Republic of the Philippines On July 18, 1988, the petitioners filed their answer to the third party
SUPREME COURT complaint.
Manila
THIRD DIVISION
G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between
two parties in this case? Who owns the stocks of the corporation
under the terms of the voting trust agreement? How long can a voting
trust agreement remain valid and effective? Did a director of the
corporation cease to be such upon the creation of the voting trust
agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition
for certiorari — whether or not there was proper service of summons
on Alfa Integrated Textile Mills (ALFA, for short) through the
petitioners as president and vice-president, allegedly, of the subject
corporation after the execution of a voting trust agreement between
ALFA and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts
appear:
On November 15, 1985, a complaint for a sum of money was filed by
the International Corporate Bank, Inc. against the private respondents
who, in turn, filed a third party complaint against ALFA and the
petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the
third party complaint which the Regional Trial Court of Makati, Branch
58 denied in an Order dated June 27, 1988.
Meanwhile, on July 12, 1988, the trial court issued an order requiring
the issuance of an alias summons upon ALFA through the DBP as a
consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering
that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was
not authorized to receive summons on behalf of ALFA since the DBP
had not taken over the company which has a separate and distinct
corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to
ALFA.
On August 16, 1988, the private respondents filed a Manifestation and
Motion for the Declaration of Proper Service of Summons which the
trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for
reconsideration submitting that Rule 14, section 13 of the Revised
Rules of Court is not applicable since they were no longer officers of
ALFA and that the private respondents should have availed of another
mode of service under Rule 14, Section 16 of the said
Rules, i.e., through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September
27, 1988, the private respondents argued that the voting trust
agreement dated March 11, 1981 did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that
service of summons upon ALFA through the petitioners as corporate
officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of
summons on ALFA through the petitioners, thus, denying the latter's
1
motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed
by the petitioners reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and directors of ALFA,
hence, they could no longer receive summons or any court processes
for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting
trust agreement between all the stockholders of ALFA (the petitioners
included), on the one hand, and the DBP, on the other hand, whereby
the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that service upon
the petitioners who were no longer corporate officers of ALFA cannot
be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a
reconsideration of the above Order which was affirmed by the court in
its Order dated August 14, 1989 denying the private respondent's
motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly
submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on
September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an Order
declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not
be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a
motion for reconsideration on which the trial court took no further
action.
On March 19, 1990, after the petitioners filed their answer to the
private respondents' petition for certiorari, the public respondent
rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent
judge dated April 25, 1989 and August 14, 1989 are hereby SET
ASIDE and respondent corporation is ordered to file its answer within
the reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the
decision of the public respondent which resolved to deny the same on
May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction on
the part of the public respondent in reversing the questioned Orders
dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through
the petitioners.
In the meantime, the public respondent inadvertently made an entry of
judgment on July 16, 1990 erroneously applying the rule that the
period during which a motion for reconsideration has been pending
must be deducted from the 15-day period to appeal. However, in its
Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it
relied on applies to appeals from decisions of the Regional Trial
Courts to the Court of Appeals, not to appeals from its decision to us
pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
(CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments,
to wit:
(1) that the execution of the voting trust agreement by a stockholders
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholders of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code ( Rollo, pp.
270-3273); and
2
(2) that the petitioners were no longer acting or holding any of the
positions provided under Rule 14, Section 13 of the Rules of Court
authorized to receive service of summons for and in behalf of the
private domestic corporation so that the service of summons on ALFA
effected through the petitioners is not valid and ineffective; to maintain
the respondent Court of Appeals' position that ALFA was properly
served its summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by such acts
which are within the scope of its officers' or agents' authority (Rollo,
pp. 273-275)
In resolving the issue of the propriety of the service of summons in the
instant case, we dwell first on the nature of a voting trust agreement
and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group of identical
agreements between individual stockholders and a common trustee,
whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, either for certain
purposes or for all purposes, is to be lodged in the trustee, either with
or without a reservation to the owners, or persons designated by
them, of the power to direct how such control shall be used. (98 ALR
2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definitive meaning may
be gathered. The said provision partly reads:
Sec. 59. Voting Trusts — One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights pertaining
to the share for a period rights pertaining to the shares for a period not
exceeding five (5) years at any one time: Provided, that in the case of
a voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the
terms and conditions thereof. A certified copy of such agreement shall
be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of
the voting rights of a stockholder from his other rights such as the
right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled
until the liquidation of the corporation. However, in order to distinguish
a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the
voting rights of the stock are separated from the other attributes of
ownership; (2) that the voting rights granted are intended to be
irrevocable for a definite period of time; and (3) that the principal
purpose of the grant of voting rights is to acquire voting control of the
corporation. (5 Fletcher, Cyclopedia of the Law on Private
Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright,
374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares as long as
the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud." (section 59, 5th
paragraph of the Corporation Code) Thus, the traditional concept of a
voting trust agreement primarily intended to single out a stockholder's
right to vote from his other rights as such and made irrevocable for a
limited duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the specific
provision of the voting trust agreement.
3
The execution of a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholders, on the one hand, and the legal
title thereto on the other hand.
The law simply provides that a voting trust agreement is an
agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in order
to vest in the latter voting or other rights pertaining to said shares for a
period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the
agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the
period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of
the creation of the voting trust agreement. The petitioners maintain
that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as
the other party, the former assigned and transferred all their shares in
ALFA to DBP, as trustee. They argue that by virtue to of the voting
trust agreement the petitioners can no longer be considered directors
of ALFA. In support of their contention, the petitioners invoke section
23 of the Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director
. . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more safeguarded
the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency
of the tenure of the directors of a corporation. They cited the
commentaries by Prof. Aguedo Agbayani on the right and status of
the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing
stockholder", is equitable owner for the stocks represented by the
voting trust certificates and the stock reversible on termination of the
trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus
render them ineligible as directors. But a more accurate statement
seems to be that for some purposes the depositing stockholder
holding voting trust certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a stockholder. It
seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as,
a technical stockholders' suit in right of the corporation. [Commercial
Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5
Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute
as to the most immediate effect of a voting trust agreement on the
status of a stockholder who is a party to its execution — from legal
titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner.
(Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, The Law on Private Corporations and Corporate
Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The
Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p.
386; Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate
question, therefore, is whether the change in his status deprives the
stockholder of the right to qualify as a director under section 23 of the
present Corporation Code which deletes the phrase "in his own right."
Section 30 of the old Code states that:
Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director, which
stock shall stand in his name on the books of the corporation. A
director who ceases to be the owner of at least one share of the
capital stock of a stock corporation of which is a director shall thereby
cease to be a director . . . (Emphasis supplied)
4
Under the old Corporation Code, the eligibility of a director, strictly
speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares
subject of the voting trust agreement pursuant to which a transfer of
the stockholder's shares in favor of the trustee is required (section 36
of the old Corporation Code). No disqualification arises by virtue of the
phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not beneficial owners of
the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra,
p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the corporation (2
Fletcher, Cyclopedia of the Law of Private Corporations, section 300,
p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting
trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners
ceased to be directors. Hence, the transfer of the petitioners' shares
to the DBP created vacancies in their respective positions as directors
of ALFA. The transfer of shares from the stockholder of ALFA to the
DBP is the essence of the subject voting trust agreement as evident
from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of the stocks owned by them respectively and
shall do all things necessary for the transfer of their respective shares
to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust
certificate for the number of shares transferred, which shall be
transferrable in the same manner and with the same effect as
certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings
of ALFA, annual or special, upon any resolution, matter or business
that may be submitted to any such meeting, and shall possess in that
respect the same powers as owners of the equitable as well as the
legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one
share of stock for the purpose of qualifying such person as director of
ALFA, and cause a certificate of stock evidencing the share so
transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his
shares to the same trustees without the need of revising this
agreement, and this agreement shall have the same force and effect
upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)
Considering that the voting trust agreement between ALFA and the
DBP transferred legal ownership of the stock covered by the
agreement to the DBP as trustee, the latter became the stockholder of
record with respect to the said shares of stocks. In the absence of a
showing that the DBP had caused to be transferred in their names
one share of stock for the purpose of qualifying as directors of ALFA,
the petitioners can no longer be deemed to have retained their status
as officers of ALFA which was the case before the execution of the
subject voting trust agreement. There appears to be no dispute from
the records that DBP has taken over full control and management of
the firm.
Moreover, in the Certification dated January 24, 1989 issued by the
DBP through one Elsa A. Guevarra, Vice-President of its Special
Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of
April 1982." (CA Rollo, pp. 140-142)
5
Inasmuch as the private respondents in this case failed to
substantiate their claim that the subject voting trust agreement did not
deprive the petitioners of their position as directors of ALFA, the public
respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may
have ceased to be president and vice-president, respectively, of the
corporation at the time of service of summons on them on August 21,
1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the
express terms of Stipulation No. 4 of the subject voting trust
agreement. Both parties, ALFA and the DBP, were aware at the time
of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of
their positions as such.
There can be no reliance on the inference that the five-year period of
the voting trust agreement in question had lapsed in 1986 so that the
legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners
pursuant to the 6th paragraph of section 59 of the new Corporation
Code which reads:
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificate as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. This is shown by the following portions of the
agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its
credit is secured by a first mortgage on the manufacturing plant of
said company;
WHEREAS, ALFA is also indebted to other creditors for various
financial accomodations and because of the burden of these
obligations is encountering very serious difficulties in continuing with
its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted
participation in the management and control of the company and to
assure the aforesaid participation by the TRUSTEE, the TRUSTORS
have agreed to execute a voting trust covering their shareholding in
ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any
portion thereof, remains outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986,
the DBP would not have transferred all its rights, titles and interests in
ALFA "effective June 30, 1986" to the national government through
the Asset Privatization Trust (APT) as attested to in a Certification
dated January 24, 1989 of the Vice President of the DBP's Special
Accounts Department II. In the same certification, it is stated that the
DBP, from 1987 until 1989, had handled APT's account which
included ALFA's assets pursuant to a management agreement by and
between the DBP and APT (CA Rollo, p. 142) Hence, there is
evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust
6
agreement in question was not yet terminated so that the legal title to only be bound by such acts which are within the scope of the officer's
the stocks of ALFA, then, still belonged to the DBP. or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

In view of the foregoing, the ultimate issue of whether or not there was WHEREFORE, premises considered, the petition is hereby
proper service of summons on ALFA through the petitioners is readily GRANTED. The appealed decision dated March 19, 1990 and the
answered in the negative. Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the
Orders dated April 25, 1989 and October 17, 1989 issued by the
Under section 13, Rule 14 of the Revised Rules of Court, it is provided Regional Trial Court of Makati, Branch 58 are REINSTATED.
that:
SO ORDERED.
Sec. 13. Service upon private domestic corporation or
partnership. — If the defendant is a corporation Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
organized under the laws of the Philippines or a
partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent or
any of its directors.

It is a basic principle in Corporation Law that a corporation has a

personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347
[1976]; Osias Academy v. Department of Labor and Employment, et
al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule
on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the
corporation considering the existence of a corporate entity separate
from those who compose it.

The rationale of the aforecited rule is that service must be made on a

representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey
Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated
officers. The service of summons upon ALFA, through the petitioners,
therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation can

7
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 151969 September 4, 2009
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY
GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in
their capacities as members of the Board of Directors of Valle Verde
Country Club, Inc., and JOSE RAMIREZ, Petitioners,
vs.
VICTOR AFRICA, Respondent.
DECISION
BRION, J.:
In this petition for review on certiorari, 1 the parties raise a legal
question on corporate governance: Can the members of a
corporation’s board of directors elect another director to fill in a
vacancy caused by the resignation of a hold-over director?
THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders’ Meeting of
petitioner Valle Verde Country Club, Inc. (VVCC), the following were
elected as members of the VVCC Board of Directors: Ernesto
Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago,
Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. 2 In the years
1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for
the holding of the stockholders’ meeting could not be obtained.
Consequently, the above-named directors continued to serve in the
VVCC Board in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as
member of the VVCC Board. In a meeting held on October 6, 1998,
the remaining directors, still constituting a quorum of VVCC’s nine-
member board, elected Eric Roxas (Roxas) to fill in the vacancy
created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned as
member of the VVCC Board. He was replaced by Jose Ramirez
(Ramirez), who was elected by the remaining members of the VVCC
Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the VVCC Board with
the Securities and Exchange Commission (SEC) and the Regional
Trial Court (RTC), respectively. The SEC case questioning the validity
of Roxas’ appointment was docketed as SEC Case No. 01-99-6177.
The RTC case questioning the validity of Ramirez’ appointment was
docketed as Civil Case No. 68726.
In his nullification complaint3 before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section 23,
of the Corporation Code of the Philippines (Corporation Code). These
provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office. xxx.
[Emphasis supplied.]
Africa claimed that a year after Makalintal’s election as member of the
VVCC Board in 1996, his [Makalintal’s] term – as well as those of the
8
other members of the VVCC Board – should be considered to have
already expired. Thus, according to Africa, the resulting vacancy
should have been filled by the stockholders in a regular or special
meeting called for that purpose, and not by the remaining members of
the VVCC Board, as was done in this case.
Africa additionally contends that for the members to exercise the
authority to fill in vacancies in the board of directors, Section 29
requires, among others, that there should be an unexpired term during
which the successor-member shall serve. Since Makalintal’s term had
already expired with the lapse of the one-year term provided in
Section 23, there is no more "unexpired term" during which Ramirez
could serve.
Through a partial decision4 promulgated on January 23, 2002, the
RTC ruled in favor of Africa and declared the election of Ramirez, as
Makalintal’s replacement, to the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying
the election of Roxas as member of the VVCC Board, vice hold-over
director Dinglasan. While VVCC manifested its intent to appeal from
the SEC’s ruling, no petition was actually filed with the Court of
Appeals; thus, the appellate court considered the case closed and
terminated and the SEC’s ruling final and executory. 5
THE PETITION
VVCC now appeals to the Court to assail the RTC’s January 23, 2002
partial decision for being contrary to law and jurisprudence. VVCC
made a direct resort to the Court via a petition for review
on certiorari, claiming that the sole issue in the present case involves
a purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining
directors of the corporation’s Board, still constituting a quorum, can
elect another director to fill in a vacancy caused by the resignation of
a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a
vacancy created by the resignation of a hold-over director is expressly
granted to the remaining members of the corporation’s board of
directors.
Under the above-quoted Section 29 of the Corporation Code, a
vacancy occurring in the board of directors caused by the expiration of
a member’s term shall be filled by the corporation’s stockholders.
Correlating Section 29 with Section 23 of the same law, VVCC alleges
that a member’s term shall be for one year and until his
successor is elected and qualified; otherwise stated, a member’s
term expires only when his successor to the Board is elected and
qualified. Thus, "until such time as [a successor is] elected or qualified
in an annual election where a quorum is present," VVCC contends
that "the term of [a member] of the board of directors has yet not
expired."
As the vacancy in this case was caused by Makalintal’s resignation,
not by the expiration of his term, VVCC insists that the board rightfully
appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Court’s ruling in the
1927 El Hogar6 case which states:
Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the practice
of the directors to fill in vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of directors
until the election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another directorate
is chosen and qualified. Unless the law or the charter of a corporation
9
expressly provides that an office shall become vacant at the expiration
of the term of office for which the officer was elected, the general rule
is to allow the officer to hold over until his successor is duly qualified.
Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation. The doctrine
above stated finds expression in article 66 of the by-laws of the
respondent which declares in so many words that directors shall hold
office "for the term of one year or until their successors shall have
been elected and taken possession of their offices." xxx.
It results that the practice of the directorate of filling vacancies by
the action of the directors themselves is valid. Nor can any
exception be taken to the personality of the individuals chosen by the
directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCC’s contentions, raises the same arguments
that he did before the trial court.
THE COURT’S RULING
We are not persuaded by VVCC’s arguments and, thus, find its
petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining
directors of a corporation’s Board, still constituting a quorum, can
elect another director to fill in a vacancy caused by the resignation of
a hold-over director. The resolution of this legal issue is significantly
hinged on the determination of what constitutes a director’s term of
office.
The holdover period is not part of the term of office of a member of the
board of directors
The word "term" has acquired a definite meaning in jurisprudence. In
several cases, we have defined "term" as the time during which the
officer may claim to hold the office as of right, and fixes the interval
after which the several incumbents shall succeed one another. 7 The
term of office is not affected by the holdover. 8 The term is fixed by
statute and it does not change simply because the office may have
become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not
been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s "tenure"
represents the term during which the incumbent actually holds office.
The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 23 9 of the Corporation
Code declares that "the board of directors…shall hold office for one
(1) year until their successors are elected and qualified," we construe
the provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after
election to the office. The holdover period – that time from the lapse of
one year from a member’s election to the Board and until his
successor’s election and qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent
member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired,
and the incumbent is holding the succeeding term. 10
After the lapse of one year from his election as member of the VVCC
Board in 1996, Makalintal’s term of office is deemed to have already
expired. That he continued to serve in the VVCC Board in a holdover
capacity cannot be considered as extending his term. To be precise,
Makalintal’s term of office began in 1996 and expired in 1997, but, by
virtue of the holdover doctrine in Section 23 of the Corporation Code,
he continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered as part
of his term, which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted
which, by the terms of Section 29 11 of the Corporation Code, must be
filled by the stockholders of VVCC in a regular or special meeting
called for the purpose. To assume – as VVCC does – that the
vacancy is caused by Makalintal’s resignation in 1998, not by the
expiration of his term in 1997, is both illogical and unreasonable. His
resignation as a holdover director did not change the nature of the
10
vacancy; the vacancy due to the expiration of Makalintal’s term had
been created long before his resignation.
The powers of the corporation’s board of directors emanate from its
stockholders
VVCC’s construction of Section 29 of the Corporation Code on the
authority to fill up vacancies in the board of directors, in relation to
Section 23 thereof, effectively weakens the stockholders’ power to
participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the
directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of
the corporation from them. The board of directors, in drawing to
themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board
should exercise not only care and diligence, but utmost good faith in
the management of corporate affairs. 12
The underlying policy of the Corporation Code is that the business
and affairs of a corporation must be governed by a board of directors
whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can
the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders,
be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over
properties that they do not own.13
This theory of delegated power of the board of directors similarly
explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporation’s board of directors is caused
not by the expiration of a member’s term, the successor "so elected to
fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office." The law has authorized the remaining
members of the board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporation’s operations; yet, in
recognition of the stockholders’ right to elect the members of the
board, it limited the period during which the successor shall serve only
to the "unexpired term of his predecessor in office."
While the Court in El Hogar approved of the practice of the directors
to fill vacancies in the directorate, we point out that this ruling was
made before the present Corporation Code was enacted 14 and before
its Section 29 limited the instances when the remaining directors can
fill in vacancies in the board, i.e., when the remaining directors still
constitute a quorum and when the vacancy is caused for reasons
other than by removal by the stockholders or by expiration of the
term.1avvphi1
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the director’s term of office.
When a vacancy is created by the expiration of a term, logically, there
is no more unexpired term to speak of. Hence, Section 29 declares
that it shall be the corporation’s stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a member’s
term.
As correctly pointed out by the RTC, when remaining members of the
VVCC Board elected Ramirez to replace Makalintal, there was no
more unexpired term to speak of, as Makalintal’s one-year term had
already expired. Pursuant to law, the authority to fill in the vacancy
caused by Makalintal’s leaving lies with the VVCC’s stockholders, not
the remaining members of its board of directors.
WHEREFORE, we DENY the petitioners’ petition for review on
certiorari, and AFFIRM the partial decision of the Regional Trial Court,
Branch 152, Manila, promulgated on January 23, 2002, in Civil Case
No. 68726. Costs against the petitioners.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
11
 CONCHITA CARPIO
MARIANO C. DEL CASTILLO
MORALES
Associate Justice
Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached
in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the

Division Chairperson’s Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the
Court’s Division.

