1. Gamboa vs.
oa vs. Teves , GR Number and Date: 652 SCRA 690 Whether the term “capital” includes both voting and non-voting shares. - NO.
Author: George F. Rasalan
Doctrine: The Constitution explicitly reserves the ownership and operation of public utilities to Philippine
nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos.
Name of the parties: (and their respective role in the case):
Petitioner: Gamboa
Respondent: Teves
Articles Applicable:
Corporation code of the Philippines- Section 6. Classification of Shares
FIA 1991
Section 11, Article XII of the 1987 Constitution
Facts:
1. The issue started when petitioner Gamboa questioned the indirect sale of shares involving almost 12
million shares of the Philippine Long Distance Telephone Company (PLDT) owned by PTIC to First Pacific.
Thus, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby
increasing the total common shareholdings of foreigners in PLDT to about 81.47%. The petitioner contends that
it violates the Constitutional provision on filipinazation of public utility, stated in Section 11, Article XII of the
1987 Philippine Constitution, which limits foreign ownership of the capital of a public utility to not more than
40%. T
Ruling of Lower Courts: Then, in 2011, the court ruled the case in favor of the petitioner, hence this new case,
resolving the motion for reconsideration for the 2011 decision filed by the respondents.
Contention of Pangilinan
Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section 11, Article XII of the
Constitution. Neither does he refute petitioners claim of foreigners holding more than 40 percent of PLDTs
common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the
absence of this Courts jurisdiction over the petition; (2) petitioners lack of standing; (3) mootness of the
petition; (4) non-availability of declaratory relief; and (5) the denial of due process rights. Moreover, respondent
Pangilinan alleges that the issue should be whether owners of shares in PLDT as well as owners of shares in
companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those companies
without any law requiring them to surrender their shares and also without notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their shares
in the utility company. According to him, Section 11 does not authorize taking one persons property (the
shareholders stock in the utility company) on the basis of another partys alleged failure to satisfy a requirement
that is a condition only for that other partys retention of another piece of property (the utility company being at
least 60% Filipino-owned to keep its franchise).
Issue:
Ruling:
The Constitution expressly declares as State policy the development of an economy “effectively controlled” by
Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of
public utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino
citizens, or corporations or associations at least 60 percent of whose capital with voting rights belongs to
Filipinos. The FIA’s implementing rules explain that “[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is essential.” In effect, the FIA
clarifies, reiterates and confirms the interpretation that the term “capital” in Section 11, Article XII of the 1987
Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely
because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates
to effective control of a corporation.
The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may
have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights
except those classified and issued as preferred or redeemable shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles
of incorporation which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the corporation
or to its creditors in respect thereto: Provided; That shares without par value may
not be issued for a consideration less than the value of five (P5.00) pesos per
share: Provided, further, That the entire consideration received by the corporation
for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares
which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to
common shares. However, if the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the control or management of
the corporation is exercised through the right to vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.
To apply the PLDT shares, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and
thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting
rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; 63 (5) preferred
shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control
of a public utility is a mockery of the Constitution.
PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII of the 1987 Constitution
refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of
the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long
Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.
__________________________________________________________________________________
2. Roy III v. Herbosa G.R. No. 207246, November 22, 2016
By: Bryce King
Parties:
JOSE M. ROY III for Petitioner
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE COMMISSION, AND
PHILILIPPINE LONG DISTANCE TELEPHONE COMPANY for Respondents
Doctrine: State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos. It is an express recognition of the sensitive and vital position of public utilities both in the national
economy and for national security, also pronounced that the evident purpose of the citizenship requirement
is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest.
Beneficial Owner ship test
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote
are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
Facts:
Roy, as a lawyer and taxpayer, filed the Petition, assailing the validity of SEC-MC No. 8 for not conforming to
the letter and spirit of the Gamboa Decision and Resolution and for having been issued by the SEC with grave
abuse of discretion.
Petitioner also questions the ruling of the SEC that respondent PLDT is compliant with the constitutional rule
on foreign ownership.
He prays that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to issue new guidelines
regarding the determination of compliance with Section 11, Article XII of the Constitution in accordance with
Gamboa.
The dispositive portion of the Gamboa Decision reads:
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of
the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply
this definition of the term "capital" in determining the extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.
