Corporation,13 the SEC held that when foreigners
contribute more capital to an enterprise, doubt exists as to the actual control and
ownership of the subject corporation even if the 60% Filipino equity threshold is met.
Hence, the SEC in that one ordered a further investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the
basis for determining the level of foreign participation is the number of shares
subscribed, regardless of the par value. Applying such an interpretation, the EPD rules
that the foreign equity participation in Linear works Realty Development Corporation
amounts to 26.41% of the corporation’s capital stock since the amount of shares
subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject
corporation is compliant with the 40% limit on foreign equity participation. Accordingly,
the EPD dismissed the complaint, and did not pursue any investigation against the
subject corporation.
 Page 220 of 228

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD
did not err when it did not take into account the par value of shares in determining
compliance with the constitutional and statutory restrictions on foreign
equity.cralawred

However, we are aware that some unscrupulous individuals employ schemes to

circumvent the constitutional and statutory restrictions on foreign equity. In the present
case, the fact that the shares of the Japanese nationals have a greater par value but
only have similar rights to those held by Philippine citizens having much lower par
value, is highly suspicious. This is because a reasonable investor would expect to have
greater control and economic rights than other investors who invested less capital than
him. Thus, it is reasonable to suspect that there may be secret arrangements between
the corporation and the stockholders wherein the Japanese nationals who subscribed
to the shares with greater par value actually have greater control and economic rights
contrary to the equality of shares based on the articles of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation.
The EPD is advised to avail of the Commission’s subpoena powers in order to gather
sufficient evidence, and file the necessary complaint.

As will be discussed, even if at first glance the petitioners comply with the 60-40 Filipino
to foreign equity ratio, doubt exists in the present case that gives rise to a reasonable
suspicion that the Filipino shareholders do not actually have the requisite number of
control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a
further investigation and dissection of the extent of the ownership of the corporate
shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is

impractical as tracing the shareholdings to the point when natural persons hold rights
to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in this
regard that, while the Grandfather Rule was originally intended to trace the
shareholdings to the point where natural persons hold the shares, the SEC had already
set up a limit as to the number of corporate layers the attribution of the nationality of
the corporate shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on
two (2) levels of corporate relations for publicly-held corporations or where the shares
are traded in the stock exchanges, and to three (3) levels for closely held corporations
or the shares of which are not traded in the stock exchanges.14 These limits comply
 Page 221 of 228

with the requirement in Palting v. San Jose Petroleum , Inc.15that the application of the
Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the
petitioners and their investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to
determine the matter of true ownership and control over the petitioners as doubt exists
as to the actual extent of the participation of MBMI in the equity of the petitioners and
their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of
the 10,000 common shares of petitioner Tesoro while the Canadian-owned company,
MBMI, holds 39.98% of its shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Sara Marie Mining, Inc. Filipino 5,997 P5,997,000.00 P825,000.00
MBMI Resources, Inc.16 Canadian 3,998 P3,998,000.00 P1,878,174.60
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds
66.63% of Sara Marie’s shares while the same Canadian company MBMI holds 33.31%
of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did not pay a single
peso for its shares. On the contrary, MBMI paid for 99% of the paid-up capital of Sara
Marie.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Olympic Mines & Filipino 6,663 P6,663,000.00 P0.00
Development Corp.17
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,794,000.00
Amanti Limson Filipino 1 P1,000.00 P1,000.00
 Page 222 of 228

Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00

Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G. Hernando Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro
creates serious doubt as to the true extent of its (MBMI) control and ownership over
both Sara Marie and Tesoro since, as observed by the SEC, “a reasonable investor would
expect to have greater control and economic rights than other investors who invested
less capital than him.” The application of the Grandfather Rule is clearly called for, and
as shown below, the Filipinos’ control and economic benefits in petitioner Tesoro
(through Sara Marie) fall below the threshold 60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67 (Filipino equity in Sara Marie) x59.97 (Sara Marie’s share in Tesoro) =
39.98%
100

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

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

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign

individual SHs in Tesoro)
= 59.99%
=====
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99%
foreign ownership of its shares, it is clear that petitioner Tesoro does not comply with
the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution.
Hence, the appellate court’s observation that Tesoro is a foreign corporation not entitled
to an MPSA is apt.
 Page 223 of 228

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its
10, 000 common shares is owned by supposedly Filipino Madridejos Mining Corporation
(Madridejos), while 39.98% belonged to the Canadian MBMI.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Mining Corporation Filipino 5,997 P5,997,000.00 P825,000.00
MBMI Resources, Inc.[18 Canadian 3,998 P3,998,000.00 P1,878,174.60
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares
belonged to MBMI. Yet again, Olympic did not contribute to the paid-up capital of
Madridejos and it was MBMI that provided 99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Olympic Mines & Filipino 6,663 P6,663,000.00 P0.00
Development Corp.19
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,803,900.00
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G. Hernando Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and
McArthur creates serious doubt as to the true extent of its control and ownership of
MBMI over both Madridejos and McArthur. The application of the Grandfather Rule is
clearly called for, and as will be shown below, MBMI,along with the other foreign
shareholders, breached the maximum limit of 40% ownership in petitioner McArthur,
rendering the petitioner disqualified to an MPSA:
 Page 224 of 228