REYNATO S. PUNO
Chief Justice

12
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 153413 March 1, 2007
NECTARINA S. RANIEL and MA. VICTORIA R. PAG-ONG, Petitioners,
vs.
PAUL JOCHICO, JOHN STEFFENS and SURYA VIRIYA, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in the present Petition for Review on Certiorari is the
Decision1 of the Court of Appeals (CA) dated April 30, 2002, affirming
with modification the Decision dated October 27, 2000 rendered by
the Securities and Exchange Commission (SEC) which held as valid
the removal of petitioners Ma. Victoria R. Pag-ong (Pag-ong) as
director and Nectarina S. Raniel (Raniel) as director and corporate
officer of Nephro Systems Dialysis Center (Nephro).
Petitioners first questioned their removal in SEC Case No. 02-98-5902
for Declaration of Nullity of the Illegal Acts of Respondents, Damages
and Injunction. Petitioners, together with respondents Paul Jochico
(Jochico), John Steffens and Surya Viriya, were incorporators and
directors of Nephro, with Raniel acting as Corporate Secretary and
Administrator. The conflict started when petitioners questioned
respondents' plan to enter into a joint venture with the Butuan Doctors'
Hospital and College, Inc. sometime in December 1997. Because of
this, petitioners claim that respondents tried to compel them to waive
and assign their shares with Nephro but they refused. Thereafter,
Raniel sought an indefinite leave of absence due to stress, but this
was denied by Jochico, as Nephro President. Raniel, nevertheless,
did not report for work, causing Jochico to demand an explanation
from her why she should not be removed as Administrator and
Corporate Secretary. Raniel replied, expressing her sentiments over
the disapproval of her request for leave and respondents' decision
with regard to the Butuan venture.
On January 30, 1998, Jochico issued a Notice of Special Board
Meeting on February 2, 1998. Despite receipt of the notice, petitioners
did not attend the board meeting. In said meeting, the Board passed
several resolutions ratifying the disapproval of Raniel's request for
leave, dismissing her as Administrator of Nephro, declaring the
position of Corporate Secretary vacant, appointing Otelio Jochico as
the new Corporate Secretary and authorizing the call of a Special
Stockholders' Meeting on February 16, 1998 for the purpose of the
removal of petitioners as directors of Nephro.
Otelio Jochico issued the corresponding notices for the Special
Stockholders' Meeting to be held on February 16, 1998 which were
received by petitioners on February 2, 1998. Again, they did not
attend the meeting. The stockholders who were present removed the
petitioners as directors of Nephro. Thus, petitioners filed SEC Case
No. 02-98-5902.
On October 27, 2000, the SEC rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, the Commission so holds that complainants cannot be
awarded the reliefs prayed for in reinstating Nectarina S. Raniel as
secretary and administrator.
The corporation acting thru its Board of Directors can validly remove
its corporate officers, particularly complainant Nectarina S. Raniel as
corporate secretary, treasurer and administrator of the Dialysis Clinic.
Also, the Commission cannot grant the relief prayed for by
complainants in restraining the respondents from interfering in the
administration of the Dialysis Clinic owned by the corporation and the
use of corporate funds.
The administration of the Dialysis Clinic of the corporation and the use
of corporate funds, rightfully belong to the officers of the corporation,
which in this case are the respondents.
The counterclaim of respondents to return or assign back the
complainants' shares in favor of respondent Paul Jochico or his
nominee is hereby denied for lack of merit.
13
The respondents failed to show any clear and convincing evidence to
rebut the presumption of the validity and truthfulness of documents
submitted to the Commission in the grant of corporate license.
The claim for attorney's fees and damages of both parties are likewise
denied for lack of merit, as neither party should be punished for
vindicating a right, which he/she believes should be protected or
enforced.
SO ORDERED.2
Dissatisfied, petitioners filed a petition for review with the CA.
On April 30, 2002, the CA rendered the assailed Decision, with the
following dispositive portion:
WHEREFORE, in light of the foregoing discussions, the appealed
decision of the Securities and Exchange Commission is hereby
AFFIRMED with the MODIFICATION that the renewal of petitioners
as directors of Nephro is declared valid.
SO ORDERED.3
Respondents filed a Manifestation and Motion to Correct
Typographical Error, stating that the term "renewal" as provided in the
CA Decision should be "removal."4 Petitioners, on the other hand, filed
the present petition for review on certiorari.
On November 20, 2002, the CA issued a Resolution resolving to
refrain from acting on all pending incidents before it in view of the
filing of the petition with the Court. 5
In the present petition, petitioners raised basically the same argument
they had before the SEC and the CA, i.e., their removal from Nephro
was not valid.
Both the SEC and the CA held that Pag-ong's removal as director and
Raniel's removal as director and officer of Nephro were valid. For its
part, the SEC ruled that the Board of Directors had sufficient ground
to remove Raniel as officer due to loss of trust and confidence, as her
abrupt and unauthorized leave of absence exhibited her disregard of
her responsibilities as an officer of the corporation and disrupted the
operations of Nephro. The SEC also held that the Special Board
Meeting held on February 2, 1998 was valid and the resolutions
adopted therein are binding on petitioners. 6
The CA upheld the SEC's conclusions, adding further that the special
stockholders' meeting on February 16, 1998 was likewise validly held.
The CA also ruled that Pag-ong's removal as director of Nephro was
justified as it was due to her "undenied delay in the release of
Nephro's medical supplies from the warehouse of the Fly-High
Brokerage where she was an officer, on top of her and her co-
petitioner Raniel's absence from the aforementioned directors' and
stockholders' meetings of Nephro despite due notice." 7
It is well to stress the settled rule that the findings of fact of
administrative bodies, such as the SEC, will not be interfered with by
the courts in the absence of grave abuse of discretion on the part of
said agencies, or unless the aforementioned findings are not
supported by substantial evidence. They carry even more weight
when affirmed by the CA.8 Such findings are accorded not only great
respect but even finality, and are binding upon this Court, unless it is
shown that it had arbitrarily disregarded or misapprehended evidence
before it to such an extent as to compel a contrary conclusion had
such evidence been properly appreciated. 9 This rule is rooted in the
doctrine that this Court is not a trier of facts, as well as in the respect
to be accorded the determinations made by administrative bodies in
general on matters falling within their respective fields of
specialization or expertise.10
A review of the petition failed to demonstrate any reversible error
committed by the two tribunals, hence, the petition must be denied. It
does not present any argument which convinces the Court that the
SEC and the CA made any misappreciation of the facts and the
applicable laws such that their decisions should be overturned.
A corporation exercises its powers through its board of directors
and/or its duly authorized officers and agents, except in instances
14
where the Corporation Code requires stockholders’ approval for
certain specific acts.11
Based on Section 23 of the Corporation Code which provides:
SEC. 23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees x x x.
a corporation’s board of directors is understood to be that body which
(1) exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all
property of the corporation. Its members have been characterized as
trustees or directors clothed with a fiduciary character. 12 Moreover,
the directors may appoint officers and agents and as incident to this
power of appointment, they may discharge those appointed.13
In this case, petitioner Raniel was removed as a corporate officer
through the resolution of Nephro's Board of Directors adopted in a
special meeting on February 2, 1998. As correctly ruled by the SEC,
petitioners' removal was a valid exercise of the powers of Nephro's
Board of Directors, viz.:
In the instant complaint, do respondents have sufficient grounds to
cause the removal of Raniel from her positions as Corporate
Secretary, Treasurer and Administrator of the Dialysis Clinic? Based
on the facts proven during the hearing of this case, the answer is in
the affirmative.
Raniel's letter of January 26, 1998 speaks for itself. Her request for an
indefinite leave, immediately effective yet without prior notice, reveals
a disregard of the critical responsibilities pertaining to the sensitive
positions she held in the corporation. Prior to her hasty departure,
Raniel did not make a proper turn-over of her duties and had to be
expressly requested to hand over documents and records, including
keys to the office and the cabinets (Exh. 15).
xxxx
Since Raniel occupied all three positions in Nephro, it is not difficult to
foresee the disruption that her immediate and indefinite absence can
inflict on the operations of the company. By leaving abruptly, Raniel
abandoned the positions she is now trying to reclaim. Raniel's
actuation has been sufficiently proven to warrant loss of the Board's
confidence.14
The SEC also correctly concluded that petitioner Raniel was removed
as an officer of Nephro in compliance with established procedure,
thus:
The resolutions of the Board dismissing complainant Raniel from her
various positions in Nephro are valid. Notwithstanding the absence of
complainants from the meeting, a quorum was validly constituted. x x
x.
xxxx
Based on its articles of incorporation, Nephro has five directors – two
of the positions were occupied by complainants and the remaining
three are held by respondents. This being the case, the presence of
all three respondents in the Special Meeting of the Board on February
2, 1998 established a quorum for the conduct of business. The
unanimous resolutions carried by the Board during such meeting are
therefore valid and binding against complainants.
It bears emphasis that Raniel was given sufficient opportunity to be
heard. Jochico's letters of January 26, 1998 and January 27, 1998,
albeit adversarial, recognized her right to explain herself and gave her
the chance to do so. In fact, Raniel did respond to Jochico's letter on
January 28, 1998 and took the occasion to voice her opinions about
Jochico's alleged "practice of using others for your own benefit,
without cost." (Exh. 14). Moreover, the Special Meeting of the Board
could have been the appropriate venue for Raniel to air her side. Had
Raniel decided to grace the meeting with her presence, she could
have explained herself before the board and tried to convince them to
allow her to keep her posts.15
15
Petitioners Raniel and Pag-ong's removal as members of Nephro's more than enough to oust petitioners from their respective positions
Board of Directors was likewise valid. as members of the board, with or without cause.

Only stockholders or members have the power to remove the Verily therefore, there is no cogent reason to grant the present
directors or trustees elected by them, as laid down in Section 28 of petition.
the Corporation Code,16 which provides in part:
WHEREFORE, the petition is DENIED for lack of merit.
SEC. 28. Removal of directors or trustees. -- Any director or trustee
of a corporation may be removed from office by a vote of the SO ORDERED.
stockholders holding or representing at least two-thirds (2/3) of
the outstanding capital stock, or if the corporation be a non-stock MA. ALICIA AUSTRIA-MARTINEZ
corporation, by a vote of at least two-thirds (2/3) of the members Associate Justice
entitled to vote: Provided, that such removal shall take place either at
a regular meeting of the corporation or at a special meeting called for WE CONCUR:
the purpose, and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose such CONSUELO YNARES-SANTIAGO
removal at the meeting. A special meeting of the stockholders or Associate Justice
members of a corporation for the purpose of removal of directors or Chairperson
trustees or any of them, must be called by the secretary on order of
the president or on the written demand of the stockholders ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO
representing or holding at least a majority of the outstanding capital Associate Justice Asscociate Justice
stock, or if it be a non-stock corporation, on the written demand of a ANTONIO EDUARDO B. NACHURA
majority of the members entitled to vote. x x x Notice of the time and Associate Justice
place of such meeting, as well as of the intention to propose such
removal, must be given by publication or by written notice as ATTESTATION
prescribed in this Code. x x x Removal may be with or without
cause: Provided, That removal without cause may not be used to I attest that the conclusions in the above Decision had been reached in
deprive minority stockholders or members of the right of consultation before the case was assigned to the writer of the opinion of the
representation to which they may be entitled under Section 24 of this Court’s Division.
Code. (Emphasis supplied)
CONSUELO YNARES-SANTIAGO
Associate Justice
Petitioners do not dispute that the stockholders' meeting was held in Chairperson, Third Division
accordance with Nephro's By-Laws. The ownership of Nephro's
outstanding capital stock is distributed as follows: Jochico - 200 CERTIFICATION
shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75 shares;
and Pag-ong - 25 shares,17 or a total of 500 shares. A two-thirds vote
Pursuant to Section 13, Article VIII of the Constitution, and the Division
of Nephro's outstanding capital stock would be 333.33 shares, and Chairperson’s attestation, it is hereby certified that the conclusions in the
during the Stockholders' Special Meeting held on February 16, 1998, above Decision had been reached in consultation before the case was
400 shares voted for petitioners' removal. Said number of votes is assigned to the writer of the opinion of the Court’s Division.

16
REYNATO S. PUNO
Chief Justice
SECOND DIVISION
G.R. No. 152392 May 26, 2005
EXPERTRAVEL & TOURS, INC., petitioner,
vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the
Court of Appeals (CA) in CA-G.R. SP No. 61000 dismissing the
petition for certiorari and mandamus filed by Expertravel and Tours,
Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in
the Republic of South Korea and licensed to do business in the
Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law
firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a
Complaint2 against ETI with the Regional Trial Court (RTC) of Manila,
for the collection of the principal amount of P260,150.00, plus
attorney’s fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo,
who indicated therein that he was the resident agent and legal
counsel of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty.
Aguinaldo was not authorized to execute the verification and
certificate of non-forum shopping as required by Section 5, Rule 7 of
the Rules of Court. KAL opposed the motion, contending that Atty.
Aguinaldo was its resident agent and was registered as such with the
Securities and Exchange Commission (SEC) as required by the
Corporation Code of the Philippines. It was further alleged that Atty.
Aguinaldo was also the corporate secretary of KAL. Appended to the
said opposition was the identification card of Atty. Aguinaldo, showing
that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that
he had been authorized to file the complaint through a resolution of
the KAL Board of Directors approved during a special meeting held on
June 25, 1999. Upon his motion, KAL was given a period of 10 days
within which to submit a copy of the said resolution. The trial court
granted the motion. Atty. Aguinaldo subsequently filed other similar
motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date,
executed by its general manager Suk Kyoo Kim, alleging that the
board of directors conducted a special teleconference on June 25,
1999, which he and Atty. Aguinaldo attended. It was also averred that
in that same teleconference, the board of directors approved a
resolution authorizing Atty. Aguinaldo to execute the certificate of non-
forum shopping and to file the complaint. Suk Kyoo Kim also alleged,
however, that the corporation had no written copy of the aforesaid
resolution.
On April 12, 2000, the trial court issued an Order4 denying the motion
to dismiss, giving credence to the claims of Atty. Aguinaldo and Suk
Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a
resolution as quoted in the submitted affidavit.
ETI filed a motion for the reconsideration of the Order, contending that
it was inappropriate for the court to take judicial notice of the said
teleconference without any prior hearing. The trial court denied the
motion in its Order5 dated August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the
orders of the RTC. In its comment on the petition, KAL appended a
certificate signed by Atty. Aguinaldo dated January 10, 2000, worded
as follows:
SECRETARY’S/RESIDENT AGENT’S CERTIFICATE
17
 KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and
appointed Corporate Secretary and Resident Agent of KOREAN
AIRLINES, a foreign corporation duly organized and existing under
and by virtue of the laws of the Republic of Korea and also duly
registered and authorized to do business in the Philippines, with office
address at Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo
Village, Makati City, HEREBY CERTIFY that during a special meeting
of the Board of Directors of the Corporation held on June 25, 1999 at
which a quorum was present, the said Board unanimously passed,
voted upon and approved the following resolution which is now in full
force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo
& Associates or any of its lawyers are hereby appointed and
authorized to take with whatever legal action necessary to effect the
collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and
execute any document or paper necessary to the filing and
prosecution of said claim in Court, attend the Pre-Trial Proceedings
and enter into a compromise agreement relative to the above-
mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this
10th day of January, 1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10 th day of January,
1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax
Certificate No. 14914545, issued on January 7, 2000 at Manila,
Philippines.
Doc. No. 119; (Sgd.)
Page No. 25; ATTY. HENRY D. ADASA
Book No. XXIV Notary Public
Series of 2000. Until December 31, 2000
PTR #889583/MLA 1/3/2000
On December 18, 2001, the CA rendered judgment dismissing the
petition, ruling that the verification and certificate of non-forum
shopping executed by Atty. Aguinaldo was sufficient compliance with
the Rules of Court. According to the appellate court, Atty. Aguinaldo
had been duly authorized by the board resolution approved on June
25, 1999, and was the resident agent of KAL. As such, the RTC could
not be faulted for taking judicial notice of the said teleconference of
the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the
CA denied. Thus, ETI, now the petitioner, comes to the Court by way
of petition for review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART
FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS
QUESTIONED DECISION AND WHEN IT ISSUED ITS
QUESTIONED RESOLUTION, ANNEXES A AND B OF THE
INSTANT PETITION?7
The petitioner asserts that compliance with Section 5, Rule 7, of the
Rules of Court can be determined only from the contents of the
complaint and not by documents or pleadings outside thereof. Hence,
the trial court committed grave abuse of discretion amounting to
excess of jurisdiction, and the CA erred in considering the affidavit of
the respondent’s general manager, as well as the
Secretary’s/Resident Agent’s Certification and the resolution of the
board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner
also maintains that the RTC cannot take judicial notice of the said
teleconference without prior hearing, nor any motion therefor. The
petitioner reiterates its submission that the teleconference and the
resolution adverted to by the respondent was a mere fabrication.
18
The respondent, for its part, avers that the issue of whether modern
technology is used in the field of business is a factual issue; hence,
cannot be raised in a petition for review on certiorari under Rule 45 of
the Rules of Court. On the merits of the petition, it insists that Atty.
Aguinaldo, as the resident agent and corporate secretary, is
authorized to sign and execute the certificate of non-forum shopping
required by Section 5, Rule 7 of the Rules of Court, on top of the
board resolution approved during the teleconference of June 25,
1999. The respondent insists that "technological advances in this time
and age are as commonplace as daybreak." Hence, the courts may
take judicial notice that the Philippine Long Distance Telephone
Company, Inc. had provided a record of corporate conferences and
meetings through FiberNet using fiber-optic transmission technology,
and that such technology facilitates voice and image transmission with
ease; this makes constant communication between a foreign-based
office and its Philippine-based branches faster and easier, allowing for
cost-cutting in terms of travel concerns. It points out that even the E-
Commerce Law has recognized this modern technology. The
respondent posits that the courts are aware of this development in
technology; hence, may take judicial notice thereof without need of
hearings. Even if such hearing is required, the requirement is
nevertheless satisfied if a party is allowed to file pleadings by way of
comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the
matter of teleconferencing as a means of conducting meetings of
board of directors for purposes of passing a resolution; until and after
teleconferencing is recognized as a legitimate means of gathering a
quorum of board of directors, such cannot be taken judicial notice of
by the court. It asserts that safeguards must first be set up to prevent
any mischief on the public or to protect the general public from any
possible fraud. It further proposes possible amendments to the
Corporation Code to give recognition to such manner of board
meetings to transact business for the corporation, or other related
corporate matters; until then, the petitioner asserts, teleconferencing
cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special
meeting on June 25, 1999 through teleconferencing where Atty.
Aguinaldo was supposedly given such an authority is a farce,
considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code
requires board resolutions of corporations to be submitted to the SEC.
Even assuming that there was such a teleconference, it would be
against the provisions of the Corporation Code not to have any record
thereof.
The petitioner insists that the teleconference and resolution adverted
to by the respondent in its pleadings were mere fabrications foisted by
the respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping.— The plaintiff or
principal party shall certify under oath in the complaint or other
initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed
therewith: (a) that he has not theretofore commenced any
action or filed any claim involving the same issues in any
court, tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete
statement of the present status thereof; and (c) if he should
thereafter learn that the same or similar action or claim has
been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be
curable by mere amendment of the complaint or other initiatory
pleading but shall be cause for the dismissal of the case
without prejudice, unless otherwise provided, upon motion and
after hearing. The submission of a false certification or non-
compliance with any of the undertakings therein shall
constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts
of the party or his counsel clearly constitute willful and
deliberate forum shopping, the same shall be ground for
19
 summary dismissal with prejudice and shall constitute direct
contempt, as well as a cause for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum
shopping is mandatory8 and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court or
other tribunal that there are no other pending cases involving basically
the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual
knowledge of whether or not he has initiated similar actions or
proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts.9 Hence, the requisite certification executed by
the plaintiff’s counsel will not suffice. 10
In a case where the plaintiff is a private corporation, the certification
may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the
documents. The reason was explained by the Court in National Steel
Corporation v. Court of Appeals,11 as follows:
Unlike natural persons, corporations may perform physical
actions only through properly delegated individuals; namely, its
officers and/or agents.
… certificate of non-forum shopping as the resident agent and counsel of
The corporation, such as the petitioner, has no powers except
those expressly conferred on it by the Corporation Code and
those that are implied by or are incidental to its existence. In
turn, a corporation exercises said powers through its board of
directors and/or its duly-authorized officers and agents.
Physical acts, like the signing of documents, can be performed
only by natural persons duly-authorized for the purpose by
corporate by-laws or by specific act of the board of directors.
"All acts within the powers of a corporation may be performed
by agents of its selection; and except so far as limitations or
restrictions which may be imposed by special charter, by-law,
or statutory provisions, the same general principles of law
which govern the relation of agency for a natural person
govern the officer or agent of a corporation, of whatever status
or rank, in respect to his power to act for the corporation; and
agents once appointed, or members acting in their stead, are
subject to the same rules, liabilities and incapacities as are
agents of individuals and private persons."
…
… For who else knows of the circumstances required in the
Certificate but its own retained counsel. Its regular officers, like
its board chairman and president, may not even know the
details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in
the complaint or appended thereto as an integral part of the
complaint. The rule is that compliance with the rule after the filing of
the complaint, or the dismissal of a complaint based on its non-
compliance with the rule, is impermissible. However, in exceptional
circumstances, the court may allow subsequent compliance with the
rule.12 If the authority of a party’s counsel to execute a certificate of
non-forum shopping is disputed by the adverse party, the former is
required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the
authority of Atty. Aguinaldo to execute the requisite verification and
the respondent. It was, thus, incumbent upon the respondent, as the
plaintiff, to allege and establish that Atty. Aguinaldo had such authority
to execute the requisite verification and certification for and in its
behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was
incorporated in the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address
at Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts.,
Ermita, Manila, after having sworn to in accordance with law
hereby deposes and say: THAT -
20
 1. I am the Resident Agent and Legal Counsel of the plaintiff in
the above entitled case and have caused the preparation of
the above complaint;
2. I have read the complaint and that all the allegations
contained therein are true and correct based on the records on
files;
3. I hereby further certify that I have not commenced any other
action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or different divisions thereof, or
any other tribunal or agency. If I subsequently learned that a
similar action or proceeding has been filed or is pending
before the Supreme Court, the Court of Appeals, or different
divisions thereof, or any tribunal or agency, I will notify the
court, tribunal or agency within five (5) days from such
notice/knowledge.
(Sgd.)
MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30 th day of
August, 1999, affiant exhibiting to me his Community Tax
Certificate No. 00671047 issued on January 7, 1999 at Manila,
Philippines.
Doc. No. 1005; (Sgd.)
Page No. 198;
Book No. XXI ATTY. HENRY D. ADASA
Series of 1999. Notary Public
Until December 31, 2000
PTR No. 320501 Mla. 1/4/9913 execute a certificate of non-forum shopping as required by Section 5,
As gleaned from the aforequoted certification, there was no allegation
that Atty. Aguinaldo had been authorized to execute the certificate of
non-forum shopping by the respondent’s Board of Directors;
moreover, no such board resolution was appended thereto or
incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the
Philippines, this does not mean that he is authorized to execute the
requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in
the Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all actions and
other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. – A resident agent
may either be an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he
must be of good moral character and of sound financial
standing.
SEC. 128. Resident agent; service of process. – The
Securities and Exchange Commission shall require as a
condition precedent to the issuance of the license to transact
business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange
Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom
any summons and other legal processes may be served in all
actions or other legal proceedings against such corporation,
and consenting that service upon such resident agent shall be
admitted and held as valid as if served upon the duly-
authorized officers of the foreign corporation as its home
office.14
Under the law, Atty. Aguinaldo was not specifically authorized to
Rule 7 of the Rules of Court. This is because while a resident agent
may be aware of actions filed against his principal (a foreign
corporation doing business in the Philippines), such resident may not
be aware of actions initiated by its principal, whether in the Philippines
21
against a domestic corporation or private individual, or in the country
where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident
agent, was not specifically authorized to execute the said certification.
It attempted to show its compliance with the rule subsequent to the
filing of its complaint by submitting, on March 6, 2000, a resolution
purporting to have been approved by its Board of Directors during a
teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo
and Suk Kyoo Kim in attendance. However, such attempt of the
respondent casts veritable doubt not only on its claim that such a
teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because
of the onset of modern technology, persons in one location may
confer with other persons in other places, and, based on the said
premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo had a
teleconference with the respondent’s Board of Directors in South
Korea on June 25, 1999. The CA, likewise, gave credence to the
respondent’s claim that such a teleconference took place, as
contained in the affidavit of Suk Kyoo Kim, as well as Atty.
Aguinaldo’s certification.
Generally speaking, matters of judicial notice have three material
requisites: (1) the matter must be one of common and general
knowledge; (2) it must be well and authoritatively settled and not
doubtful or uncertain; and (3) it must be known to be within the limits
of the jurisdiction of the court. The principal guide in determining what
facts may be assumed to be judicially known is that of notoriety.
Hence, it can be said that judicial notice is limited to facts evidenced
by public records and facts of general notoriety. [15] Moreover, a
judicially noticed fact must be one not subject to a reasonable dispute
in that it is either: (1) generally known within the territorial jurisdiction
of the trial court; or (2) capable of accurate and ready determination
by resorting to sources whose accuracy cannot reasonably be
questionable.16
Things of "common knowledge," of which courts take judicial matters
coming to the knowledge of men generally in the course of the
ordinary experiences of life, or they may be matters which are
generally accepted by mankind as true and are capable of ready and
unquestioned demonstration. Thus, facts which are universally known,
and which may be found in encyclopedias, dictionaries or other
publications, are judicially noticed, provided, they are of such
universal notoriety and so generally understood that they may be
regarded as forming part of the common knowledge of every person.
As the common knowledge of man ranges far and wide, a wide variety
of particular facts have been judicially noticed as being matters of
common knowledge. But a court cannot take judicial notice of any fact
which, in part, is dependent on the existence or non-existence of a
fact of which the court has no constructive knowledge.17
In this age of modern technology, the courts may take judicial notice
that business transactions may be made by individuals through
teleconferencing. Teleconferencing is interactive group
communication (three or more people in two or more locations)
through an electronic medium. In general terms, teleconferencing can
bring people together under one roof even though they are separated
by hundreds of miles.18 This type of group communication may be
used in a number of ways, and have three basic types: (1) video
conferencing - television-like communication augmented with sound;
(2) computer conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal communication via the
telephone with optional capacity for telewriting or telecopying. 19
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960’s with American
Telephone and Telegraph’s Picturephone. At that time, however, no
demand existed for the new technology. Travel costs were reasonable
and consumers were unwilling to pay the monthly service charge for
using the picturephone, which was regarded as more of a novelty than
as an actual means for everyday communication. 20 In time, people
found it advantageous to hold teleconferencing in the course of
business and corporate governance, because of the money saved,
among other advantages include:
22
 1. People (including outside guest speakers) who wouldn’t
normally attend a distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease
and little expense.
3. Socializing is minimal compared to an FTF meeting;
therefore, meetings are shorter and more oriented to the
primary purpose of the meeting.
4. Some routine meetings are more effective since one can
audio-conference from any location equipped with a
telephone.
5. Communication between the home office and field staffs is
maximized.
6. Severe climate and/or unreliable transportation may
necessitate teleconferencing.
7. Participants are generally better prepared than for FTF
meetings.
8. It is particularly satisfactory for simple problem-solving,
information exchange, and procedural tasks.
9. Group members participate more equally in well-moderated
teleconferences than an FTF meeting.21
On the other hand, other private corporations opt not to hold
teleconferences because of the following disadvantages:
1. Technical failures with equipment, including connections
that aren’t made.
2. Unsatisfactory for complex interpersonal communication,
such as negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group
rapport.
4. Lack of participant familiarity with the equipment, the
medium itself, and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order;
frequently one person monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible. 22
Indeed, teleconferencing can only facilitate the linking of people; it
does not alter the complexity of group communication. Although it
may be easier to communicate via teleconferencing, it may also be
easier to miscommunicate. Teleconferencing cannot satisfy the
individual needs of every type of meeting.23
In the Philippines, teleconferencing and videoconferencing of
members of board of directors of private corporations is a reality, in
light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with related to such
conferences.24 Thus, the Court agrees with the RTC that persons in
the Philippines may have a teleconference with a group of persons in
South Korea relating to business transactions or corporate
governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondent’s Board of
Directors, the Court is not convinced that one was conducted; even if
there had been one, the Court is not inclined to believe that a board
resolution was duly passed specifically authorizing Atty. Aguinaldo to
file the complaint and execute the required certification against forum
shopping.
23
The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo,
its resident agent, was duly authorized to sue in its behalf. The
respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification
card25 of Atty. Aguinaldo which the respondent appended to its
pleading merely showed that he is the company lawyer of the
respondent’s Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of
the teleconference only during the hearing of January 28, 2000; Atty.
Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to file
the complaint and execute the required certification against forum
shopping. The court granted the motion. 26 The respondent, however,
failed to comply, and instead prayed for 15 more days to submit the
said resolution, contending that it was with its main office in Korea.
The court granted the motion per its Order27 dated February 11, 2000.
The respondent again prayed for an extension within which to submit
the said resolution, until March 6, 2000.28 It was on the said date that
the respondent submitted an affidavit of its general manager Suk
Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the
said teleconference on June 25, 1999, where the Board of Directors
supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A.
Aguinaldo & Associates or any of its lawyers are hereby
appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of
Expert Travel & Tours. They are hereby specifically authorized
to prosecute, litigate, defend, sign and execute any document
or paper necessary to the filing and prosecution of said claim
in Court, attend the Pre-trial Proceedings and enter into a
compromise agreement relative to the above-mentioned
claim.29
But then, in the same affidavit, Suk Kyoo Kim declared that the
respondent "do[es] not keep a written copy of the aforesaid
Resolution" because no records of board resolutions approved during
teleconferences were kept. This belied the respondent’s earlier
allegation in its February 10, 2000 motion for extension of time to
submit the questioned resolution that it was in the custody of its main
office in Korea. The respondent gave the trial court the impression
that it needed time to secure a copy of the resolution kept in Korea,
only to allege later (via the affidavit of Suk Kyoo Kim) that it had no
such written copy. Moreover, Suk Kyoo Kim stated in his affidavit that
the resolution was embodied in the Secretary’s/Resident Agent’s
Certificate signed by Atty. Aguinaldo. However, no such resolution
was appended to the said certificate.
The respondent’s allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution
(with Atty. Aguinaldo in attendance) is incredible, given the additional
fact that no such allegation was made in the complaint. If the
resolution had indeed been approved on June 25, 1999, long before
the complaint was filed, the respondent should have incorporated it in
its complaint, or at least appended a copy thereof. The respondent
failed to do so. It was only on January 28, 2000 that the respondent
claimed, for the first time, that there was such a meeting of the Board
of Directors held on June 25, 1999; it even represented to the Court
that a copy of its resolution was with its main office in Korea, only to
allege later that no written copy existed. It was only on March 6, 2000
that the respondent alleged, for the first time, that the meeting of the
Board of Directors where the resolution was approved was
held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty.
Aguinaldo had signed a Secretary’s/Resident Agent’s Certificate
alleging that the board of directors held a teleconference on June 25,
1999. No such certificate was appended to the complaint, which was
filed on September 6, 1999. More importantly, the respondent did not
explain why the said certificate was signed by Atty. Aguinaldo as early
as January 9, 1999, and yet was notarized one year later (on January
10, 2000); it also did not explain its failure to append the said
certificate to the complaint, as well as to its Compliance dated March
6, 2000. It was only on January 26, 2001 when the respondent filed its
comment in the CA that it submitted the Secretary’s/Resident Agent’s
Certificate30 dated January 10, 2000.
24
The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the
resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its
complaint against the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The