The SEC, through Chairperson Herbosa, issued SEC-MCNo. 8 entitled "Guidelines on Compliance with the
Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations
Engaged in Nationalized and Partly Nationalized Activities."
Section 2: All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance there with, the required percentage of Filipino ownership
shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of
directors; AND(b) the total number of outstanding shares of stock, whether or not entitled to vote in the election
of directors.
Issue:
W/O the SEC gravely abused its discretion in ruling that PLDT is compliant with the constitutional limitation
on foreign ownership. NO
W/O the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the Gamboa Decision and
Gamboa Resolution. NO
Decision:
First Issue
No, SEC already clarified that it "has not yet issued a definitive ruling anent PLDT's compliance with the
limitation on foreign ownership imposed under the Constitution and relevant laws.
In fact, a careful perusal of SEC-MC No. 8 readily reveals that all existing covered corporations which are non-
compliant with Section 2 thereof were given a period of one (1) year from the effectivity of the same within
which to comply with said ownership requirement. Thus, in the absence of a definitive ruling by the SEC on
PLDT's compliance with the capital requirement pursuant to the Gamboa Decision and Resolution, any question
relative to the inexistent ruling is premature.
Second Issue
No, the SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction when it issued
SEC-MC No. 8. To the contrary, SEC-MC No. 8 was issued in fealty to the Gamboa Decision and Resolution.
The sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the Constitution
refers to the total common shares only or to the total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility." The Court directly answered the issue and consistently
defined the term "capital" as follows “Shares of stock entitled to vote in the election of directors” and thus in the
present case only to common shares, and not to the total outstanding capital stock comprising both common and
non-voting preferred shares.
Effective control by Filipino citizens of a public utility is already assured in Section 2 of SEC-MC No. 8. With
respect to a stock corporation engaged in the business of a public utility, the constitutional provision mandates
three safeguards: (1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign investors
in its board of directors is limited to their proportionate share in its capital; and (3) all its executive and
managing officers must be citizens of the Philippines.
Beneficial Owner ship test
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are
considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine nationals.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test and the Beneficial Ownership test. In
fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the total number of outstanding shares of stock, whether
voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement that
"full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights is required.”
__________________________________________________________________________________
3. JOSE M. ROY III, Petitioner Vs. CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND
EXCHANGE COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,,
Respondents G.R. No. 207246 April 18, 2017- HORARIO
Doctrine: Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the Decision,
relevant in resolving only the question of who is the beneficial owner or has beneficial ownership of each
"specific stock" of the public utility company whose stocks are under review. If the Filipino has the voting
power of the "specific stock", i.e., he can vote the stock or direct another to vote for him, or the Filipino has
the investment power over the "specific stock", i.e., he can dispose of the stock or direct another to dispose of
it for him, or both, i.e., he can vote and dispose of that "specific stock" or direct another to vote or dispose it
for him, then such Filipino is the "beneficial owner" of that "specific stock." Being considered Filipino,
that "specific stock" is then to be counted as part of the 60% Filipino ownership requirement under the
Constitution. The right to the dividends, jus fruendi - a right emanating from ownership of that "specific
stock" necessarily accrues to its Filipino "beneficial owner."
Article Applicable: The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens x x x."
Facts:
1) This is a Motion for Reconsideration of dated January 19, 2017 (the Motion) filed by petitioner Jose M. Roy
III (movant) seeking the reversal and setting aside of the Decision dated November 22, 2016 (the Decision)
which denied the movant's petition, and declared that the Securities and Exchange Commission (SEC) did not
commit grave abuse of discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as
the same was in compliance with, and in fealty to, the decision of the Court in Gamboa v. Finance Secretary
Teves, (Gamboa Decision) and the resolution4 denying the Motion for Reconsideration therein (Gamboa
Resolution). Please refer to the facts of the original Case
Contentions of the PETITIONER/PLAINTIFF The grounds raised by movant are: (1) He has the requisite
standing because this case is one of transcendental importance; (2) The Court has the constitutional duty to
exercise judicial review over any grave abuse of discretion by any instrumentality of government; (3) He did
not rely on an obiter dictum; and (4) The Court should have treated the petition as the appropriate device to
explain the Gamboa Decision.