Filipino participation in petitioner McArthur: 40.01%

66.67 (Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) =

39.98%
100

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

=40.01%
=====

Foreign participation in petitioner McArthur: 59.99%

33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) =

19.99%
100

19.99% + 39.98% (MBMI’s direct participation in McArthur) + .02% (shares of

foreign individual SHs in McArthur)
= 59.99%
=====

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur,
as compared to 59.99% foreign ownership of its shares, it is clear that petitioner
McArthur does not comply with the minimum Filipino equity requirement imposed in
Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not err in holding that
petitioner McArthur is a foreign corporation not entitled to an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
 Page 225 of 228

Patricia Lousie Mining and Filipino 5,997 P5,997,000.00 P1,677,000.00

Development Corp.
MBMI Resources, Inc.[20 Canadian 3,996 P3,996,000.00 P1,116,000.00
Higinio C. Mendoza, Jr. Filipino 1 P1,000.00 P1,000.00
Henry E. Fernandez Filipino 1 P1,000.00 P1,000.00
Ma. Elena A. Bocalan Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00

PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development
Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the
Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Filipino 6,596 P6,596,000.00 P0
Resource Development Corp.
MBMI Resources, Inc.[21 Canadian 3,396 P3,396,000.00 P2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Henry E. Fernandez Filipino 1 P1,000.00 P1,000.00
Ma. Elena A. Bocalan Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,804,000.00

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

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed
99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent
of MBMI’s control and ownership over both PLMDC and Narra since “a reasonable
investor would expect to have greater control and economic rights than other investors
who invested less capital than him.” Thus, the application of the Grandfather Rule is
justified. And as will be shown, it is clear that the Filipino ownership in petitioner
 Page 226 of 228

Narrafalls below the limit prescribed in both the Constitution and the Philippine Mining
Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02 (Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%

100

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

=39.64%
====
Foreign participation in petitioner Narra: 60.36%

33.98 (Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%

100

20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign

individual SHs in McArthur)
= 60.36%
=====

With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino
ownership of its shares, it is clear that petitioner Narra does not comply with the
minimum Filipino equity requirement imposed in Section 2, Article XII of the
Constitution. Hence, the appellate court did not err in holding that petitioner McArthur
is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’

Filipino equity composition was based on their common shareholdings, not preferred or
redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly
provides that “no share may be deprived of voting rights except those classified as
‘preferred’ or ‘redeemable’ shares.” Further, as Justice Leonen puts it, there is “no
indication that any of the shares x x x do not have voting rights, [thus] it must be
assumed that all such shares have voting rights.”22 It cannot therefore be gainsaid that
 Page 227 of 228

the foregoing computation hewed with the pronouncements of Gamboa, as implemented

by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8)23Section 2 of
which states:

Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement. For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote in the election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares
besides the 10,000 common shares. Neither is it suggested that the common shares
were further divided into voting or non-voting common shares. Hence, for purposes of
this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000 common shares
of each of the petitioners, and there is no need to separately apply the 60-40 ratio to
any segment or part of the said common shares.

III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of applications
for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of
Arbitrators (POA) of the Department of Environment and Natural Resources (DENR)
since the POA’s determination of petitioners’ nationalities is supposedly beyond its
limited jurisdiction, as defined in Gonzales v. Climax Mining Ltd.24 and Philex Mining
Corp. v. Zaldivia.25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s
pronouncements in either Gonzales or Philex Mining that POA’s jurisdiction “is limited
only to mining disputes which raise questions of fact,” and not judicial questions
cognizable by regular courts of justice. However, to properly recognize and give effect to
the jurisdiction vested in the POA by Section 77 of the Philippine Mining Act of 1995,26
and in parallel with this Court’s ruling in Celestial Nickel Mining Exploration
Corporation v. Macroasia Corp.,27the Court has recognized in its Decision that in
resolving disputes “involving rights to mining areas” and “involving mineral agreements
or permits,” the POA has jurisdiction to make a preliminary finding of the required
nationality of the corporate applicant in order to determine its right to a mining area or
a mineral agreement.
 Page 228 of 228

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful
detainer cases, where the subject of inquiry is possession de facto, the jurisdiction of
the municipal trial courts to make a preliminary adjudication regarding ownership of
the real property involved is allowed, but only for purposes of ruling on the determinative
issue of material possession.

The present case arose from petitioners’ MPSA applications, in which they asserted their
respective rights to the mining areas each applied for. Since respondent Redmont, itself
an applicant for exploration permits over the same mining areas, filed petitions for the
denial of petitioners’ applications, it should be clear that there exists a controversy
between the parties and it is POA’s jurisdiction to resolve the said dispute. POA’s ruling
on Redmont’s assertion that petitioners are foreign corporations not entitled to MPSA is
but a necessary incident of its disposition of the mining dispute presented before it,
which is whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain “disputes involving rights to mining
areas,” it necessarily follows that the POA likewise wields the authority to pass upon the
nationality issue involving petitioners, since the resolution of this issue is essential and
indispensable in the resolution of the main issue, i.e., the determination of the
petitioners’ right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further

pleadings shall be entertained. Let entry of judgment be made in due course.

SO ORDERED.