Decision of the Court of Appeals in CA-G.R. SP No. 61000 is
REVERSED and SET ASIDE. The Regional Trial Court of Manila is
hereby ORDERED to dismiss, without prejudice, the complaint of the
respondent.

SO ORDERED.

Puno, Acting C.J., (Chairman), Austria-Martinez, and Chico-Nazario,

JJ., concur.
Tinga, J., out of the country.

25
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 161886 March 16, 2007
FILIPINAS PORT SERVICES, INC., represented by stockholders,
ELIODORO C. CRUZ and MINDANAO TERMINAL AND
BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C.
TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS SYBICO,
MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME,
ERNESTO S. JAYME, and ELIEZER B. DE JESUS, Respondents.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on
certiorari is the Decision1 dated 19 January 2004 of the Court of
Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision
of the Regional Trial Court (RTC) of Davao City and accordingly
dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz
for and in behalf of the stockholders of co-petitioner Filipinas Port
Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a
domestic corporation engaged in stevedoring services with principal
office in Davao City. It was initially instituted with the Securities and
Exchange Commission (SEC) where the case hibernated and
remained unresolved for several years until it was overtaken by the
enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799,
otherwise known as the Securities Regulation Code. From the SEC
and consistent with R.A. No. 8799, the case was transferred to the
RTC of Manila, Branch 14, sitting as a corporate court. Subsequently,
upon respondents’ motion, the case eventually landed at the RTC of
Davao City where it was docketed as Civil Case No. 28,552-2001.
RTC-Davao City, Branch 10, ruled in favor of the petitioners
prompting respondents to go to the CA in CA-G.R. CV No. 73827.
This time, the respondents prevailed, hence, this petition for review by
the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president
from 1968 until he lost his bid for reelection as Filport’s president
during the general stockholders’ meeting in 1991, wrote a letter 2 to the
corporation’s Board of Directors questioning the board’s creation of
the following positions with a monthly remuneration of ₱13,050.00
each, and the election thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C.
Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus
(Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary
action/actions to recover from those elected to the aforementioned
positions the salaries they have received.
On 15 September 1992, the board met and took up Cruz’s letter. The
records do not show what specific action/actions the board had taken
on the letter. Evidently, whatever action/actions the board took did not
sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal
and Brokerage Services, Inc. (Minterbro), filed with the SEC a
petition3 which he describes as a derivative suit against the herein
respondents who were then the incumbent members of Filport’s
Board of Directors, for alleged acts of mismanagement detrimental to
the interest of the corporation and its shareholders at large, namely:
26
 1. creation of an executive committee in 1991 composed of
seven (7) members of the board with compensation of
₱500.00 for each member per meeting, an office which, to
Cruz, is not provided for in the by-laws of the corporation and
whose function merely duplicates those of the President and
General Manager;
2. increase in the emoluments of the Chairman, Vice-
President, Treasurer and Assistant General Manager which
increases are greatly disproportionate to the volume and
character of the work of the directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents
(AVPs) for Corporate Planning, Operations, Finance and
Administration, and the election thereto of board members
Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and
Henry Chua, respectively; and
4. creation of the additional positions of Special Assistants to
the President and the Board Chairman, with Fortunato V. de
Castro and Arsenio Lopez Chua elected to the same, the
directors elected/appointed thereto not doing any work to
deserve the monthly remuneration of ₱13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz
alleged that despite demands made upon the respondent members of
the board of directors to desist from creating the positions in question
and to account for the amounts incurred in creating the same, the
demands were unheeded. Cruz thus prayed that the respondent
members of the board of directors be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages
incurred as a result of the creation of the offices/positions complained
of and the aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim, 4 the respondents denied
the allegations of mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per
diems for the attendance of each member are allowed under
the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman,
Vice-President, Treasurer and Assistant General Manager
were well within the financial capacity of the corporation and
well-deserved by the officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations,
Finance and Administration were already in existence during
the tenure of Cruz as president of the corporation, and were
merely recreated by the Board, adding that all those appointed
to said positions of Assistant Vice Presidents, as well as the
additional position of Special Assistants to the Chairman and
the President, rendered services to deserve their
compensation.
In the same Answer, respondents further averred that Cruz and his
co-petitioner Minterbro, while admittedly stockholders of Filport, have
no authority nor standing to bring the so-called "derivative suit" for and
in behalf of the corporation; that respondent Mary Jean D. Co has
already ceased to be a corporate director and so with Fortunato V. de
Castro, one of those holding an assailed position; and that no demand
to cease and desist from further committing the acts complained of
was made upon the board. By way of affirmative defenses,
respondents asserted that (1) the petition is not duly verified by
petitioner Filport which is the real party-in-interest; (2) Filport, as
represented by Cruz and Minterbro, failed to exhaust remedies for
redress within the corporation before bringing the suit; and (3) the
petition does not show that the stockholders bringing the suit are
joined as nominal parties. In support of their counterclaim,
respondents averred that Cruz filed the alleged derivative suit in bad
faith and purely for harassment purposes on account of his non-
reelection to the board in the 1991 general stockholders’ meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491)
hibernated with the SEC for a long period of time. With the enactment
of R.A. No. 8799, the case was first turned over to the RTC of Manila,
Branch 14, sitting as a corporate court. Thereafter, on respondents’
27
motion, it was eventually transferred to the RTC of Davao City
whereat it was docketed as Civil Case No. 28,552-2001 and raffled to
Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision 5 in the
case. Even as it found that (1) Filport’s Board of Directors has the
power to create positions not provided for in the by-laws of the
corporation since the board is the governing body; and (2) the
increases in the salaries of the board chairman, vice-president,
treasurer and assistant general manager are reasonable, the trial
court nonetheless rendered judgment against the respondents by
ordering the directors holding the positions of Assistant Vice President
for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman to refund to the corporation the
salaries they have received as such officers "considering that Filipinas
Port Services is not a big corporation requiring multiple executive
positions" and that said positions "were just created for
accommodation." We quote the fallo of the trial court’s decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to
restore to the corporation the total amount of salaries he received as
assistant vice president for corporate planning; and likewise ordering
Fortunato V. de Castro and Arsenio Lopez Chua under the fourth
cause of action to restore to the corporation the salaries they each
received as special assistants respectively to the president and board
chairman. In case of insolvency of any or all of them, the members of
the board who created their positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went
on appeal to the CA in CA-G.R. CV No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the
findings of the trial court that the creation of the positions of Assistant
Vice President for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman was merely
for accommodation purposes, granted the respondents’ appeal,
reversed and set aside the appealed decision of the trial court and
accordingly dismissed the so-called derivative suit filed by Cruz, et al.,
thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal
is GRANTED, the challenged decision is REVERSED and SET
ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-
2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision,
the CA, before proceeding to address the merits of the appeal,
prefaced its disposition with the statement reading "[T]he appeal is
bereft of merit,"7 thereby contradicting the very fallo of its own decision
and the discussions made in the body thereof, respondents filed with
the appellate court a Motion For Nunc Pro Tunc Order, 8 thereunder
praying that the phrase "[T]he appeal is bereft of merit," be corrected
to read "[T]he appeal is impressed with merit." In its resolution 9 of 23
April 2004, the CA granted the respondents’ motion and accordingly
effected the desired correction.
Hence, petitioners’ present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA.
For clarity, we shall formulate the issues as follows:
1. Whether the CA erred in holding that Filport’s Board of
Directors acted within its powers in creating the executive
committee and the positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and those of the
Special Assistants to the President and the Board Chairman,
each with corresponding remuneration, and in increasing the
salaries of the positions of Board Chairman, Vice-President,
Treasurer and Assistant General Manager; and
2. Whether the CA erred in finding that no evidence exists to
prove that (a) the positions of AVP for Corporate Planning,
28
 Special Assistant to the President and Special Assistant to the
Board Chairman were created merely for accommodation, and
(b) the salaries/emoluments corresponding to said positions
were actually paid to and received by the directors appointed
thereto.
For their part, respondents, aside from questioning the propriety of the
instant petition as the same allegedly raises only questions of fact and
not of law, also put in issue the purported derivative nature of the
main suit initiated by petitioner Eliodoro C. Cruz allegedly in
representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of
the Rules of Court, only questions of law may be raised and passed
upon by the Court. Factual findings of the CA are binding and
conclusive and will not be reviewed or disturbed on appeal. 10 Of
course, the rule is not cast in stone; it admits of certain exceptions,
such as when the findings of fact of the appellate court are at variance
with those of the trial court,11 as here. For this reason, and for a
proper and complete resolution of the case, we shall delve into the
records and reexamine the same.
The governing body of a corporation is its board of directors. Section
23 of the Corporation Code 12 explicitly provides that unless otherwise
provided therein, the corporate powers of all corporations formed
under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within
the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the board of
directors is restricted to the management of the regular business
affairs of the corporation, unless more extensive power is expressly
conferred.
The raison d’etre behind the conferment of corporate powers on the
board of directors is not lost on the Court. Indeed, the concentration in
the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to conduct
its business directly. And so the plan of corporate organization is for
the stockholders to choose the directors who shall control and
supervise the conduct of corporate business. 13
In the present case, the board’s creation of the positions of Assistant
Vice Presidents for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President
and the Board Chairman, was in accordance with the regular business
operations of Filport as it is authorized to do so by the corporation’s
by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section
25 of the Code which reads:
Sec. 25. Corporate officers, quorum. – Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may
or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided
for in the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be
elected by the board of directors at their first meeting after the election
of Directors. xxx
The officers of the corporation shall be a Chairman of the Board,
President, a Vice-President, a Secretary, a Treasurer, a General
Manager and such other officers as the Board of Directors may from
time to time provide, and these officers shall be elected to hold office
until their successors are elected and qualified. (Emphasis supplied.)
29
Likewise, the fixing of the corresponding remuneration for the
positions in question is provided for in the same by-laws of the
corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers
and agents of the corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the
creation by its board of directors of an executive committee. Under
Section 3515 of the Corporation Code, the creation of an executive
committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we
cannot rule that the creation of the executive committee by the board
of directors is illegal or unlawful. One reason is the absence of a
showing as to the true nature and functions of said executive
committee considering that the "executive committee," referred to in
Section 35 of the Corporation Code which is as powerful as the board
of directors and in effect acting for the board itself, should be
distinguished from other committees which are within the competency
of the board to create at anytime and whose actions require
ratification and confirmation by the board. 16 Another reason is that,
ratiocinated by both the two (2) courts below, the Board of Directors
has the power to create positions not provided for in Filport’s bylaws
since the board is the corporation’s governing body, clearly upholding
the power of its board to exercise its prerogatives in managing the
business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and
admitted by petitioner Cruz himself, it was during his incumbency as
Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation of
the positions of the AVPs for Operations, Finance and Administration.
By his acquiescence and/or ratification of the creation of the aforesaid
offices, Cruz is virtually precluded from suing to declare such acts of
the board as invalid or illegal. And it makes no difference that he sues
in behalf of himself and of the other stockholders. Indeed, as his voice
was not heard in protest when he was still Filport’s president, raising a
hue and cry only now leads to the inevitable conclusion that he did so
out of spite and resentment for his non-reelection as president of the
corporation.
With regard to the increased emoluments of the Board Chairman,
Vice-President, Treasurer and Assistant General Manager which are
supposedly disproportionate to the volume and nature of their work,
the Court, after a judicious scrutiny of the increase vis-à-vis the value
of the services rendered to the corporation by the officers concerned,
agrees with the findings of both the trial and appellate courts as to the
reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their
evidence as to the alleged acts of mismanagement by the then
incumbent board. A perusal of the records, however, reveals that
petitioners merely relied on the testimony of Cruz in support of their
bold claim of mismanagement. To the mind of the Court, Cruz’
testimony on the matter of mismanagement is bereft of any
foundation. As it were, his testimony consists merely of insinuations of
alleged wrongdoings on the part of the board. Without more,
petitioners’ posture of mismanagement must fall and with it goes their
prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was
mismanagement resulting to corporate damages and/or business
losses, still the respondents may not be held liable in the absence, as
here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not
liable.17 For them to be held accountable, the mismanagement and
the resulting losses on account thereof are not the only matters to be
proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts.
Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty through some motive or
interest or ill-will partaking of the nature of fraud. 18 We have searched
the records and nowhere do we find a "dishonest purpose" or "some
moral obliquity," or "conscious doing of a wrong" on the part of the
respondents that "partakes of the nature of fraud."
30
We thus extend concurrence to the following findings of the CA,
affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as
president and director, that the executive committee was created.
What is more, it was appellee himself who moved for the creation of
the positions of assistant vice presidents for operations, for finance,
and for administration. He should not be heard to complain thereafter
for similar corporate acts.
The increase in the salaries of the board chairman, president,
treasurer, and assistant general manager are indeed reasonable
enough in view of the responsibilities assigned to them, and the
special knowledge required, to be able to effectively discharge their
respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the
CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial
court parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of
the positions of the three (3) AVPs for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board
Chairman, each with a salary of ₱13,050.00 a month, was merely for
accommodation purposes considering that Filport is not a big
corporation requiring multiple executive positions. Hence, the trial
court’s order for said officers to return the amounts they received as
compensation.
On the other hand, the CA took issue with the trial court and ruled that
Cruz’s accommodation theory is not based on facts and without any
evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from
Cruz’s bare and self-serving testimony, no other evidence was
presented to show the fact of "accommodation." By itself, the
testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation of the
aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not
constitute evidence adequate to support a conclusion. It is basic in the
rule of evidence that he who alleges a fact bears the burden of
proving it by the quantum of proof required. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under the
Rules of Court.19 The party having the burden of proof must establish
his case by a preponderance of evidence. 20
Besides, the determination of the necessity for additional offices
and/or positions in a corporation is a management prerogative which
courts are not wont to review in the absence of any proof that such
prerogative was exercised in bad faith or with malice.1awphi1.nét
Indeed, it would be an improper judicial intrusion into the internal
affairs of Filport were the Court to determine the propriety or
impropriety of the creation of offices therein and the grant of salary
increases to officers thereof. Such are corporate and/or business
decisions which only the corporation’s Board of Directors can
determine.
So it is that in Philippine Stock Exchange, Inc. v. CA, 21 the Court
unequivocally held:
Questions of policy or of management are left solely to the honest
decision of the board as the business manager of the corporation, and
the court is without authority to substitute its judgment for that of the
board, and as long as it acts in good faith and in the exercise of
honest judgment in the interest of the corporation, its orders are not
reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that
the CA went beyond the issues raised in the court of origin when it
ruled on the absence of receipt of actual payment of the
salaries/emoluments pertaining to the positions of Assistant Vice-
President for Corporate Planning, Special Assistant to the Board
Chairman and Special Assistant to the President. Petitioners insist
31
that the issue of nonpayment was never raised by the respondents
before the trial court, as in fact, the latter allegedly admitted the same
in their Answer With Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors
appointed to the assailed positions are not doing anything to deserve
their compensation, petitioners are saddled with the burden of proving
that salaries were actually paid. Since the trial court, in effect, found
that the petitioners successfully proved payment of the salaries when
it directed the reimbursements of the same, respondents necessarily
have to raise the issue on appeal. And the CA rightly resolved the
issue when it found that no evidence of actual payment of the salaries
in question was actually adduced. Respondents’ alleged admission of
the fact of payment cannot be inferred from a reading of the pertinent
portions of the parties’ respective initiatory pleadings. Respondents’
allegations in their Answer With Counterclaim that the officers
corresponding to the positions created "performed the work called for
in their positions" or "deserve their compensation," cannot be
interpreted to mean that they were "actually paid" such compensation.
Directly put, the averment that "one deserves one’s compensation"
does not necessarily carry the implication that "such compensation
was actually remitted or received." And because payment was not
duly proven, there is no evidentiary or factual basis for the trial court
to direct respondents to make reimbursements thereof to the
corporation.
This brings us to the respondents’ claim that the case filed by the
petitioners before the SEC, which eventually landed in RTC-Davao
City as Civil Case No. 28,552-2001, is not a derivative suit, as
maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured party,
its power to sue is lodged with its board of directors or trustees. But
an individual stockholder may be permitted to institute a derivative suit
in behalf of the corporation in order to protect or vindicate corporate
rights whenever the officials of the corporation refuse to sue, or when
a demand upon them to file the necessary action would be futile
because they are the ones to be sued, or because they hold control of
the corporation.22 In such actions, the corporation is the real party-in-
interest while the suing stockholder, in behalf of the corporation, is
only a nominal party.23
Here, the action below is principally for damages resulting from
alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of mismanagement are
detrimental to the interests of Filport. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be
by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like petitioner
Cruz, may validly institute a "derivative suit" to vindicate the alleged
corporate injury, in which case Cruz is only a nominal party while
Filport is the real party-in-interest. For sure, in the prayer portion of
petitioners’ petition before the SEC, the reliefs prayed were asked to
be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a
stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder as of the
time of the act or transaction complained of, the number of his
shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has
made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the
suit.24
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he
sought without success to have its board of directors remedy what he
perceived as wrong when he wrote a letter requesting the board to do
the necessary action in his complaint; and (3) the alleged wrong was
32
in truth a wrong against the stockholders of the corporation generally, CERTIFICATION
and not against Cruz or Minterbro, in particular. In the end, it is Filport,
not Cruz which directly stands to benefit from the suit. And while it is Pursuant to Section 13, Article VIII of the Constitution, I certify that the
true that the complaining stockholder must show to the satisfaction of conclusions in the above decision had been reached in consultation
the court that he has exhausted all the means within his reach to before the case was assigned to the writer of the opinion of the
attain within the corporation itself the redress for his grievances, or Court’s Division.
actions in conformity to his wishes, nonetheless, where the
corporation is under the complete control of the principal defendants, REYNATO S. PUNO
as here, there is no necessity of making a demand upon the directors. Chief Justice
The reason is obvious: a demand upon the board to institute an action
and prosecute the same effectively would have been useless and an
exercise in futility. In fine, we rule and so hold that the petition filed
with the SEC at the instance of Cruz, which ultimately found its way to
the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative
suit of which Cruz has the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of