Issue: Wether the SEC gravely abused its discretion in ruling that respondent PLDT is compliant with the
limitation on foreign ownership under the Constitution and other relevant laws -NO
Ruling + Ratio: [E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC did not commit grave abuse of
discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the contrary, the
Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision and Resolution.
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively found
no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that pronouncement in the
Gamboa Resolution that the constitutional requirement on Filipino ownership should "apply uniformly and
across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a
corporation."[[9-a]] The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are definite,
clear and unequivocal. While there is a passage in the body of the Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision x x x the definiteness and clarity of the fallo of the Gamboa
Decision must control over the obiter dictum in the Gamboa Resolution regarding the application of the 60-40
Filipino-foreign ownership requirement to "each class of shares, regardless of differences in voting rights,
privileges and restrictions."
 To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of the
Gamboa Decision was in no way modified by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution, which
provides: "No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital is owned by such citizens x x x."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is "[fJull
[and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights x x x must rest in the hands of Filipino nationals x x x." 11 And, precisely that is what SEC-MC
No. 8 provides, viz.: "x x x For purposes of determining compliance [with the constitutional or statutory
ownership], the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote x x x."
In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals.
In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract, arrangement, understanding, relationship
or otherwise, has or shares voting power (which includes the power to vote or direct the voting of such security)
and/or investment returns or power (which includes the power to dispose of, or direct the disposition of such
security) x x x.
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the Decision,
relevant in resolving only the question of who is the beneficial owner or has beneficial ownership of each
"specific stock" of the public utility company whose stocks are under review. If the Filipino has the voting
power of the "specific stock", i.e., he can vote the stock or direct another to vote for him, or the Filipino has the
investment power over the "specific stock", i.e., he can dispose of the stock or direct another to dispose of it for
him, or both, i.e., he can vote and dispose of that "specific stock" or direct another to vote or dispose it for him,
then such Filipino is the "beneficial owner" of that "specific stock." Being considered Filipino, that "specific
stock" is then to be counted as part of the 60% Filipino ownership requirement under the Constitution. The right
to the dividends, jus fruendi - a right emanating from ownership of that "specific stock" necessarily accrues to
its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any particular
stock are determinative of that stock's "beneficial ownership." Dividend declaration is dictated by the
corporation's unrestricted retained earnings. On the other hand, the corporation's need of capital for expansion
programs and special reserve for probable contingencies may limit retained earnings available for dividend
declaration. It bears repeating here that the Court in the Gamboa Decision adopted the foregoing definition of
the term "capital" in Section 11, Article XII of the 1987 Constitution in express recognition of the sensitive and
vital position of public utilities both in the national economy and for national security, so that the evident
purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest. This purpose prescinds from the "benefits"/dividends that are derived from
or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by aliens. So long as Filipinos
have controlling interest of a public utility corporation, their decision to declare more dividends for a particular
stock over other kinds of stock is their sole prerogative - an act of ownership that would presumably be for the
benefit of the public utility corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares
of stock entitled to vote directors, which is what the Constitution precisely requires, then the Filipino
stockholders control the corporation, i.e., they dictate corporate actions and decisions, and they have all the
rights of ownership including, but not limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for corporate pursuits (such as expansion), may
be good for the corporation that they own. Surely, these "true owners" will not allow any dilution of their
ownership and control if such move will not be beneficial to them.
Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust fund that
is created by the public entity whose compliance with the limitation on foreign ownership under the
Constitution is under scrutiny, and how the SEC will determine if such public utility does, in fact, control how
the said stocks will be voted, and whether, resultantly, the trust fund would be considered as Philippine national
or not - lengthily discussed in the dissenting opinion of Justice Carpio - is speculative at this juncture. The Court
cannot engage in guesswork. Thus, there is need of an actual case or controversy before the Court may exercise
its power of judicial review. The movant's petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares created by
respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a wholly-owned company of
the PLDT Beneficial Trust Fund (BTF), and whether or not it is respondent PLDT's management that controls
BTF and BTF Holdings, Inc. - all these are factual matters that are outside the ambit of this Court's review
which, as stated in the beginning, is confined to determining whether or not the SEC committed grave abuse of
discretion in issuing SEC-MC No. 8; that is, whether or not SEC-MC No. 8 violated the ruling of the Court in
Gamboa v. Finance Secretary Teves, and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec. Teves
denying the Motion for Reconsideration therein as to the proper understanding of "capital".