the CA is AFFIRMED in all respects.

No pronouncement as to costs.

SO ORDERED.

CANCIO C. GARCIA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-
RENATO C. CORONA
GUTIERREZ
Asscociate Justice
Associate Justice

ADOLFO S. AZCUNA
Associate Justice

33
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 108905 October 23, 1997
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs.
THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION,
INC., ALEJANDRO G. BELTRAN, and ERNESTO L.
GO, respondents.
MENDOZA, J.:
The question for decision in this case is the right of petitioner's
representative to sit in the board of directors of respondent Grace
Village Association, Inc. as a permanent member thereof. For fifteen
years — from 1975 until 1989 — petitioner's representative had been
recognized as a "permanent director" of the association. But on
February 13, 1990, petitioner received notice from the association's
committee on election that the latter was "reexamining" (actually,
reconsidering) the right of petitioner's representative to continue as an
unelected member of the board. As the board denied petitioner's
request to be allowed representation without election, petitioner
brought an action for mandamus in the Home Insurance and Guaranty
Corporation. Its action was dismissed by the hearing officer whose
decision was subsequently affirmed by the appeals board. Petitioner
appealed to the Court of Appeals, which in turn upheld the decision of
the HIGC's appeals board. Hence this petition for review based on the
following contentions:
1. The Petitioner herein has already acquired a vested
right to a permanent seat in the Board of Directors of
Grace Village Association;
2. The amended By-laws of the Association drafted and
promulgated by a Committee on December 20, 1975 is
valid and binding; and
3. The Practice of tolerating the automatic inclusion of
petitioner as a permanent member of the Board of
Directors of the Association without the benefit of
election is allowed under the law.1
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution
offering preparatory, kindergarten and secondary courses at the
Grace Village in Quezon City. Private respondent Grace Village
Association, Inc., on the other hand, is an organization of lot and/or
building owners, lessees and residents at Grace Village, while private
respondents Alejandro G. Beltran and Ernesto L. Go were its
president and chairman of the committee on election, respectively, in
1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article
IV, as follows:
The annual meeting of the members of the Association
shall be held on the first Sunday of January in each
calendar year at the principal office of the Association
at 2:00 P.M. where they shall elect by plurality vote and
by secret balloting, the Board of Directors, composed
of eleven (11) members to serve for one (1) year until
their successors are duly elected and have qualified. 2
It appears, that on December 20, 1975, a committee of the board of
directors prepared a draft of an amendment to the by-laws, reading as
follows:3
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association
shall be held on the second Thursday of January of
each year. Each Charter or Associate Member of the
Association is entitled to vote. He shall be entitled to as
many votes as he has acquired thru his monthly
34
 membership fees only computed on a ratio of TEN
(P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the
Directors of the Association. The candidates receiving
the first fourteen (14) highest number of votes shall be
declared and proclaimed elected until their successors
are elected and qualified. GRACE CHRISTIAN HIGH
SCHOOL representative is a permanent Director of the
ASSOCIATION.
This draft was never presented to the general membership for
approval. Nevertheless, from 1975, after it was presumably submitted
to the board, up to 1990, petitioner was given a permanent seat in the
board of directors of the association. On February 13, 1990, the
association's committee on election in a letter informed James Tan,
principal of the school, that "it was the sentiment that all directors
should be elected by members of the association" because "to make a
person or entity a permanent Director would deprive the right of voters
to vote for fifteen (15) members of the Board," and "it is undemocratic
for a person or entity to hold office in perpetuity." 4 For this reason,
Tan was told that "the proposal to make the Grace Christian High
School representative as a permanent director of the association,
although previously tolerated in the past elections should be
reexamined." Following this advice, notices were sent to the members
of the association that the provision on election of directors of the
1968 by-laws of the association would be observed.
Petitioner requested the chairman of the election committee to change
the notice of election by following the procedure in previous elections,
claiming that the notice issued for the 1990 elections ran "counter to
the practice in previous years" and was "in violation of the by-laws (of
1975)" and "unlawfully deprive[d] Grace Christian High School of its
vested right [to] a permanent seat in the board." 5
As the association denied its request, the school brought suit
for mandamus in the Home Insurance and Guaranty Corporation to
compel the board of directors of the association to recognize its right
to a permanent seat in the board. Petitioner based its claim on the
following portion of the proposed amendment which, it contended, had
become part of the by-laws of the association as Article VI, paragraph
2, thereof:
The Charter and Associate Members shall elect the
Directors of the Association. The candidates receiving
the first fourteen (14) highest number of votes shall be
declared and proclaimed elected until their successors
are elected and qualified. GRACE CHRISTIAN HIGH
SCHOOL representative is a permanent Director of the
ASSOCIATION.
It appears that the opinion of the Securities and Exchange
Commission on the validity of this provision was sought by the
association and that in reply to the query, the SEC rendered an
opinion to the effect that the practice of allowing unelected members
in the board was contrary to the existing by-laws of the association
and to §92 of the Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer.
Additionally, the association contended that the basis of the petition
for mandamus was merely "a proposed by-laws which has not yet
been approved by competent authority nor registered with the SEC or
HIGC." It argued that "the by-laws which was registered with the SEC
on January 16, 1969 should be the prevailing by-laws of the
association and not the proposed amended by-laws."6
In reply, petitioner maintained that the "amended by-laws is valid and
binding" and that the association was estopped from questioning the
by-laws. 7
A preliminary conference was held on March 29, 1990 but nothing
substantial was agreed upon. The parties merely agreed that the
board of directors of the association should meet on April 17, 1990
and April 24, 1990 for the purpose of discussing the amendment of
the by-laws and a possible amicable settlement of the case. A
meeting was held on April 17, 1990, but the parties failed to reach an
agreement. Instead, the board adopted a resolution declaring the
1975 provision null and void for lack of approval by members of the
association and the 1968 by-laws to be effective.
35
On June 20, 1990, the hearing officer of the HIGC rendered a
decision dismissing petitioner's action. The hearing officer held that
the amended by-laws, upon which petitioner based its claim, "[was]
merely a proposed by-laws which, although implemented in the past,
had not yet been ratified by the members of the association nor
approved by competent authority"; that, on the contrary, in the
meeting held on April 17, 1990, the directors of the association
declared "the proposed by-law dated December 20, 1975 prepared by
the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the
association is to operate until such time that the proposed
amendments to the by-laws are approved and ratified by a majority of
the members of the association and duly filed and approved by the
pertinent government agency." The hearing officer rejected
petitioner's contention that it had acquired a vested right to a
permanent seat in the board of directors. He held that past practice in
election of directors could not give rise to a vested right and that
departure from such practice was justified because it deprived
members of association of their right to elect or to be voted in office,
not to say that "allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to
law and the registered by-laws of respondent association." 8
The appeals board of the HIGC affirmed the decision of the hearing
officer in its resolution dated September 13, 1990. It cited the opinion
of the SEC based on §92 of the Corporation Code which reads:
§92. Election and term of trustees. — Unless otherwise
provided in the articles of incorporation or the by-laws,
the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-laws, shall,
as soon as organized, so classify themselves that the
term of office of one-third (1/3) of the number shall
expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall
be held annually and trustees so elected shall have a
term of three (3) years. Trustees thereafter elected to
fill vacancies occurring before the expiration of a
particular term shall hold office only for the unexpired
period.
The HIGC appeals board denied claims that the school "[was]
being deprived of its right to be a member of the Board of
Directors of respondent association," because the fact was
that "it may nominate as many representatives to the
Association's Board as it may deem appropriate." It said that
"what is merely being upheld is the act of the incumbent
directors of the Board of correcting a long standing practice
which is not anchored upon any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost as
the appellate court on February 9, 1993, affirmed the decision of the
HIGC. The Court of Appeals held that there was no valid amendment
of the association's by-laws because of failure to comply with the
requirement of its existing by-laws, prescribing the affirmative vote of
the majority of the members of the association at a regular or special
meeting called for the adoption of amendment to the by-laws. Article
XIX of the by-laws provides: 10
The members of the Association by an affirmative vote
of the majority at any regular or special meeting called
for the purpose, may alter, amend, change or adopt
any new by-laws.
This provision of the by-laws actually implements §22 of the
Corporation Law (Act No. 1459) which provides:
§22. The owners of a majority of the subscribed capital
stock, or a majority of the members if there be no
capital stock, may, at a regular or special meeting duly
called for the purpose, amend or repeal any by-law or
adopt new by-laws. The owners of two-thirds of the
subscribed capital stock, or two-thirds of the members
if there be no capital stock, may delegate to the board
of directors the power to amend or repeal any by-law or
to adopt new by-laws: Provided, however, That any
power delegated to the board of directors to amend or
repeal any by-law or adopt new by-laws shall be
36
 considered as revoked whenever a majority of the
stockholders or of the members of the corporation shall
so vote at a regular or special meeting. And provided,
further, That the Director of the Bureau of Commerce
and Industry shall not hereafter file an amendment to
the by-laws of any bank, banking institution or building
and loan association, unless accompanied by
certificate of the Bank Commissioner to the effect that
such amendments are in accordance with law.
The proposed amendment to the by-laws was never approved by the
majority of the members of the association as required by these
provisions of the law and by-laws. But petitioner contends that the
members of the committee which prepared the proposed amendment
were duly authorized to do so and that because the members of the
association thereafter implemented the provision for fifteen years, the
proposed amendment for all intents and purposes should be
considered to have been ratified by them. Petitioner contends: 11
Considering, therefore, that the "agents" or committee
were duly authorized to draft the amended by-laws and
the acts done by the "agents" were in accordance with
such authority, the acts of the "agents" from the very
beginning were lawful and binding on the homeowners
(the principals) per se without need of any ratification or
adoption. The more has the amended by-laws become
binding on the homeowners when the homeowners
followed and implemented the provisions of the
amended by-laws. This is not merely tantamount to
tacit ratification of the acts done by duly authorized
"agents" but express approval and confirmation of what
the "agents" did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested right to a
permanent seat in the board. Says petitioner:
The right of the petitioner to an automatic membership
in the board of the Association was granted by the
members of the Association themselves and this grant
has been implemented by members of the board
themselves all through the years. Outside the present
membership of the board, not a single member of the
Association has registered any desire to remove the
right of herein petitioner to an automatic membership in
the board. If there is anybody who has the right to take
away such right of the petitioner, it would be the
individual members of the Association through a
referendum and not the present board some of the
members of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question,
giving petitioner's representative a permanent seat in the
board of the association, is contrary to law. Petitioner claims
that that is not so because there is really no provision of law
prohibiting unelected members of boards of directors of
corporations. Referring to §92 of the present Corporation
Code, petitioner says:
It is clear that the above provision of the Corporation
Code only provides for the manner of election of the
members of the board of trustees of non-stock
corporations which may be more than fifteen in number
and which manner of election is even subject to what is
provided in the articles of incorporation or by-laws of
the association thus showing that the above provisions
[are] not even mandatory.
Even a careful perusal of the above provision of the
Corporation Code would not show that it prohibits a
non-stock corporation or association from granting one
of its members a permanent seat in its board of
directors or trustees. If there is no such legal prohibition
then it is allowable provided it is so provided in the
Articles of Incorporation or in the by-laws as in the
instant case.
xxx xxx xxx
37
 If fact, the truth is that this is allowed and is being
practiced by some corporations duly organized and
existing under the laws of the Philippines.
One example is the Plus XII Catholic Center, Inc.
Under the by-laws of this corporation, that whoever is
the Archbishop of Manila is considered a member of
the board of trustees without benefit of election. And
not only that. He also automatically sits as the
Chairman of the Board of Trustees, again without need
of any election.
Another concrete example is the Cardinal Santos
Memorial Hospital, Inc. It is also provided in the by-
laws of this corporation that whoever is the Archbishop
of Manila is considered a member of the board of
trustees year after year without benefit of any election
and he also sits automatically as the Chairman of the
Board of Trustees.
It is actually §§28 and 29 of the Corporation Law — not §92 of the
present law or §29 of the former one — which require members of the
boards of directors of corporations to be elected. These provisions
read:
§28. Unless otherwise provided in this Act, the
corporate powers of all corporations formed under this
Act shall be exercised, all business conducted and all
property of such corporations controlled and held by a
board of not less than five nor more than eleven
directors to be elected from among the holders of stock
or, where there is no stock, from the members of the
corporation: Provided, however, That in corporations,
other than banks, in which the United States has or
may have a vested interest, pursuant to the powers
granted or delegated by the Trading with the Enemy
Act, as amended, and similar Acts of Congress of the
United States relating to the same subject, or by
Executive Order No. 9095 of the President of the
United States, as heretofore or hereafter amended, or
both, the directors need not be elected from among the
holders of the stock, or, where there is no stock from
the members of the corporation. (emphasis added)
§29. At the meeting for the adoption of the original by-
laws, or at such subsequent meeting as may be then
determined, directors shall be elected to hold their
offices for one year and until their successors are
elected and qualified. Thereafter the directors of the
corporation shall be elected annually by the
stockholders if it be a stock corporation or by the
members if it be a nonstock corporation, and if no
provision is made in the by-laws for the time of election
the same shall be held on the first Tuesday after the
first Monday in January. Unless otherwise provided in
the by-laws, two weeks' notice of the election of
directors must be given by publication in some
newspaper of general circulation devoted to the
publication of general news at the place where the
principal office of the corporation is established or
located, and by written notice deposited in the post-
office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to
each member, at his last known place of residence. If
there be no newspaper published at the place where
the principal office of the corporation is established or
located, a notice of the election of directors shall be
posted for a period of three weeks immediately
preceding the election in at least three public places, in
the place where the principal office of the corporation is
established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on
May 1, 1980, 12 similarly provides:
§23. The Board of Directors or Trustees. — Unless
otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be
exercised, all business conducted and all property of
such corporations controlled and held by the board of
38
 directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold
office for one (1) year and until their successors are
elected and qualified. (Emphasis added)
Nor can petitioner claim a vested right to sit in the board on the basis
of "practice." Practice, no matter how long continued, cannot give rise
to any vested right if it is contrary to law. Even less tenable is
petitioner's claim that its right is "coterminus with the existence of the
association." 14

These provisions of the former and present corporation law leave no Finally, petitioner questions the authority of the SEC to render an
room for doubt as to their meaning: the board of directors of opinion on the validity of the provision in question. It contends that
corporations must be elected from among the stockholders or jurisdiction over this case is exclusively vested in the HIGC.
members. There may be corporations in which there are unelected
members in the board but it is clear that in the examples cited by But this case was not decided by the SEC but by the HIGC. The HIGC
petitioner the unelected members sit as ex officio members, i.e., by merely cited as authority for its ruling the opinion of the SEC
virtue of and for as long as they hold a particular office. But in the chairman. The HIGC could have cited any other authority for the view
case of petitioner, there is no reason at all for its representative to be that under the law members of the board of directors of a corporation
given a seat in the board. Nor does petitioner claim a right to such must be elected and it would be none the worse for doing so.
seat by virtue of an office held. In fact it was not given such seat in the
beginning. It was only in 1975 that a proposed amendment to the by- WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
laws sought to give it one.
SO ORDERED.
Since the provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but, on the Puno and Torres, Jr., JJ., concur.
contrary, appears to have been implemented by the members of the
association cannot forestall a later challenge to its validity. Neither can
it attain validity through acquiescence because, if it is contrary to law,
it is beyond the power of the members of the association to waive its
invalidity. For that matter the members of the association may have
formally adopted the provision in question, but their action would be of
no avail because no provision of the by-laws can be adopted if it is
contrary to law. 13

It is probable that, in allowing petitioner's representative to sit on the

board, the members of the association were not aware that this was
contrary to law. It should be noted that they did not actually implement
the provision in question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not the allowance of
petitioner's representative as an unelected member of the board of
directors. It is more accurate to say that the members merely tolerated
petitioner's representative and tolerance cannot be considered
ratification.

39

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117847 October 7, 1998
PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,
vs.
COURT OF APPEALS and STEFANI SAÑO, respondents.
PANGANIBAN, J.:
Contracts entered into by a corporate president without express prior
board approval bind the corporation, when such officer's apparent
authority is estabished and when these contracts are ratified by the
corporation.
The Case
This principle is stressed by the Court in rejecting the Petition for
Review of the February 28, 1994 Decision and the October 28, 1994
Resolution of the Court of Appeals in CA-GR CV No. 30670.
In a collection case1 filed by Stefani Saño against People's Aircargo
and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay
City, Branch 110, rendered a Decision 2 dated October 26, 1990, the
dispositive portion of which reads: 3
WHEREFORE, in light of all the foregoing, Judgment is
hereby rendered, ordering [petitioner] to pay [private
respondent] the amount of sixty thousand (P60,000.00)
pesos representing payment of [private respondents]
services in preparing the manual of operations and in
the conduct of a seminar for [petitioner]. The
Counterclaim is hereby dismissed.
Aggrieved by what he considered a minuscule award of P60,000,
private respondent appealed to the Court of Appeals 4 (CA) which, in
its Decision promulgated February 28, 1994, granted his prayer for
P400,000, as follows: 5
WHEREFORE, PREMISES CONSIDERED, the
appealed judgment is hereby MODIFIED in that
[petitioner] is ordered to pay [private respondent] the
amount of four hundred thousand pesos (P400,000.00)
representing payment of [private respondent's] services
in preparing the manual of operations and in the
conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of the
above-mentioned Decision was denied in the Resolution promulgated
on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in the
middle of 1986 to operate a customs bonded warehouse at the old
Manila International Airport in Pasay City. 6
To obtain a license for the corporation from the Bureau of Customs,
Antonio Punsalan Jr., the corporation president, solicited a proposal
from private respondent for the preparation of a feasibility
study.7 Private respondent submitted a letter-proposal dated October
17, 1986 ("First Contract" hereafter) to Punsalan, which is reproduced
hereunder: 8
Dear Mr. Punsalan:
With reference to your request for professional engineering
consultancy services for your proposed MIA Warehousing Project
may we offer the following outputs and the corresponding rate and
terms of agreement:
=======================================
40
Project Feasibility Study consisting of
Market Study
Technical Study
Financial Feasibility Study
Preparation of pertinent documentation requirements for the
application
_____________________________________________
The above services will be provided for a fee of [p]esos 350,000.00
payable according to the following schedule:
=====================================================
Fifty percent (50%) upon confirmation of the agreement
Twenty-five percent (25%) 15 days after the confirmation of the
agreement
Twenty-five percent (25%) upon submission of the specified outputs
The outputs will be completed and submitted within 30 days upon
confirmation of the agreement and receipt by us of the first fifty
percent payment.
---------------------------------------------------------------------------------
Thank you.
Yours truly, CONFORME:
(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR.
(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected
to private respondent's offer, as another company priced a similar
proposal at only P15,000.9 However, Punsalan preferred private
respondent's service because of the latter's membership in the task
force, which was supervising the transition of the Bureau of Customs
from the Marcos government to the Aquino administration. 10
On October 17, 1986, pertitioner, through Punsalan, sent private
respondent a letter, confirming their agreement as follows:
Dear Mr. Saño:
With regard to the services offered by your company in your letter
dated 13 October 1986, for the preparation of the necessary study
and documentations to support our Application for Authority to
Operate a public Customs Bonded Warehouse located at the old MIA
Compound in Pasay City, please be informed that our company is
willing to hire your services and will pay the amount of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:
P100,000.00 — uppon signing of the agreement;
150,000.00 — on or before October 31, 1986, with the favorable
Recommendation of the CBW on our application.
100,000.00 — upon receipt of the study in final form.
Very truly yours,
(S)ANTONIO C. PUNSALAN
(T)ANTONIO C. PUNSALAN
41
 This is to formalize our proposal
e for consultancy services to your
company the scope of which issdefined in the attached service
description. i
d
e
The total service you have decided to avail . . . would be available
n
upon signing of the conforme below and would come [in] the
amount of FOUR HUNDRED THOUSANDt PESOS (P400,000.00)
payable at the schedule defined as follows (with the balance
CONFORME & RECEIVED from PAIRCARGO, the covered by post-dated cheques):

amount of ONE HUNDRED THOUSAND PESOS Downpayment upon signing conforme P80,000.00

(P100,000.00), this 17th day of October, 1986 15 January 1987 53,333.00

as 1st Installment payment of the service agreement 30 January 1987 53,333.00

dated October 13, 1986. 15 February 1987 53,333.00

(S)STEFANI C. SAÑO 28 February 1987 53,333.00

(T)STEFANI C. SAÑO 15 March1987 53,333.00

Accordingly, private respondent prepared a feasibility study for 30 March 1987 53,333.00
petitioner which eventually paid him the balance of the contract
price, although not according to the schedule agreed upon. 11 With is package, you are assured of the highest service quality
as our performance record shows we always deliver no less.
On December 4, 1986, upon Punsalan's request, private
respondent sent petitioner another letter-proposal ("Second Thank you very much.
Contract" hereafter), which reads:
Yours truly,
People's Air Cargo & Warehousing Co., Inc.
(S)STEFANI C. SAÑO
Old MIA Compound, Metro Manila
(T)STEFANI C. SAÑO
Attention: Mr. ANTONIO PUN[S]ALAN, JR.
Industrial Engineering Consultant
President
CONFORME:
Dear Mr. Pun[s]alan:
42
(S)ANTONIO C. PUNSALAN JR. three public bonded warehouses at the international
airport. 13 Private respondent also conducted, in the third week of
(T)PAIRCARGO CO. INC. January 1987 in the warehouse of petitioner, a three-day training
seminar for the latter's employees. 14
During the trial, the lower court observed that the Second
Contract bore, at the lower right portion of the letter, the On March 25, 1987, private respondent joined the Bureau of
following notations in pencil: Customs as special assistant to then Commissioner Alex Padilla,
a position he held until he became technical assitant to then
1. Operations Manual Commissioner Miriam Defensor-Santiago on March 7,
1988. 15 Meanwhile, Punsalan sold his shares in petitioner-
2. Seminar/workshop for your employees corporation and resigned as its president in 1987. 16

P400,000 — package deal On February 9, 1988, private respondent filed a collection suit
against petitioner. He allege that he had prepared an operations
50% upon completion of manual for petitioner, conducted a seminar-workshop for its
seminar/workshop employees and delivered to it a computer program; but that,
despite demand, petitioner refused to pay him for his services.
50% upon approval by the
Commissioner Petitioner, in its answer, denied that private respondent had
prepared an operations manual and a computer program or
conducted a seminar-workshop for its employees. It further
The Manual has already been approved by the
alleged that the letter-agreement was signed by Punsalan without
Commissioner but payment has not yet been made.
authority, "in collusion with [private respondent] in order to
unlawfully get some money from [petitioner]," and despite his
The lower left corner of the letter also contained the following knowledge that a group of employees of the company had been
notations: commissioned by the board of directors to prepare an operations
manual. 17
1st letter — 4 Dec. 1986
The trial court declared the Second Contract unenforceable or
2nd letter — 15 June simulated. However, since private respondent had actually
1987 with prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court awarded
"Hinanakit". P60,000 to the former, on the ground that no one should be
unjustly enriched at the expense of another (Article 2142, Civil
On January 10, 1987, Andy Villaceren, vice president of Code). The trial court determined the amount "in light of the
petitioner, received the operations manual prepared by private evidence presented by defendant on the usual charges made by
respondent. 12 Petitioner submitted said operations manual to the a leading consultancy firm on similar services." 18
Bureau of Customs is connection with the former's application to
operate a bonded warehouse; thereafter, in May 1987, the Bureau The Ruling of the Court of Appeals
issued to it a license to operate, enabling it to become one of the
43
To Respondent Court, the pivotal issue of private respondent's
appeal was the enforceability of the Second Contract. It noted
that petitioner did not appeal the Decision of the trial court,
implying that it had agreed to pay the P60,000 award. If the
contract was valid and enforceable, then petitioner should be
held liable for the full amount stated therein, not P60,000 as held
by the lower court.
Rejecting the finding of the trial court that the December 4, 1986
contract was simulated or unenforceable, the CA ruled in favor of
its validity and enforceability. According to the Court of Appeals,
the evidence on record shows that the president of petititoner-
corporation had entered into the First Contract, which was
similar to the Second Contract. Thus, petitioner had clothed its
president with apparent authority to enter into the disputed
agreement. As it had also become the practice of the petitioner-
corporation to allow its president to negotiate and execute
contracts necessary to secure its license as a customs bonded
warehouse without prior board approval, the board itself, by its
acts and through acquiescence, practically laid aside the normal
requirement of prior express approval. The Second Contract was
declared valid and binding on the petitioner, which was held
liable to private respondent in the full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before
us. 19
The Issues
Instead of alleging reversible errors, petitioner imputes "grave
abuse of discretion" to the Court of Appeals, viz.: 20
I. . . . [I]n ruling that the subject letter-agreement for
services was binding on the corporation simply
because it was entered into by its president[;]
II. . . . [I]n ruling that the subject letter-agreement
for services was binding on the corporation
notwithstanding the lack of any board authority
since it was the purported "practice" to allow the
president to enter into contracts of said nature
(citing one previous instance of a similar
contract)[;] and
III. . . . [I]n ruling that the subject letter-agreement
for services was a valid contract and not merely
simulated.
The Court will overlook the lapse of petitioner in alleging grave
abuse of discretion as its ground for seeking reversal of the
assailed Decision. Although the Rules of Court specify
"reversible errors" as grounds for a petition for review under
Rule 45, the Court will lay aside for the nonce this procedural
lapse and consider the allegations of "grave abuse" as
statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the
amount of such accountability. Hence, the resolution of this
petition rests on the sole issue of the enforceability and validity
of the Second Contract, more specifically: (1) whether the
president of the petitioner-corporation had apparent authority to
bind petitioner to the Second Contract; and (2) whether the said
contract was valid and not merely simulated.
The Court's Ruling
The petition is not meritorious.
First Issue:
Apparent Authority of a Corporate President
Petitioner argues that the disputed contract is unenforceable,
because Punsalan, its president, was not authorized by its board
of directors to enter into said contract.
The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly
44
bind a corporation. 21 A corporation is a juridical person,
separate and distinct from its stockholders and members,
"having . . . powers, attributes and properties expressly
authorized by law or incident to its existence." 22
Being a juridical entity, a corporation may board of directors,
which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency
of management, 23 as provided in Section 23 of the Corporation
Code of the Philippines:
Sec. 23. The Board of Directors or Trustees. —
Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees . . . .
Under this provision, the power and the responsibility to decide
whether the corporation should enter into a contract that will
bind the corporation is lodged in the board, subject to the
articles of incorporaration, bylaws, or relevant provisions of
law. 24 Howeever, just as a natural person may authorize another
to do certain acts for and on his behalf, the board of directors
may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals
to bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course
of business, viz.: 25
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that [the] authority to do so
has been conferred upon him, and this includes
powers which have been intentionally conferred,
and also such powers as, in the usual course of the
particular business, are incidental to, or may be
implied from, the powers intentionally conferred,
powers added by custom and usage, as usually
pertaining to the particular officer or agent, and
such apparent powers as the corporation has
caused persons dealing with the officer or agent to
believe that it has conferred.
Accordingly, the appellate court ruled in this case that the
authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances, wherein the power
was in fact exercised without any objection from its board or
shareholders. Petitioner had previously allowed its president to
enter into the First Contract with private respondent without a
board resolution expressly authorizing him; thus, it had clothed
its president with apparent authority to execute the subject
contract.
Petitioner rebuts, arguing that a single isolated agreement prior
to the subject contract does not constitute corporate practice,
which Webster defines as "frequent or custmary action." It
cites Board of Liquidators v. Kalaw, 26 in which the practice of
NACOCO allowing its general manager to negotiate and execute
contract in its copra trading activities for and on its behalf,
without prior board approval, was inferred from sixty contract —
not one, as in present case — previously entered into by the
corporation without such board resolution.
Petitioner's argument is not persuasive. Apparent authority is
derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to
act or, in other words, the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers.27 It
requires presentation of evidence of similar act(s) executed
either in its favor or in favor of other parties. 28 It is not the
quantity of similar acts which establishes apparent authority, but
the vesting of a corporale officer with the power to bind the
corporation.
45
In the case at bar, petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract without first
securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus
"clothing" its president with the power to bind the corporation.
The grant of apparent authority to Punsalan is evident in the
testimony of Yong — senior vice president, treasurer and major
stockholder of petitioner. Testifying on the First Contract, he
said: 29
A: Mr. [Punsalan] told me that he
prefer[s] Mr. Saño because Mr. Saño
is very influential with the Collector
of Customs[s]. Because the Collector
of Custom[s] will be the one to
approve our project study and I
objected to that, sir. And I said it [was
an exorbitant] price. And Mr.
Punsalan he is the [p]resident, so he
[gets] his way.
Q: And so did the company
eventually pay this P350,000.00 to Mr.
Saño?
A: Yes, sir.
The First Contract was consummated, implemented and
paid without a hitch.
Hence, private respondent should not be faulted for believing
that Punsalan's conformity to the contract in dispute was also
binding on petitioner. It is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to act
within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent's
authority. 30
Furthermore, private respondent prepared an operations manual
and conducted a seminar for the employees of petitioner in
accordance with their contract. Petitioner accepted the
operations manual, submitted it to the Bureau of Customs and
allowed the seminar for its employees. As a result of its
aforementioned actions, petitioner was given by the Bureau of
Customs a license to operate a bonded warehouse. Granting
arguendo then that the Second Contract was outside the usual
powers of the president, petitioner's ratification of said contract
and acceptance of benefits have made it binding, nonetheless.
The enforceability of contracts under Article 1403(2) is ratified
"by the acceptance of benefits under them" under Article 1405.
Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict rule
that said officer has no inherent power to act for the corporation
is slowly giving way to the realization that such officer has
certain limited powers in the transaction of the usual and
ordinary business of the corporation. 31 In the absence of a
charter or bylaw provision to the contrary, the president is
presumed to have the authority to act within the domain of the
general objectives of its business and within the scope of his or
her usual duties. 32
Hence, it has been held in other jurisdictions that the president
of a corporation possesses the power to enter into a contract for
the corporation, when the "conduct on the part of both the
president and the corporation [shows] that he had been in the
habit of acting in similar matters on behalf of the company and
that the company had authorized him so to act and had
recognized, approved and ratified his former and similar
actions." 33 Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the authority to
enter, on behalf of the corporation, into contracts that are within
the scope of the powers of said corporation and that do not
violate any statute or rule on public policy. 34
Second Issue:
Alleged Simulation of the First Contract
46
As an alternative position, petitioner seeks to pare down its
liabilities by limiting its exposure from P400,000 to only P60,000,
the amount awarded by the RTC. Petitioner capitalizes on the
"badges of fraud" cited by the trial court in declaring said
contract either simulated or unenforceable, viz.:
. . . The October 1986 transaction with [private
respondent] involved P350,000. The same was
embodied in a letter which bore therein not only the
conformity of [petitioner's] then President
Punsalan but also drew a letter-confirmation from
the latter for, indeed, he was clothed with authority
to enter into the contract after the same was
brought to the attention and consideration of
[petitioner]. Not only that, a [down payment] was
made. In the alleged agreement of December 4,
1986 subject of the present case, the amount is
even bigger - P400,000.00. Yet, the alleged letter-
agreement drew no letter of confirmation. And no
[down payment] and postdated checks were given.
Until the filing of the present case in February 1988,
no written demand for payment was sent to
[petitioner]. [Private respondent's] claim that he
sent one in writing, and one was sent by his
counsel who manifested that "[h]e was looking for
a copy in [his] files" fails in light of his failure to
present any such copy. These and the following
considerations, to wit:
1) Despite the fact that no [down payment] and/or
postdated checks [partial payments] (as
purportedly stipulated in the alleged contract) [was
given, private respondent] went ahead with the
services[;]
2) [There was a delay in the filing of the present
suit, more than a year after [private respondent]
allegedly completed his services or eight months
after the alleged last verbal demand for payment
made on Punsalan in June 1987;
3) Does not Punsalan's writing allegedly in June
1987 on the alleged letter-agreement of "your
employees[,]" when it should have been "our
employees", as he was then still connected with
[petitioner], indicate that the letter-agreement was
signed by Punsalan when he was no longer
connected with [petitioner] or, as claimed by
[petitioner], that Punsalan signed it without
[petitioner's] authority and must have been done
"in collusion with plaintiff in order to unlawfully get
some money from [petitioner]?
4) If, as [private respondent] claims, the letter was
returned by Punsalan after affixing thereon his
conformity, how come . . . when Punsalan allegedly
visited [private respondent] in his office at the
Bureau of Customs, in June 1987, Punsalan
"brought" (again?) the letter (with the pencil
[notation] at the left bottom portion allegedly
already written)?
5) How come . . . [private respondent] did not even
keep a copy of the alleged service contract
allegedly attached to the letter-agreement?
6) Was not the letter-agreement a mere draft, it
bearing the corrections made by Punsalan of his
name (the letter "n" is inserted before the last letter
"o" in Antonio) and of the spelling of his family
name (Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is factual
in nature, and the Court eschews factual examinanon in a
petition for review under Rule 45 of the Rules of Court. 35 This
rule, however, admits of exceptions, one of which is a conflict
between the factual findings of the lower and of the appellate
courts 36 as in the case at bar.
47
After judicious deliberation, the Court agrees with the appellate Contemporaneous and subsequent acts are also principal
court that the alleged "badges of fraud" mentioned earlier have factors in the determination of the will of the contracting
not affected in any manner the perfection thereof. First, the lack parties. 42 The circumstances outlined above do not establish
of payment (whether down, partial or full payment), even after any intention to simulate the contract in dispute. On the contrary,
completion of private respondent's obligations, imports only a the legal presumption is always on the validity of contracts. A
defect in the performance of the contract on the part of corporation, by accepting benefits of a transaction entered into
petitioner. Second, the delay in the filing of action was not fatal without authority, has ratified the agreement and is, therefore,
to private respondent's cause. Despite the lapse of one year after bound by it. 43
private respondent completed his services or eight months after
the alleged last demand for payment in June 1987, the action was WHEREFORE, the petition is hereby DENIED and the assailed
still filed within the allowable period, considering that an action Decision AFFIRMED. Costs against petitioner.
based on a written contract prescribes only after ten years from
the time the right of action accrues. 37 Third, a misspelling in the SO ORDERED.
contract does not establish vitiation of consent, cause or object
of the contract. Fourth, a confirmation letter is not an essential Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
element of a contract, neither is it necessary to perfect one. Fifth,
private respondent's failure to implead the corporate president
does not establish collusion between them. Petitioner could have
easily filed a third-party claim against Punsalan if it believed that
it had recourse against the latter. Lastly, the mere fact that the
contract price was six times the alleged going rate does not
invalidate it. 38 In short, these "badges" do not establish
simulation of said contract.

A fictitious and simulated agreement lacks consent which is

essential to a valid and enforceable contract. 39 A contract is
simulated if the parties do not intend to be bound at all
(absolutely simulated), 40 or if the parties conceal their true
agreement (relatively simulated).41 In the case at bar, petitioner
received from private respondent a letter-offer containing the
terms of the former, including a stipulation of the consideration
for the latter's services. Punsalan's conformity, as well as the
receipt and use of the operations manual, shows petitioner's
consent to or, at the very least, ratification of the contract. To
repeat, petitioner even submitted the manual to the Bureau of
Customs and allowed private respondent to conduct the seminar
for its employees. Private respondent heard no objection from
the petitioner, until he claimed payment for the services he had
rendered.