To be sure, it would be more prudent and advisable for the Court to await the SEC's prior determination
of the citizenship of specific shares of stock held in trust - based on proven facts - before the Court proceeds to
pass upon the legality of such determination.
As to whether respondent PLDT is currently in compliance with the Constitutional provision regarding
public utility entities, the Court must likewise await the SEC's determination thereof applying SEC-MC No. 8.
After all, as stated in the Decision, it is the SEC which is the government agency with the competent expertise
and the mandate of law to make such determination.
In conclusion, the basic issues raised in the Motion having been duly considered and passed upon by the
Court in the Decision and no substantial argument having been adduced to warrant the reconsideration sought,
the Court resolves to DENY the Motion with FINALITY.
NOTE
Gamboa Doctrine: The Court said that the Constitution is clear in expressing its State policy of developing an
economy ‘effectively controlled’ by Filipinos. Asserting the ideals that our Constitution’s Preamble want to
achieve, that is – to conserve and develop our patrimony , hence, the State should fortify a Filipino-controlled
economy. In the 2011 decision, the Court finds no wrong in the construction of the term ‘capital’ which refers
to the ‘shares with voting rights, as well as with full beneficial ownership’ (Art. 12, sec. 10) which implies that
the right to vote in the election of directors, coupled with benefits, is tantamount to an effective control.
Therefore, the Court’s interpretation of the term ‘capital’ was not erroneous.
____________________________________________________________________________________
4. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
G.R. No. 195580, April 21, 2014
Digest Author: Gutierrez
DOCTRINE: Although the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled
to undertake the exploration, development and utilization of the natural resources of the Philippines:
however, when there is doubt in the minds of the court based on the attendant facts and circumstances of
the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather
rule."
Facts:
1. Responded Redmont Consolidated Mines Corp. (Redmont), a domestic corporation took interest in mining
and exploring certain areas of the province of Palawan. After inquiring with the DENR, it learned that the areas
where it wanted to undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners (1) Narra, (2)Tesoro and (3) McArthur.
2. Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP). Subsequently, SMMI was issued MPSA EPA. The
MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, assigned to petitioner
McArthur.
3. Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia
Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with
the MGB. Through the said application, the DENR issued MPSA. Subsequently, PLMDC conveyed, transferred
and/or assigned its rights and interests over the MPSA application in favor of Narra.
4. Another MPSA application of SMMI was filed which was subsequently conveyed, transferred and
assigned its rights and interest over the said MPSA application to Tesoro.
5. Redmont filed before the Panel of Arbitrators (POA) of the DENR 3 seperate petitions for the denial of
petitioners’ applications for MPSA.
6. Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since
MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the
MPSAs over the areas covered by applications since it knows that it can only participate in mining activities
through corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital
stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens.
ISSUES:
Whether the petitioner corporations are Filipino and can validly be issued MPSA and EP – NO
Whether the grandfather rule must be applied in this case - YES
RULING:
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and
the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in
enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall
be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of
the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and
pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the
ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which
is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7
of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine
the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation.
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part
of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases
where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien
or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
doubt, the Grandfather Rule will not apply.
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of
petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––
MBMI, funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of
Filipinos are less than 60%.
Applying the Grandfather Rule, the Court ruled that McArthur, Tesoro and Narra are not Filipino since MBMI,
a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to
the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and
Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations
under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority
control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.
Hence, PETITION DENIED.
_____________________________________________________________________________
5-6. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and McARTHUR MINING, INC., petitioners, vs. REDMONT
CONSOLIDATED MINES CORP., respondent , G.R. No. 195580. January 28, 2015
Author: Daguinod, Ericka
Doctrine: The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership
and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied.
Overview of the Case:
A Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition for Review on
Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining, Inc. (McArthur). The challenged
Decision sustained the appellate court’s ruling that petitioners, being foreign corporations, are not entitled to
Mineral Production Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with
approval the appellate court’s finding that there was doubt as to petitioners’ nationality since a 100% Canadian-
owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks of the petitioners by
owning equity interest of petitioners’ other majority corporate shareholders.
Facts:
- In a strongly worded Motion for Reconsideration, petitioners-movants argued, in the main, that the
Court’s Decision was not in accord with law and logic.