48

FIRST DIVISION
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN
CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN
NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.
LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting
stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the
existence of a quorum during members’ meetings. Dead members
shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the
Rules of Court seeks the reversal of the January 23 2 and May 7,
2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No.
68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA. Allegedly, without the proper authorization of
the other petitioners, the Verification and Certification of Non-Forum
Shopping were signed by only one of them -- Atty. Sabino Padilla Jr.
The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-
profit educational corporation with fifteen (15) regular members, who
also constitute the board of trustees. [4] During the annual members’
meeting held on April 6, 1998, there were only eleven (11) [5] living
member-trustees, as four (4) had already died. Out of the eleven,
seven (7) 6 attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over
the objection of Atty. Antonio C. Pacis, who argued that there was no
quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo,
Virginia Khoo, and Judith Tan were voted to replace the four
deceased member-trustees.
When the controversy reached the Securities and Exchange
Commission (SEC), petitioners maintained that the deceased
member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all
their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998
meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their
number as specified in the articles of incorporation, not simply the
number of living members. 8 She explained that the qualifying phrase
"entitled to vote" in Section 24 9 of the Corporation Code, which
provided the basis for determining a quorum for the election of
directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of
GCHS, insofar as it prescribed the mode of filling vacancies in the
board of trustees, must be interpreted in conjunction with Section
29 12 of the Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in toto. 13 It
found to be untenable their contention that the word "members," as
used in Section 52 14 of the Corporation Code, referred only to the
living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because
the Verification and Certification of Non-Forum Shopping had been
signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney
had been attached to show his authority to sign for the rest of the
petitioners.
Hence, this Petition. 16
Issues
49
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of
whether or not in NON-STOCK corporations, dead members should
still be counted in determination of quorum for purposed of conducting
the Annual Members’ Meeting.
"Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum primarily
on the ground that members’ rights are ‘personal and non-
transferable’ as provided in Sections 90 and 91 of the Corporation
Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989
SEC Opinion that did not even involve a non-stock corporation as
petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to
resolve this question and instead dismissed the petition for review on
a technicality – the failure to timely submit an SPA from the petitioners
authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of
the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the
Court of Appeals are not in accord with law particularly the
pronouncements of this Honorable Court in Escorpizo v. University of
Baguio (306 SCRA 497), Robern Development Corporation v.
Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below
and the merits of the case decided in petitioners’ favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the
CA erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should
still be counted in the determination of the quorum, for purposes of
conducting the annual members’ meeting.
The Court’s Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the
Verification and Certification of Non-Forum Shopping were signed by
only one, not by all, of the petitioners; further, it failed to show proof
that the signatory was authorized to sign on behalf of all of them.
Subsequently, however, petitioners submitted a Special Power of
Attorney, attesting that Atty. Padilla was authorized to file the action
on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may
be excused. 19 There appears to be no intention to circumvent the
need for proper verification and certification, which are aimed at
assuring the truthfulness and correctness of the allegations in the
Petition for Review and at discouraging forum shopping. 20 More
important, the substantial merits of petitioners’ case and the purely
legal question involved in the Petition should be considered special
circumstances 21 or compelling reasons that justify an exception to the
strict requirements of the verification and the certification of non-forum
shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the
purpose of electing directors or trustees 23 and transacting some other
business calling for or requiring the action or consent of the
shareholders or members, 24 such as the amendment of the articles of
incorporation and bylaws, sale or disposition of all or substantially all
corporate assets, consolidation and merger and the like, or any other
business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically
elect the board of directors or trustees, who are charged with the
50
management of the corporation. 25 The board, in turn, periodically
elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to
receive profits, the management and direction of the corporation are
lodged with their representatives and agents -- the board of directors
or trustees. 26 In other words, acts of management pertain to the
board; and those of ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must seek approval of the
stockholders or members. 27
Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees
who are to manage the corporate affairs. 28 The right to choose the
persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder can
have a voice in the management of corporate affairs, or in which a
member in a nonstock corporation can have a say on how the
purposes and goals of the corporation may be achieved. 29 Once the
directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the
contrary, the general rule is that every member of a nonstock
corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right
to vote. 30 Voting may be expressed personally, or through proxies
who vote in their representative capacities. 31 Generally, the right to be
present and to vote in a meeting is determined by the time in which
the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in
this Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock, as defined by
the Code thus:
"SECTION 137. Outstanding capital stock defined. – The term
‘outstanding capital stock’ as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of
corporate stocks. 33 It is settled that unissued stocks may not be voted
or considered in determining whether a quorum is present in a
stockholders’ meeting, or whether a requisite proportion of the stock
of the corporation is voted to adopt a certain measure or act. Only
stock actually issued and outstanding may be voted. 34 Under Section
6 of the Corporation Code, each share of stock is entitled to vote,
unless otherwise provided in the articles of incorporation or declared
delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent
shares that have never passed to the ownership of stockholders; or,
having so passed, have again been purchased by the
corporation. 36 These shares are not to be taken into consideration in
determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares
that have passed from the corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. – The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
51
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, that there shall always be a class or series of
shares which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6
shows that the intention of the lawmakers was to base the quorum
mentioned in Section 52 on the number of outstanding voting
stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to
membership. 39 Members vote as persons, in accordance with the law
and the bylaws of the corporation. Each member shall be entitled to
one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for
determining the quorum for stock corporations is applied by analogy
to nonstock corporations, only those who are actual members with
voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the
members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in
the articles of incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses
the phrase "majority vote of the members"; likewise Section 48 of the
Corporation Code refers to 50 percent of 94 (the number of registered
members of the association mentioned therein) plus one. The best
evidence of who are the present members of the corporation is the
"membership book"; in the case of stock corporations, it is the stock
and transfer book. 43
Section 25 of the Code specifically provides that a majority of the
directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless
the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in
the meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation, it would have expressly specified
so. Otherwise, the only logical conclusion is that the legislature did not
have that intention.
52
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is to
be reckoned as the actual number of members of the corporation, the
next question to resolve is what happens in the event of the death of
one of them.
In stock corporations, shareholders may generally transfer their
shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal title
to the stock and entitled to vote it. Until a settlement and division of
the estate is effected, the stocks of the decedent are held by the
administrator or executor. 44
On the other hand, membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead
members" are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation
or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,
among others, be terminated by the death of the member. 46 Section
91 of the Corporation Code further provides that termination
extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members
who are dropped from the membership roster in the manner and for
the cause provided for in the By-Laws of GCHS are not to be counted
in determining the requisite vote in corporate matters or the requisite
quorum for the annual members’ meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members’ meeting, conducted with
six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29
of the Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that
those remaining still constitute a quorum. The phrase "may be filled"
in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose
how vacancies in their respective boards may be filled up -- either by
the remaining directors constituting a quorum, or by the stockholders
or members in a regular or special meeting called for the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up
existing vacancies in its board of directors; that is, by a majority vote
of the remaining members of the board. 50
While a majority of the remaining corporate members were present,
however, the "election" of the four trustees cannot be legally upheld
for the obvious reason that it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the
fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up by
the remaining trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new ones.
53
Indeed, there is a well-defined distinction between a corporate act to ARTEMIO V. PANGANIBAN
be done by the board and that by the constituent members of the Chief Justice
corporation. The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in
their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members’ meeting of
GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed

Resolutions of the Court of Appeals are hereby REVERSED AND
SET ASIDE. The remaining members of the board of trustees of
Grace Christian High School (GCHS) may convene and fill up the
vacancies in the board, in accordance with this Decision. No
pronouncement as to costs in this instance.

SO ORDERED.

ARTEMIO V. PANGANIBAN

Chief Justice
Chairperson, First Division

W E C O N C U R:

CONSUELO YNARES-SANTIAGO, MA. ALICIA AUSTRIA-

MARTINEZ

Associate Justice Associate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the
Court’s Division.
54

FIRST DIVISION
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN
CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN
NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.
LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting
stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the
existence of a quorum during members’ meetings. Dead members
shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the
Rules of Court seeks the reversal of the January 23 2 and May 7,
2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No.
68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA. Allegedly, without the proper authorization of
the other petitioners, the Verification and Certification of Non-Forum
Shopping were signed by only one of them -- Atty. Sabino Padilla Jr.
The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-
profit educational corporation with fifteen (15) regular members, who
also constitute the board of trustees. [4] During the annual members’
meeting held on April 6, 1998, there were only eleven (11) [5] living
member-trustees, as four (4) had already died. Out of the eleven,
seven (7) 6 attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over
the objection of Atty. Antonio C. Pacis, who argued that there was no
quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo,
Virginia Khoo, and Judith Tan were voted to replace the four
deceased member-trustees.
When the controversy reached the Securities and Exchange
Commission (SEC), petitioners maintained that the deceased
member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all
their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998
meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their
number as specified in the articles of incorporation, not simply the
number of living members. 8 She explained that the qualifying phrase
"entitled to vote" in Section 24 9 of the Corporation Code, which
provided the basis for determining a quorum for the election of
directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of
GCHS, insofar as it prescribed the mode of filling vacancies in the
board of trustees, must be interpreted in conjunction with Section
29 12 of the Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in toto. 13 It
found to be untenable their contention that the word "members," as
used in Section 52 14 of the Corporation Code, referred only to the
living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because
the Verification and Certification of Non-Forum Shopping had been
signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney
had been attached to show his authority to sign for the rest of the
petitioners.
Hence, this Petition. 16
55
 Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of
whether or not in NON-STOCK corporations, dead members should
still be counted in determination of quorum for purposed of conducting
the Annual Members’ Meeting.
"Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum primarily
on the ground that members’ rights are ‘personal and non-
transferable’ as provided in Sections 90 and 91 of the Corporation
Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989
SEC Opinion that did not even involve a non-stock corporation as
petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to
resolve this question and instead dismissed the petition for review on
a technicality – the failure to timely submit an SPA from the petitioners
authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of
the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the
Court of Appeals are not in accord with law particularly the
pronouncements of this Honorable Court in Escorpizo v. University of
Baguio (306 SCRA 497), Robern Development Corporation v.
Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below
and the merits of the case decided in petitioners’ favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the
CA erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should
still be counted in the determination of the quorum, for purposes of
conducting the annual members’ meeting.
The Court’s Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the
Verification and Certification of Non-Forum Shopping were signed by
only one, not by all, of the petitioners; further, it failed to show proof
that the signatory was authorized to sign on behalf of all of them.
Subsequently, however, petitioners submitted a Special Power of
Attorney, attesting that Atty. Padilla was authorized to file the action
on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may
be excused. 19 There appears to be no intention to circumvent the
need for proper verification and certification, which are aimed at
assuring the truthfulness and correctness of the allegations in the
Petition for Review and at discouraging forum shopping. 20 More
important, the substantial merits of petitioners’ case and the purely
legal question involved in the Petition should be considered special
circumstances 21 or compelling reasons that justify an exception to the
strict requirements of the verification and the certification of non-forum
shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the
purpose of electing directors or trustees 23 and transacting some other
business calling for or requiring the action or consent of the
shareholders or members, 24 such as the amendment of the articles of
incorporation and bylaws, sale or disposition of all or substantially all
corporate assets, consolidation and merger and the like, or any other
business that may properly come before the meeting.
56
Under the Corporation Code, stockholders or members periodically
elect the board of directors or trustees, who are charged with the
management of the corporation. 25 The board, in turn, periodically
elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to
receive profits, the management and direction of the corporation are
lodged with their representatives and agents -- the board of directors
or trustees. 26 In other words, acts of management pertain to the
board; and those of ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must seek approval of the
stockholders or members. 27
Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees
who are to manage the corporate affairs. 28 The right to choose the
persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder can
have a voice in the management of corporate affairs, or in which a
member in a nonstock corporation can have a say on how the
purposes and goals of the corporation may be achieved. 29 Once the
directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the
contrary, the general rule is that every member of a nonstock
corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right
to vote. 30 Voting may be expressed personally, or through proxies
who vote in their representative capacities. 31 Generally, the right to be
present and to vote in a meeting is determined by the time in which
the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in
this Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock, as defined by
the Code thus:
"SECTION 137. Outstanding capital stock defined. – The term
‘outstanding capital stock’ as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of
corporate stocks. 33 It is settled that unissued stocks may not be voted
or considered in determining whether a quorum is present in a
stockholders’ meeting, or whether a requisite proportion of the stock
of the corporation is voted to adopt a certain measure or act. Only
stock actually issued and outstanding may be voted. 34 Under Section
6 of the Corporation Code, each share of stock is entitled to vote,
unless otherwise provided in the articles of incorporation or declared
delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent
shares that have never passed to the ownership of stockholders; or,
having so passed, have again been purchased by the
corporation. 36 These shares are not to be taken into consideration in
determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares
that have passed from the corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
57
"Section 6. Classification of shares. – The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, that there shall always be a class or series of
shares which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6
shows that the intention of the lawmakers was to base the quorum
mentioned in Section 52 on the number of outstanding voting
stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to
membership. 39 Members vote as persons, in accordance with the law
and the bylaws of the corporation. Each member shall be entitled to
one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for
determining the quorum for stock corporations is applied by analogy
to nonstock corporations, only those who are actual members with
voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the
members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in
the articles of incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses
the phrase "majority vote of the members"; likewise Section 48 of the
Corporation Code refers to 50 percent of 94 (the number of registered
members of the association mentioned therein) plus one. The best
evidence of who are the present members of the corporation is the
"membership book"; in the case of stock corporations, it is the stock
and transfer book. 43
Section 25 of the Code specifically provides that a majority of the
directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless
the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in
the meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation, it would have expressly specified
58
so. Otherwise, the only logical conclusion is that the legislature did not
have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is to
be reckoned as the actual number of members of the corporation, the
next question to resolve is what happens in the event of the death of
one of them.
In stock corporations, shareholders may generally transfer their
shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal title
to the stock and entitled to vote it. Until a settlement and division of
the estate is effected, the stocks of the decedent are held by the
administrator or executor. 44
On the other hand, membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead
members" are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation
or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,
among others, be terminated by the death of the member. 46 Section
91 of the Corporation Code further provides that termination
extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members
who are dropped from the membership roster in the manner and for
the cause provided for in the By-Laws of GCHS are not to be counted
in determining the requisite vote in corporate matters or the requisite
quorum for the annual members’ meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members’ meeting, conducted with
six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29
of the Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that
those remaining still constitute a quorum. The phrase "may be filled"
in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose
how vacancies in their respective boards may be filled up -- either by
the remaining directors constituting a quorum, or by the stockholders
or members in a regular or special meeting called for the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up
existing vacancies in its board of directors; that is, by a majority vote
of the remaining members of the board. 50
While a majority of the remaining corporate members were present,
however, the "election" of the four trustees cannot be legally upheld
for the obvious reason that it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the
fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up by
59
the remaining trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to
be done by the board and that by the constituent members of the
corporation. The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in
their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members’ meeting of
GCHS.
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the
Court’s Division.
ARTEMIO V. PANGANIBAN
Chief Justice

WHEREFORE, the Petition is partly GRANTED.The assailed

Resolutions of the Court of Appeals are hereby REVERSED AND
SET ASIDE. The remaining members of the board of trustees of
Grace Christian High School (GCHS) may convene and fill up the
vacancies in the board, in accordance with this Decision. No
pronouncement as to costs in this instance.

SO ORDERED.

ARTEMIO V. PANGANIBAN

Chief Justice
Chairperson, First Division

W E C O N C U R:

CONSUELO YNARES-SANTIAGO, MA. ALICIA AUSTRIA-

MARTINEZ

Associate Justice Associate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CERTIFICATION

60

THIRD DIVISION
G.R. No. 144109 February 17, 2003
ASSOCIATED COMMUNICATIONS & WIRELESS SERVICES –
UNITED BROADCASTING NETWORKS, petitioner,
vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, respondent.
DECISION
PUNO, J.:
For many years now, there has been a "pervading confusion in the
state of affairs of the broadcast industry brought about by conflicting
laws, decrees, executive orders and other pronouncements
promulgated during the Martial Law regime."1 The question that has
taken a long life is whether the operation of a radio or television
station requires a congressional franchise. The Court shall now lay to
rest the issue.
This is a petition for review on certiorari of the Court of Appeals’
January 31, 2000 decision and February 21, 2000 resolution affirming
the January 13, 1999 decision of the National Telecommunications
Commission (NTC for brevity).
First, the facts.
On November 11, 1931, Act No. 3846, entitled "An Act Providing for
the Regulation of Radio Stations and Radio Communications in the
Philippines and for Other Purposes," was enacted. Sec. 1 of the law
reads, viz:
"Sec. 1. No person, firm, company, association, or corporation shall
construct, install, establish, or operate a radio transmitting station, or a
radio receiving station used for commercial purposes, or a radio
broadcasting station, without having first obtained a franchise therefor
from the Congress of the Philippines..."
Pursuant to the above provision, Congress enacted in 1965 R.A. No.
4551, entitled "An Act Granting Marcos J. Villaverde, Jr. and Winfred
E. Villaverde a Franchise to Construct, Install, Maintain and Operate
Public Radiotelephone and Radiotelegraph Coastal Stations, and
Public Fixed and Public Based and Land Mobile Stations within the
Philippines for the Reception and Transmission of Radiotelephone
and Radiotelegraph for Domestic Communications and Provincial
Telephone Systems in Certain Provinces." It gave the grantees a 50-
year franchise.2 In 1969, the franchise was transferred to petitioner
Associated Communications & Wireless Services – United
Broadcasting Network, Inc. (ACWS for brevity) through Congress’
Concurrent Resolution No. 58.3 Petitioner ACWS then engaged in the
installation and operation of several radio stations around the country.
In 1974, P.D. No. 576-A, "Regulating the Ownership and Operation of
Radio and Television Stations and for other Purposes" was issued,
with the following pertinent provisions on franchise of radio and
television broadcasting systems:
"Sec. 1. No radio station or television channel may obtain a franchise
unless it has sufficient capital on the basis of equity for its operation
for at least one year, including purchase of equipment.
xxxxxxxxx
Sec. 6. All franchises, grants, licenses, permits, certificates or other
forms of authority to operate radio or television broadcasting systems
shall terminate on December 31, 1981. Thereafter, irrespective of any
franchise, grant, license, permit, certificate or other forms of authority
to operate granted by any office, agency or person, no radio or
television station shall be authorized to operate without the authority
of the Board of Communications and the Secretary of Public Works
and Communications or their successors who have the right and
authority to assign to qualified parties frequencies, channels or other
61
means of identifying broadcasting system; Provided, however, that
any conflict over, or disagreement with a decision of the
aforementioned authorities may be appealed finally to the Office of the
President within fifteen days from the date the decision is received by
the party in interest."
A few years later or in 1979, E.O. No. 546 4 was issued. It integrated
the Board of Communications and the Telecommunications Control
Bureau under the Integrated Reorganization Plan of 1972 into the
NTC. Among the powers vested in the NTC under Sec. 15 of E.O. No.
546 are the following:
"a. Issue Certificate of Public Convenience for the operation of
communication utilities and services, radio communications systems,
wire or wireless telephone or telegraph system, radio and television
broadcasting system and other similar public utilities;
xxxxxxxxx
c. Grant permits for the use of radio frequencies for wireless
telephone and telegraph systems and radio communication systems
including amateur radio stations and radio and television broadcasting
systems; . . . "
Upon termination of petitioner’s franchise on December 31, 1981
pursuant to P.D. No. 576-A, it continued operating its radio stations
under permits granted by the NTC.
As these presidential issuances relating to the radio and television
broadcasting industry brought about confusion as to whether the NTC
could issue permits to radio and television broadcast stations without
legislative franchise, the NTC sought the opinion of the Department of
Justice (DOJ) on the matter. On June 20, 1991, the DOJ rendered
Opinion No. 98, Series of 1991, viz:
"We believe that under P.D. No. 576-A dated November 11, 1974 and
prior to the issuance of E.O No. 546 dated July 23, 1979, the NTC,
then Board of Communications, had no authority to issue permits or
authorizations to operate radio and television broadcasting systems
without a franchise first being obtained pursuant to Section 1 of Act
No. 3846, as amended. A close reading of the provisions of Sections
1 and 6 of P.D. No. 576-A, supra, does not reveal any indication of a
legislative intent to do away with the franchising requirement under
Section 1 of Act No. 3846. In fact, a mere reading of Section 1 would
readily indicate that a franchise was necessary for the operation of
radio and television broadcasting systems as it expressly provided
that no such franchise may be obtained unless the radio station or
television channel has ‘sufficient capital on the basis of equity for its
operation for at least one year, including purchase of equipment.’
It is believed that the termination of all franchises granted for the
operation of radio and television broadcasting systems effective
December 31, 1981 and the vesting of the power to authorize the
operation of any radio or television station upon the Board of
Communications and the Secretary of Public Works and
Communications and their successors under Section 6 of P.D. No.
576-A does not necessarily imply the abrogation of the requirement of
obtaining a franchise under Section 1 of Act No. 3846, as amended, in
the absence of a clear provision in P.D. No. 576-A providing to this
effect.
It should be noted that under Act No. 3846, as amended, a person,
firm or entity desiring to operate a radio broadcasting station must
obtain the following: (a) a franchise from Congress (Sec. 1); (b) a
permit to construct or install a station from the Secretary of Commerce
and Industry (Sec. 2); and (c) a license to operate the station also
from the Secretary of Commerce and Industry (id.). The franchise is
the privilege granted by the State through its legislative body and is
subject to regulation by the State itself by virtue of its police power
through its administrative agencies (RCPI vs. NTC, 150 SCRA 450).
The permit and license are the administrative authorizations issued by
the administrative agency in the exercise of regulation. It is clear that
what was transferred to the Board of Communications and the
Secretary of Commerce and Industry under Section 6 of P.D. No. 576-
A was merely the regulatory powers vested solely in the Secretary of
Commerce and Industry under Section 2 of Act No. 3846, as
amended. The franchising authority was retained by the then
incumbent President as repository of legislative power under Martial
62
Law, as is clearly indicated in the first WHEREAS clause of P.D. No.
576-A to wit:
‘WHEREAS, the President of the Philippines is empowered under the
Constitution to review and approve franchises for public utilities.’
Of course, under the Constitution, said power (the power to review
and approve franchises), belongs to the lawmaking body (Sec. 5, Art.
XIV, 1973 Constitution; Sec. 11, Art. XII, 1987 Constitution).
The corollary question to be resolved is: Has E.O. No 546 (which is a
law issued pursuant to P.D. No. 1416, as amended by P.D. No. 1771,
granting the then President continuing authority to reorganize the
administrative structure of the national government) modified the
franchising and licensing arrangement for radio and television
broadcasting systems under P.D. No. 576-A?
We believe so.
E.O. No. 546 integrated the Board of Communications and the
Telecommunications Bureau into a single entity known as the NTC
(See Sec. 14), and vested the new body with broad powers, among
them, the power to issue Certificates of Public Convenience for the
operation of communications utilities, including radio and televisions
broadcasting systems and the power to grant permits for the use of
radio frequencies (Sec. 14[a] and [c], supra). Additionally, NTC was
vested with broad rule making authority ‘to encourage a larger and
more effective use of communications, radio and television
broadcasting facilities, and to maintain effective competition among
private entities in these activities whenever the Commission finds it
reasonably feasible’ (Sec. 15[f]).
In the recent case of Albano vs. Reyes (175 SCRA 264), the Supreme
Court held that ‘franchises issued by Congress are not required
before each and every public utility may operate.’ Administrative
agencies may be empowered by law ‘to grant licenses for or to
authorize the operation of certain public utilities.’ The Supreme Court
stated that the provision in the Constitution (Art. XII, Sec. 11) ‘that the
issuance of a franchise, certificate or other form of authorization for
the operation of a public utility shall be subject to amendment,
alteration or repeal by Congress, does not necessarily imply . . . that
only Congress has the power to grant such authorization. Our statute
books are replete with laws granting specified agencies in the
Executive Branch the power to issue such authorization for certain
classes of public utilities.’
We believe that E.O. No. 546 is one law which authorizes an
administrative agency, the NTC, to issue authorizations for the
operation of radio and television broadcasting systems without need
of a prior franchise issued by Congress.
Based on all the foregoing, we hold the view that NTC is empowered
under E.O. No. 546 to issue authorization and permits to operate
radio and television broadcasting system."5
However, on May 3, 1994, the NTC, the Committee on Legislative
Franchises of Congress, and the Kapisanan ng mga Brodkaster sa
Pilipinas of which petitioner is a member of good standing, entered
into a Memorandum of Understanding (MOU) that requires a
congressional franchise to operate radio and television stations. The
MOU states, viz:
"WHEREAS, under the provisions of Section 1 of Act No. 3846 (Radio
Laws of the Philippines, as amended), only radio and television
broadcast stations with legislative franchise are authorized to operate.
WHEREAS, Executive Order No. 546, which created the National
Telecommunications Commission (NTC) and abolished the Board of
Communications (BOC) and the Telecommunications Control Bureau
(TCB), and integrated the functions and prerogative of the latter two
agencies into the National Telecommunications Commission (NTC);
WHEREAS, the National Telecommunications Commission (NTC) is
authorized to issue certificate of public convenience for the operation
of radio and television broadcast stations;
WHEREAS, there is a pervading confusion in the state of affairs of the
broadcast industry brought about by conflicting laws, decrees,
63
executive orders and other pronouncements promulgated during the
Martial Law regime, the parties in their common desire to rationalize
the broadcast industry, promote the interest of public welfare, avoid a
vacuum in the delivery of broadcast services, and foremost to better
serve the ends of press freedom, the parties hereto have agreed as
follows:
‘The NTC shall continue to issue and grant permits or authorizations
to operate radio and television broadcast stations within their mandate
under Section 15 of Executive Order No. 546, provided that such
temporary permits or authorization to operate shall be valid for two (2)
years within which the permittee shall be required to file an application
for legislative franchise with Congress not later than December 31,
1994; provided finally, that if the permittee of the temporary permit or
authorization to operate fails to secure the legislative franchise with
Congress within this period, the NTC shall not extend or renew its
permit or authorization to operate any further.’"6
Prior to the December 31, 1994 deadline set by the MOU, petitioner
filed with Congress an application for a franchise on December 20,
1994. Pending its approval, the NTC issued to petitioner a temporary
permit dated July 7, 1995 to operate a television station via Channel
25 of the UHF Band from June 29, 1995 to June 28, 1997. 7 In 1996,
the NTC authorized petitioner to increase the power output of Channel
25 from 1.0 kilowatt to 25 kilowatts after finding it financially and
technically capable;8 it also granted petitioner a permit to purchase
radio transmitters/transceivers for use in its television Channel 25
broadcasting.9 Shortly before the expiration of its temporary permit,
petitioner applied for its renewal on May 14, 1997.10
On October 28, 1997, the House Committee on Legislative
Franchises of Congress replied to an inquiry of the NTC’s Broadcast
Division Chief regarding the franchise application of ACWS filed on
December 20, 1994. The Committee certified that petitioner’s
franchise application was not deliberated on by the 9th Congress
because petitioner failed to submit the required supporting
documents. In the next Congress, petitioner did not re-file its
application.11
The following month or on November 17, 1997, the NTC’s Broadcast
Service Department wrote to petitioner ordering it to submit a new
congressional franchise for the operation of its seven radio stations
and informing it that pending compliance, its application for temporary
permits to operate these radio stations would be held in
abeyance.12 Petitioner failed to comply with the franchise requirement;
it claims that it did not receive the November 17, 1997 letter.
Despite the absence of a congressional franchise, the NTC notified
petitioner on January 19, 1998 that its May 14, 1997 application for
renewal of its temporary permit to operate television Channel 25 was
approved and would be released upon payment of the prescribed fee
of ₱3,600.00.13 After paying said amount,14 however, the NTC refused
to release to petitioner its renewed permit. Instead, the NTC
commenced against petitioner Administrative Case No. 98-009 based
on the November 17, 1997 letter. On February 26, 1998, the NTC
issued an Order directing petitioner to show cause why its assigned
frequency, television Channel 25, should not be recalled for lack of
the required congressional franchise. Petitioner was also directed to
cease and desist from operating Channel 25 unless subsequently
authorized by the NTC.15
In compliance with the February 26, 1998 Order, petitioner filed its
Answer on March 17, 1998.16 In a hearing on April 22, 1998, petitioner
presented evidence and asked for continuance of the presentation to
May 20, 1998.17 On May 4, 1998, however, petitioner filed before the
Court of Appeals a Petition for Mandamus, Prohibition, and Damages
to compel the NTC to release its temporary permit to operate Channel
25 which was approved in January 1998. The appellate court denied
the petition on September 30, 1998.
Meantime, on August 17, 1998, the NTC issued Memorandum
Circular No. 14-10-98 which reads, viz:
"SUBJECT: Guidelines in the Renewal/Extension of Temporary
Permit of Radio/TV Broadcast operators who failed to secure a
legislative franchise conformably with the Memorandum of
Understanding (MOU) dated May 3, 1994, entered into by and
between the National Telecommunications and the Committee on
64
Legislative Franchises, House of Representatives, and the Kapisanan
ng mga Brodkaster sa Pilipinas (KBP).
In compliance with the MOU and in order to clear the ambiguity
surrounding the operation of broadcast operators who were not able
to have their legislative franchise approved during the last congress,
the following guidelines are hereby issued:
1. Existing broadcast operators who were not able to secure a
legislative franchise up to this date are given up to December
31, 1999 within which to have their application for a legislative
franchise bill approved by Congress. The franchise bill must
be filed immediately but not later than November 30th of this
year to give both Houses time to deliberate upon and
recommend approval/disapproval thereof.
2. Broadcast operators affected by this circular must file their
respective applications for renewal/extension of their
Temporary Permits in the prescribed form together with the
certification from the Committee on Legislative Franchises,
House of Representatives that a franchise bill has indeed been
filed prior to 30 November 1998.
3. In the event the permittee will not be able to have its
franchise bill approved within the prescribed period, the NTC
will no longer renew/extend its Temporary Permit and the
Commission shall initiate the recall of its assigned frequency
provided that due process of law is observed.
4. Henceforth, no application/petition for Certificate of Public
Convenience (CPC) to establish, maintain and operate a
broadcast station in the broadcast service shall be accepted
for filing without showing that the applicant has an approved
Legislative Franchise.
This Memorandum Circular shall be published in one (1) newspaper
of general circulation in the Philippines and shall take effect thirty (30)
days from its publication.
August 17, 1998, Quezon City, Philippines."18
The Memorandum Circular was published in the Philippine Star on
October 15, 1998.
Well within the November 30, 1998 deadline under the Memorandum
Circular, House Bill No. 3216, entitled "An Act Granting the ACWS-
United Broadcasting Network, Inc. a Franchise to Construct, Install,
Operate and Maintain Radio and Television Broadcasting Stations
within the Philippines, and for other Purposes," was filed with the
Legislative Calendar Section, Bills and Index Division on September
2, 1998.19
On January 13, 1999, the NTC rendered a decision on Administrative
Case No. 98-009 against petitioner, the dispositive portion of which
reads:
"WHEREFORE, for lack of a legal personality to justify the issuance of
any permit or license to the respondent (ACWS), the respondent not
having a valid legislative franchise, the Commission hereby renders
judgment as follows:
1) Channel 25 assigned to herein respondent ACWS is hereby
RECALLED;
2) Respondent’s application for renewal of its temporary permit
to operate Channel 25 is hereby DENIED; and
3) Respondent is hereby ordered to CEASE and DESIST from
further operating Channel 25."20
Petitioner sought recourse at the Court of Appeals which affirmed the
NTC decision.
Hence, this petition for review on certiorari on the following grounds:
"I.
65
THE COURT OF APPEALS ERRED IN UPHOLDING THE RULING
OF THE NTC THAT A CONGRESSIONAL FRANCHISE IS A
CONDITION SINE QUA NON IN THE OPERATION OF A RADIO
AND TELEVISION BROADCASTING SYSTEM.
II.
THE COURT OF APPEALS ERRED IN NOT CONSIDERING
OPINION 98 SERIES OF 1991 DATED JUNE 20, 1991 OF THE
SECRETARY OF JUSTICE HOLDING THAT THE NTC MAY ISSUE
AUTHORIZATION FOR THE OPERATION OF RADIO AND
TELEVISION BROADCASTING SYSTEMS, WITHOUT THE NEED
OF A PRIOR FRANCHISE ISSUED BY CONGRESS, AS BINDING
ON THE NTC WHO REQUESTED FOR SAID OPINION AND IS NOT
MERELY ADVISORY, AS IT IS PREDICATED ON A DECISION OF
THIS HONORABLE COURT.
III.
THE COURT OF APPEALS ERRED IN CONSIDERING ACT NO.
3846 AS REQUIRING A FRANCHISE FROM CONGRESS FOR THE
LAWFUL OPERATION OF RADIO OR TELEVISION
BROADCASTING STATIONS WHEN CLEARLY ITS PROVISIONS
COVER ONLY RADIO BUT IT DOES NOT INCLUDE TELEVISION
STATIONS.
IV.
THE COURT OF APPEALS ERRED IN UPHOLDING THE RECALL
OF THE FREQUENCY CHANNEL 25 PREVIOUSLY ASSIGNED TO
THE PETITIONER AND/OR THE CANCELLATION OF ITS PERMIT
TO OPERATE WHICH IS UNREASONABLE, UNFAIR,
OPPRESSIVE, WHIMSICAL AND CONFISCATORY WHEN IT
PREVIOUSLY ISSUED THE SAID PERMIT WITHOUT REQUIRING
A LEGISLATIVE FRANCHISE.
V.
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT NTC
CASE NO. 98-009 HAD BEEN RENDERED MOOT AND ACADEMIC
WITH THE ADOPTION AND PROMULGATION BY THE NTC OF
MEMORANDUM CIRCULAR NO. 14-10-98 DATED AUGUST 17,
1998 AS PETITIONER FILED THE APPLICATION FOR
LEGISLATIVE FRANCHISE PURSUANT THERETO."21
The petition is devoid of merit.
We shall discuss together the first three assigned errors as they are
interrelated.
Petitioner stresses that Act. No. 3846 covers only the operation of
radio and not television stations as Section 1 of the said law does not
mention television stations in its coverage, viz:
"Sec. 1. No person, firm, company, association or corporation shall
construct, install, establish, or operate a radio transmitting station, or a
radio receiving station used for commercial purposes, or a radio
broadcasting station, without having first obtained a franchise therefor
from the Congress of the Philippines…"
Petitioner observes that quite understandably, television stations were
not included in Act No. 3846 because the law was enacted in 1931
when there was yet no television station in the Philippines. Following
the rule in statutory construction that what is not included in the law is
deemed excluded, petitioner avers that television stations are not
covered by Act No. 3846. Petitioner notes that in fact, the NTC
previously issued to it a temporary permit dated July 7, 1995 to
operate Channel 25 from June 29, 1995 to June 28, 1997 without
requiring a congressional franchise. Likewise, in 1996, the NTC
issued to it a permit to increase its television operating power and to
purchase a radio transmitter/transceiver for use in its television
broadcasting, again without requiring a congressional franchise.
Petitioner thus argues that, contrary to the January 19, 1999 decision
of the NTC, its application for renewal of its temporary permit to
operate television Channel 25 does not require a congressional
franchise.
66
In upholding the NTC decision, the Court of Appeals held that a
congressional franchise is required for the operation of radio and
television broadcasting stations as this requirement under Act No.
3846 was not expressly repealed by P.D. No. 576-A nor E.O. No. 546.
Citing Berces, Sr. v. Guingona,22 it ruled that without an express
repeal, a subsequent law cannot be construed as repealing a prior law
unless there is an irreconcilable inconsistency and repugnancy in the
language of the new and old laws, which petitioner was not able to
show.23
The appellate court correctly ruled that a congressional franchise is
necessary for petitioner to operate television Channel 25. Even
assuming that Act No. 3846 applies only to radio stations and not to
television stations as petitioner adamantly insists, the subsequent
P.D. No. 576-A clearly shows in Section 1 that a franchise is required
to operate radio as well as television stations, viz:
"Sec. 1. No radio station or television channel may obtain a franchise
unless it has sufficient capital on the basis of equity for its operation
for at least one year, including purchase of equipment." (emphasis
supplied)
As pointed out in DOJ Opinion No. 98, there is nothing in P.D. No.
576-A that reveals any intention to do away with the requirement of a
franchise for the operation of radio and television stations. Section 6
of P.D. No. 576-A merely identifies the regulatory agencies from
whom authorizations, in addition to the required congressional
franchise, must be secured after December 31, 1981, viz:
"Sec. 6. All franchises, grants, licenses, permits, certificates or other
forms of authority to operate radio or television broadcasting systems
shall terminate on December 31, 1981. Thereafter, irrespective of any
franchise, grant, license, permit, certificate or other forms of authority
to operate granted by any office, agency or person, no radio or
television station shall be authorized to operate without the authority
of the Board of Communications and the Secretary of Public Works
and Communications or their successors who have the right and
authority to assign to qualified parties frequencies, channels or other
means of identifying broadcasting system . . ." (emphasis supplied)
To understand why it was necessary to identify these agencies, we
turn a heedful eye on the laws regarding authorizations for the
operation of radio and television stations that preceded P.D. No. 576-
A.
Act No. 3846 of 1931 provides, viz:
"Sec. 1. No person, firm, company, association, or corporation shall
construct, install, establish, or operate a radio transmitting station, or a
radio receiving station used for commercial purposes, or a radio
broadcasting station, without having first obtained a franchise therefor
from the Congress of the Philippines:
xxxxxxxxx
Sec. 1-A. No person, firm, company, association or corporation shall
possess or own transmitters or transceivers (combination transmitter-
receiver), without registering the same with the Secretary of Public
Works and Communications . . . and no person, firm, company,
association or corporation shall construct or manufacture, or purchase
radio transmitters or transceivers without a permit issued by the
Secretary of Public Works and Communications.
xxxxxxxxx
Sec. 3. The Secretary of Public Works and Communications is hereby
empowered to regulate the construction or manufacture, possession,
control, sale and transfer of radio transmitters or transceivers
(combination transmitter-receiver) and the establishment, use, the
operation of all radio stations and of all forms of radio communications
and transmissions within the Philippines. In addition to the above, he
shall have the following specific powers and duties:
xxxxxxxxx
(c) He shall assign call letter and assign frequencies for each station
licensed by him and for each station established by virtue of a
franchise granted by the Congress of the Philippines and specify the
stations to which each of such frequencies may be used;. . ."
67
Shortly after the declaration of Martial Law, then President Marcos
issued P.D. No. 1 dated September 24, 1972, through which the
Integrated Reorganization Plan for the executive branch was adopted.
Under the Plan, the Public Service Commission was abolished and its
functions transferred to special regulatory boards, among which was
the Board of Communications with the following functions:
"5a. Issue Certificates of Public Convenience for the operation of
communications utilities and services, radio communications systems
. . ., radio and television broadcasting systems and other similar public
utilities;
xxxxxxxxx
c. Grant permits for the use of radio frequencies for . . . radio and
television broadcasting systems including amateur radio stations."
With the creation of the Board of Communications under the Plan, it
was no longer sufficient to secure authorization from the Secretary of
Public Works and Communications as provided in Act No. 3846. The
Board’s authorization was also necessary. Thus, P.D. No. 576-A
provides in Section 6 that radio and television station operators must
secure authorization from both the Secretary of Public Works and
Communications and the Board of Communications.
Dispensing with the requirement of a congressional franchise is not in
line with the declared purposes of P.D. No. 576-A, viz:
"WHEREAS, it has been observed that some public utilities, especially
radio and television stations, have a tendency toward monopoly in
ownership and operation to such an extent that a region or section of
the country may be covered by any number of such broadcast
stations, all or most of which are owned, operated or managed by one
person or corporation;
xxxxxxxxx
WHEREAS, on account of the limited number of frequencies available
for broadcasting in the Philippines, it is necessary to regulate the
ownership and operation of radio and television stations and provide
measures that would enhance quality and viability in broadcasting and
help serve the public interests; . . ."
A textual interpretation of Section 6 of P.D. No. 576-A yields the same
interpretation that after December 31, 1981, a franchise is still
necessary to operate radio and television stations. Were it the
intention of the law to do away with the requirement of a franchise
after said date, then the phrase "(t)hereafter, irrespective of any
franchise, grant, license, permit, certificate or other forms of authority
to operate granted by any office, agency or person (emphasis
supplied)" would not have been necessary because the first sentence
of Section 6 already states that "(a)ll franchises, grants, licenses,
permits, certificates or other forms of authority to operate radio or
television broadcasting systems shall terminate on December 31,
1981." It is therefore already understood that these forms of authority
have no more force and effect after December 31, 1981. If the
intention were to do away with the franchise requirement, Section 6
would have simply laid down after the first sentence the requirements
to operate radio and television stations after December 31, 1981, i.e.,
"no radio or television station shall be authorized to operate without
the authority of the Board of Communications and the Secretary of
Public Works and Communications." Instead, however, the phrase
"irrespective of any franchise,…" was inserted to emphasize that a
franchise or any other form of authorization from any office, agency or
person does not suffice to operate radio and television stations
because the authorizations of both the Board of Communications and
the Secretary of Public Works and Communications are required as
well. This interpretation adheres to the rule in statutory construction
that words in a statute should not be construed as surplusage if a
reasonable construction which will give them some force and meaning
is possible.24
Contrary to the opinion of the Secretary of Justice in DOJ Opinion No.
98, Series of 1991, the appellate court was correct in ruling that E.O.
No. 546 which came after P.D. No. 576-A did not dispense with the
requirement of a congressional franchise. It merely abolished the
Board of Communications and the Telecommunications Control
Bureau under the Reorganization Plan and transferred their functions
68
to the NTC,25 including the power to issue Certificates of Public
Convenience (CPC) and grant permits for the use of frequencies, viz:
"Sec. 15. a. Issue Certificate of Public Convenience for the operation
of communication utilities and services, radio communications
systems, wire or wireless telephone or telegraph system, radio and
television broadcasting system and other similar public utilities;
xxxxxxxxx
c. Grant permits for the use of radio frequencies for wireless
telephone and telegraph systems and radio communication systems
including amateur radio stations and radio and television broadcasting
systems; . . . "
E.O. No. 546 defines the regulatory and technical aspect of the legal
process preparatory to the full exercise of the privilege to operate
radio and television stations, which is different from the grant of a
franchise from Congress, viz:
"The statutory functions of NTC may then be given effect as
Congress’ prerogative to grant franchises under Act No. 3846 is
upheld for they are distinct forms of authority. The former covers
matters dealing mostly with the technical side of radio or television
broadcasting, while the latter involves the exercise by the legislature
of an exclusive power resulting in a franchise or a grant under
authority of government, conferring a special right to do an act or
series of acts of public concern (37 C.J.S., secs. 1, 14, pp. 144, 157).
In fine, there being no clear showing that the laws here involved
cannot stand together, the presumption is against inconsistency or
repugnance, hence, against implied repeal of the earlier law by the
later statute (Agujetas v. Court of Appeals, 261 SCRA 17, 1996)." 26
As we held in Radio Communication of the Philippines, Inc. v.
National Telecommunications Commission,27 a franchise is
distinguished from a CPC in that the former is a grant or privilege from
the sovereign power, while the latter is a form of regulation through
the administrative agencies, viz:
"A franchise started out as a "royal privilege or (a) branch of the King’s
prerogative, subsisting in the hands of a subject." This definition was
given by Finch, adopted by Blackstone, and accepted by every
authority since (State v. Twin Village Water Co., 98 Me 214, 56 A 763
[1903]). Today, a franchise, being merely a privilege emanating from
the sovereign power of the state and owing its existence to a grant, is
subject to regulation by the state itself by virtue of its police power
through its administrative agencies."28
Even prior to E.O. No. 546, the NTC’s precursor, i.e., the Board of
Communications, already had the function of issuing CPC under the
Integrated Reorganization Plan. The CPC was required by the Board
at the same time that P.D. No. 576-A required a franchise to operate
radio and television stations. The function of the NTC to issue CPC
under E.O. No. 546 is thus nothing new and exists alongside the
requirement of a congressional franchise under P.D. No. 576-A. There
is no conflict between E.O. No. 546 and P.D. No 576-A; Section 15 of
the former does not dispense with the franchise requirement in the
latter. We adhere to the cardinal rule in statutory construction that
statutes in pare materia, although in apparent conflict, or containing
apparent inconsistencies, should, as far as reasonably possible, be
construed in harmony with each other, so as to give force and effect
to each.29 The ruling of this Court in Crusaders Broadcasting
System, Inc. v. National Telecommunications
Commission,30 buttresses the interpretation that the requirement of a
congressional franchise for the operation of radio and television
stations exists alongside the requirement of a CPC. In that case, we
held that under E.O. No. 546, the regulation of radio communications
is a function assigned to and performed by the NTC and at the same
time recognized the requirement of a congressional franchise for the
operation of a radio station under Act No. 3846. We did not interpret
E.O. No. 546 to have repealed the congressional franchise
requirement under Act No. 3846 as these two laws are not
inconsistent and can both be given effect. Likewise, in Radio
Communication of the Philippines, Inc. v. National
Telecommunications Commission,31 we recognized the necessity of
both a congressional franchise under Act No. 3846 and a CPC under
E.O. No. 546 to operate a radio communications system.
69
In buttressing its position that a congressional franchise is not
required to operate its television station, petitioner banks on DOJ
Opinion No. 98, Series of 1991 which states that under E.O. No. 546,
the NTC may issue a permit or authorization for the operation of radio
and television broadcasting systems without a prior franchise issued
by Congress. Petitioner argues that the opinion is binding and
conclusive upon the NTC as the NTC itself requested the advisory
from the Secretary of Justice who is the legal adviser of government.
Petitioner claims that it was precisely because of the above DOJ
Opinion No. 98 that the NTC did not previously require a
congressional franchise in all of its applications for permits with the
NTC.
Petitioner, however, cannot rely on DOJ Opinion No. 98 as this
opinion is merely persuasive and not necessarily controlling. 32 As
shown above, the opinion is erroneous insofar as it holds that E.O.
No. 546 dispenses with the requirement of a congressional franchise
to operate radio and television stations. The case of Albano v.
Reyes33 cited in the DOJ opinion, which allegedly makes it binding
upon the NTC, does not lend support to petitioner’s cause. In that
case, we held, viz:
"Franchises issued by Congress are not required before each and
every public utility may operate. Thus, the law has granted certain
administrative agencies the power to grant licenses for or to authorize
the operation of certain public utilities. (See E.O. Nos. 172 and 202)
That the Constitution provides in Art. XII, Sec. 11 that the issuance of
a franchise, certificate or other form of authorization for the operation
of a public utility shall be subject to amendment, alteration or repeal
by Congress does not necessarily imply, as petitioner posits, that only
Congress has the power to grant such authorization. Our statute
books are replete with laws granting specified agencies in the
Executive Branch the power to issue such authorization for certain
classes of public utilities. (footnote omitted)"34
Our ruling in Albano that a congressional franchise is not required
before "each and every public utility may operate" should be viewed in
its proper light. Where there is a law such as P.D. No. 576-A which
requires a franchise for the operation of radio and television stations,
that law must be followed until subsequently repealed. As we have
earlier shown, however, there is nothing in the subsequent E.O. No.
546 which evinces an intent to dispense with the franchise
requirement. In contradistinction with the case at bar, the law
applicable in Albano, i.e., E.O. No. 30, did not require a franchise for
the Philippine Ports Authority to take over, manage and operate the
Manila International Port Complex and undertake the providing of
cargo handling and port related services thereat. Similarly,
in Philippine Airlines, Inc. v. Civil Aeronautics Board, et al.,35 we ruled
that a legislative franchise is not necessary for the operation of
domestic air transport because "there is nothing in the law nor in the
Constitution which indicates that a legislative franchise is an
indispensable requirement for an entity to operate as a domestic air
transport operator."36 Thus, while it is correct to say that specified
agencies in the Executive Branch have the power to issue
authorization for certain classes of public utilities, this does not mean
that the authorization or CPC issued by the NTC dispenses with the
requirement of a franchise as this is clearly required under P.D. No.
576-A.
Petitioner contends that the NTC erroneously denied its application for
renewal of its temporary permit to operate Channel 25 and recalled its
Channel 25 frequency based on the May 3, 1994 MOU that requires a
congressional franchise for the operation of television broadcast
stations.1a\^/phi1.net The MOU is not an act of Congress and thus
cannot amend Act No. 3846 which requires a congressional franchise
for the operation of radio stations alone, and not television stations.
We find no merit in petitioner’s contention. As we have shown, even
assuming that Act No. 3846 requires only radio stations to secure a
congressional franchise for its operation, P.D. No. 576-A was
subsequently issued in 1974, which clearly requires a franchise for
both radio and television stations. Thus, the 1994 MOU did not amend
any law, but merely clarified the existing law that requires a franchise.
That the legislative intent is to continue requiring a franchise for the
operation of radio and television broadcasting stations is clear from
the franchises granted by Congress after the effectivity of E.O. No.
546 in 1979 for the operation of radio and television stations. Among
these are: (1) R.A. No. 9131 dated April 24, 2001, entitled "An Act
70
Granting the Iddes Broadcast Group, Inc., a Franchise to Construct,
Install, Establish, Operate and Maintain Radio and Television
Broadcasting Stations in the Philippines;" (2) R.A. No. 9148 dated July
31, 2001, entitled "An Act Granting the Hypersonic Broadcasting
Center, Inc., a Franchise to Construct, Install, Establish, Operate and
Maintain Radio Broadcasting Stations in the Philippines;" and (3) R.A.
No. 7678 dated February 17, 1994, entitled "An Act Granting the
Digital Telecommunication Philippines, Incorporated, a Franchise to
Install, Operate and Maintain Telecommunications Systems
Throughout the Philippines." All three franchises require the grantees
to secure a CPCN/license/permit to construct and operate their
stations/systems. Likewise, the Tax Reform Act of 1997 provides in
Section 119 for tax on franchise of radio and/or television
broadcasting companies, viz:
"Sec. 119. Tax on Franchises. – Any provision of general or special
law to the contrary notwithstanding, there shall be levied, assessed
and collected in respect to all franchises on radio and/or television
broadcasting companies whose annual gross receipts of the
preceding year does not exceed Ten million pesos (₱10,000,000),
subject to Section 236 of this Code, a tax of three percent (3%) and
on electric, gas and water utilities, a tax of two percent (2%) on the
gross receipts derived from the business covered by the law granting
the franchise. . . " (emphasis supplied)
Undeniably, petitioner is aware that a congressional franchise is
necessary to operate its television station Channel 25 as shown by its
actuations. Shortly before the December 31, 1994 deadline set in the
MOU, petitioner filed an application for a franchise with Congress. It
was not, however, acted upon in the 9th Congress for petitioner’s
failure to submit the necessary supporting documents; petitioner failed
to re-file the application in the following Congress. Petitioner also filed
an application for a franchise with Congress on September 2, 1998,
before the November 30, 1998 deadline under Memorandum Circular
No. 14-10-98.37
We now come to the fourth assigned error. Petitioner avers that the
Court of Appeals erred in upholding the recall of frequency Channel
25 previously assigned to it and the cancellation of its permit to
operate which was already approved in January 1998. It claims that
these acts of the NTC were unreasonable, unfair, oppressive,
whimsical and confiscatory considering that the NTC previously
issued petitioner a temporary permit without requiring a congressional
franchise.
On February 26, 1998, the NTC issued a show cause order to
petitioner with the following decretal portion:
"IN VIEW THEREOF, respondents are hereby directed to show cause
in writing within ten (10) days from receipt of this order why their
assigned frequency, more specifically Channel 25 in the UHF Band,
should not be recalled for lack of the necessary Congressional
Franchise as required by Section 1, Act No. 3846, as amended.
Moreover, respondent is hereby directed to cease and desist from
operating DWQH-TV, unless subsequently authorized by the
Commission."38
The order was supposedly based on a letter of the NTC dated
November 17, 1997 informing petitioner that its application for renewal
of temporary permits of its seven radio stations were being held in
abeyance pending submission of its new congressional franchise.
Petitioner was directed to submit the franchise within thirty days from
expiration of its temporary permits to be renewed and informed that its
failure to do so might constitute denial of its application.
Petitioner is correct that the November 17, 1997 letter referred only to
its radio stations and not to its television Channel 25. Thus, it could
not serve as basis for the February 26, 1998 show cause order which
referred solely to its television Channel 25. Besides, petitioner claims
that it did not receive the letter. Be that as it may, the NTC’s February
26, 1998 order for petitioner to cease and desist from operating
Channel 25 was not unreasonable, unfair, oppressive, whimsical and
confiscatory. The 1994 MOU states in unmistakable terms that
petitioner’s temporary permit to operate Channel 25 would be valid for
only two years, i.e., from June 29, 1995 to June 28, 1997. During
these two years, petitioner was supposed to have secured a
congressional franchise, otherwise "the NTC shall not extend or
renew its permit or authorization to operate any further." 39 Apparently,
petitioner did not submit a congressional franchise to the NTC in
71
applying for renewal of this temporary permit on May 14, 1997. The
NTC’s approval of petitioner’s application to renew its temporary
permit in January 1998 was thus erroneous because under the 1994
MOU, the NTC could not renew petitioner’s temporary permit to
operate Channel 25 without a congressional franchise. In the absence
of a renewed temporary permit, the NTC was correct in ordering
petitioner to cease and desist from operating Channel 25, regardless
of whether or not petitioner received the November 17, 1997 letter.
The NTC’s erroneous approval of petitioner’s application in January
1998 did not estop the NTC from ordering petitioner on February 26,
1998 to cease and desist from operating Channel 25 for failure to
comply with the franchise requirement as estoppel does not work
against the government.40
Likewise, the NTC’s denial of petitioner’s application for renewal of its
temporary permit to operate Channel 25 and recall of its Channel 25
frequency in its January 13, 1999 decision were not unreasonable,
unfair, oppressive, whimsical and confiscatory so as to offend
petitioner’s right to due process. In Crusaders Broadcasting System,
Inc. v. National Telecommunications Commission,41 the Court ruled
that although a particular ground for suspending operations of the
broadcasting company was not reflected in the show cause order, the
NTC could nevertheless raise said ground if any basis therefore was
gleaned during the administrative proceedings. In the instant case, the
lack of congressional franchise as ground for denial of petitioner’s
application for renewal of temporary permit and recall of its Channel
25 frequency was raised not only during the administrative
proceedings against it, but was even stated in the February 26, 1998
show cause order, viz:
"IN VIEW THEREOF, respondents are hereby directed to show cause
in writing within ten (10) days from receipt of this order why their
assigned frequency, more specifically Channel 25 in the UHF Band,
should not be recalled for lack of the necessary Congressional
Franchise as required by Section 1, Act No. 3846, as amended.
Moreover, respondent is hereby directed to cease and desist from
operating DWQH-TV, unless subsequently authorized by the
Commission." 42 (emphasis supplied)
In Eastern Broadcasting Corporation v. Dans, Jr., et al.,43 we held that
the requirements of due process in administrative proceedings laid
down by this Court in Ang Tibay v. Court of Industrial
Relations44 should be satisfied before a broadcast station may be
closed or its operations curtailed. We enumerated these
requirements, viz:
". . . (1) the right to a hearing which includes the right to present one’s
case and submit evidence in support thereof; (2) the tribunal must
consider the evidence presented; (3) the decision must have
something to support itself; (4) the evidence must be substantial.
Substantial evidence means such reasonable evidence as a
reasonable mind might accept as adequate to support a conclusion;
(5) the decision must be based on the evidence presented at the
hearing, or at least contained in the record and disclosed to the
parties affected; (6) the tribunal or body or any of its judges must act
on its own independent consideration of the law and facts of the
controversy and not simply accept the views of a subordinate; (7) the
board or body should, in all controversial questions, render its
decisions in such a manner that the parties to the proceeding can
know the various issues involved, and the reasons for the decision
rendered."45
Petitioner had the opportunity to present its case and submit evidence
on why its assigned frequency Channel 25 should not be recalled and
its application for renewal denied. Petitioner filed its Answer to the
show cause order on March 17, 1998. 46 A hearing was held on April
22, 1998 wherein petitioner presented its evidence in compliance with
the show cause order. Based on the NTC’s findings that petitioner
failed to comply with the requirement of a congressional franchise, the
NTC denied its application for renewal of its temporary permit to
operate Channel 25 and recalled its assigned Channel 25 frequency.
The requirements of due process in Ang Tibay were satisfied, thus
petitioner cannot say that the NTC’s actions were unreasonable,
unfair, oppressive, whimsical and confiscatory.
Finally, petitioner contends that the Court of Appeals erred in not
holding that Administrative Case No. 98-009, the administrative
proceeding against it for failure to secure a congressional franchise to
operate its television Channel 25, has been rendered moot and
72
academic by the adoption and promulgation of NTC Memorandum
Circular No. 14-10-98 dated August 17, 1998 which took effect on
November 15, 1998. The Memorandum Circular states, viz:
"In compliance with the MOU and in order to clear the ambiguity
surrounding the operation of broadcast operators who were not able
to have their legislative franchise approved during the last Congress,
the following guidelines are hereby issued:
1. Existing broadcast operators who were not able to secure a
legislative franchise up to this date (August 17, 1998) are given up to
December 31, 1999 within which to have their application for a
legislative franchise bill approved by Congress. The franchise bill
must be filed immediately but not later than November 30th of this
year . . ."
Petitioner avers that the NTC erroneously held that this Memorandum
Circular is not applicable to it because the words of the circular are
clear that it covers "existing broadcasting operators" including
petitioner. In compliance with the Memorandum Circular, petitioner
filed House Bill No. 32 on September 2, 1998, well within the
November 30, 1998 deadline. Thus, petitioner argues that the NTC
erred in denying its application for renewal of permit to operate
Channel 25 and recalling its assigned Channel 25 frequency on
January 13, 1999, long before the Memorandum Circular’s December
31, 1999 deadline to secure a congressional franchise. Petitioner
posits that the NTC’s premature and arbitrary promulgation of its
January 13, 1999 decision "slammed the door for the petitioner to
secure its legislative franchise. The pending application for legislative
franchise of petitioner was effectively struck out by said NTC
decision."47
Whether or not the benefits of the Memorandum Circular extend to
petitioner, the fact is, as correctly pointed out by the appellate court,
petitioner failed to secure a legislative franchise by December 31,
1999. Consequently, the NTC’s recall of petitioner’s assigned
frequency Channel 25 and denial of its application for renewal of its
permit to operate the said television channel were proper as the
Memorandum Circular provides, viz:
"1. Existing broadcast operators who are not able to secure a
legislative franchise up to this date (August 17, 1998) are
given up to December 31, 1999 within which to have their
application for a legislative franchise approved by Congress.
The franchise bill must be filed immediately but not later than
November 30th of this year . . .
xxxxxxxxx
3. In the event the permittee will not be able to have its
franchise bill approved within the prescribed period, the NTC
will no longer renew/extend its temporary permit and the
Commission shall initiate the recall of its assigned frequency
provided that due process of law is observed.
4. Henceforth, no application/petition for Certificate of Public
Convenience (CPC) to establish, maintain and operate a
broadcast station in the broadcast service shall be accepted
for filing without showing that the applicant has an approved
legislative franchise."(emphasis supplied)
Petitioner’s argument is flawed when it states that the January 13,
1999 decision of the NTC "slammed the door" on its application for a
congressional franchise as the process of securing a congressional
franchise is separate and distinct from the process of applying for
renewal of a temporary permit with the NTC. The latter is not a
prerequisite to the former. In fact, in the normal course of securing
authorizations to operate a television and radio station, the application
for a CPC with the NTC comes after securing a franchise from
Congress.48 The CPC is not a condition for the grant of a
congressional franchise.49
The Court is not unmindful that there is a trend towards delegating the
legislative power to authorize the operation of certain public utilities to
administrative agencies and dispensing with the requirement of a
congressional franchise as in the Albano case which involved the
provision of cargo handling and port related services at the Manila
International Port Complex and the PAL case involving the operation
of domestic air transport. The rationale for this trend was explained in
the PAL case, viz:
73
". . . With the growing complexity of modern life, the multiplication of
the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency
towards the delegation of greater powers by the legislature, and
towards the approval of the practice by the
courts.1awphi1.nét (Pangasinan Transportation Co., Inc. vs. The
Public Service Commission, G.R. No. 47065, June 26, 1940, 70 Phil
221.) It is generally recognized that a franchise may be derived
indirectly from the state through a duly designated agency, and to this
extent, the power to grant franchises has frequently been delegated,
even to agencies other than those of a legislative nature. (Dyer vs.
Tuskaloosa Bridge Co., 2 Port. 296, 27 Am. D. 655; Christian-Todd
Tel. Co. vs. Commonwealth, 161 S.W. 543, 156 Ky. 557, 37 C.J.S.
158) In pursuance of this, it has been held that privileges conferred by
grant by local authorities as agents for the state constitute as much a
legislative franchise as though the grant had been made by an act of
the Legislature. (Superior Water, Light and Power Co. vs. City of
Superior, 181 N.W. 113, 174 Wis. 257, affirmed 183 N.W. 254, 37
C.J.S. 158.)
The trend of modern legislation is to vest the Public Service
Commissioner with the power to regulate and control the operation of
public services under reasonable rules and regulations, and as a
general rule, courts will not interfere with the exercise of that
discretion when it is just and reasonable and founded upon a legal
right."50 1a\^/phi1.net
The criticism against the requirement of a congressional franchise is
incisively expressed by a public utilities lawyer, viz:
"As will be noted, a legislative franchise is required to install and
operate a radio station before an applicant can apply for a Certificate
of Public Convenience to operate a radio station based in any part of
the country. Under Act No. 3846 of 1929, Sec. 1, it was provided that
no one may install and operate a radio station ‘without having first
obtained a franchise therefore from the Congress of the Philippines.’
Since then, this has been strictly followed. And this holds true with
respect to application for electric, telephone and many other
telecommunications services. Before, even mere application for
authority to operate an ice plant must have prior congressional
franchise. But this was not strictly followed until ice plant operations
were eventually deregulated. Right now, the both houses of the
legislature are saddled with House Bill Nos. etc. for the grant of
legislative franchise to operate this and that public utility services in
various places in the Philippines. We hear during sessions in both
houses the time wasted on reports and considerations of these house
bills for grant of franchises. The legislature is empowered and has
created respective regulatory bodies with requisite expertise to handle
franchising and regulation of such types of public utility services, why
not just entrust all these functions to them?
What exactly is the reason or rationale for imposing a prior
congressional franchise? There seems to be no valid reason for it
except to impose added burden and expenses on the part of the
applicant. The justification appears to be simply because this was
required in the past so it is now. We are reminded of the forceful
denunciation of Justice Holmes of a stubborn adherence to an
anachronistic rule of law:
‘It is revolting to have no better reason for a rule of law that so it was
laid down in the time of Henry IV. It is still more revolting if the
grounds upon which it was laid down have vanished long since, and
the rule simply persists from blind imitation of the past. (The Path of
the Law, Collected Legal Papers [1920] 210, 212 quoted from The
Justice Holmes Reader, Julius N. Marke, 1955 ed., p. 278.)’" 51
The call to dispense with the requisite legislative franchise must,
however, be addressed to Congress as the lawmaker of the land for
the Court’s function is to interpret and not to rewrite the law. As long
as the law remains unchanged, the requirement of a franchise to
operate a television station must be upheld.
WHEREFORE, the petition is DENIED and the Court of Appeals’
January 13, 2000 decision and February 21, 2000 resolution are
AFFIRMED. No costs.
SO ORDERED.
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Panganiban, Sandoval-Gutierrez, Corona and Carpio-Morales, JJ.,
concur.

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