- In its Comment, on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered
that petitioners’ motion for reconsideration is nothing but a rehash of their arguments and should, thus, be
denied outright for being pro forma.
- After considering the parties’ positions, as articulated in their respective submissions
Arguments & Ruling:
A1: The case has not been rendered moot and academic (Petitioners contended that conversion of MPSA
applications to FTAA made the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic)
The Supreme Court (SC) may still take cognizance of an otherwise moot and academic case, if it finds that (a)
there is a grave violation of the Constitution; (b) the situation is of exceptional character and paramount public
interest is involved; (c) the constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and (d) the case is capable of repetition yet evading review.
We can assume for the nonce that the controversy had indeed been rendered moot by these two events. As this
Court has time and again declared, the moot and academic principle is not a magical formula that automatically
dissuades courts in resolving a case. The Court may still take cognizance of an otherwise moot and academic
case, if it finds that (a) there is a grave violation of the Constitution; (b) the situation is of exceptional character
and paramount public interest is involved; (c) the constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public; and (d) the case is capable of repetition yet evading
review.
A2: The application of the Grandfather Rule is justified by the circumstances of the case to determine the
nationality of petitioners
Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources
to Filipino citizens and corporations or associations at least sixty per centum of whose capital is owned by such
citizens.
Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a corporation x x x registered in
accordance with law at least sixty percent of the capital of which is owned by citizens of the Philippines as a
person qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rule was
originally conceived to look into the citizenship of the individuals who ultimately own and control the shares of
stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino
ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed the
Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to
participate in nationalized or partly nationalized activities
As further defined by Dean Cesar Villanueva, the Grandfather Rule is the method by which the percentage of
Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided
for under the Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership
to determine the nationality of the corporate shareholder. Thus, to arrive at the actual Filipino ownership
and control in a corporation, both the direct and indirect shareholdings in the corporation are determined.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder
to the second or even the subsequent tier of ownership hews with the rule that the beneficial ownership of
corporations engaged in nationalized activities must reside in the hands of Filipino citizens. Thus, even if the
60-40 Filipino equity requirement appears to have been satisfied, the Department of Justice (DOJ), in its
Opinion No. 144, S. of 1977, stated that an agreement that may distort the actual economic or beneficial
ownership of a mining corporation may be struck down as violative of the constitutional requirement.
A3: The application of the Grandfather Rule in the present case does not eschew the Control Test.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a
corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or
partly nationalized activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears. On the other hand, a corporation that complies with the 60-40
Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to
who has the beneficial ownership and control of the corporation. In that instance, there is no need for a
dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee
corporation or the application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to
foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule
is necessary if doubt exists as to the locus of the „beneficial ownership and control. In this case, a further
investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary.
Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the
shareholdings to the point when natural persons hold rights to the stocks may very well lead to an investigation
ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace the
shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the
number of corporate layers the attribution of the nationality of the corporate shareholders may be applied. In a
1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate
relations for publicly-held corporations or where the shares are traded in the stock exchanges, and to three (3)
levels for closely held corporations or the shares of which are not traded in the stock exchanges. These limits
comply with the requirement in Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966), that the application
of the Grandfather Rule cannot go beyond the level of what is reasonable.
The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either Gonzales
v. Climax Mining Ltd., 452 SCRA 607 (2005), or Philex Mining Corp. v. Zaldivia, 43 SCRA 479 (1972), that
POA’s jurisdiction is limited only to mining disputes which raise questions of fact, and not judicial questions
cognizable by regular courts of justice. However, to properly recognize and give effect to the jurisdiction vested
in the POA by Section 77 of the Philippine Mining Act of 1995, and in parallel with this Court’s ruling in
Celestial Nickel Mining Exploration Corporation v Macroasia Corp., 541 SCRA 166 (2007),
A4: Jurisdiction of Panel of Arbitratrors
The Court has recognized in its Decision that in resolving disputes involving rights to mining areas and
involving mineral agreements or permits, the POA has jurisdiction to make a preliminary finding of the required
nationality of the corporate applicant in order to determine its right to a mining area or a mineral agreement.
DISPOSITION: MOTION FOR RECONSIDERATION DENIED WITH FINALITY
_______________________________________________________________________
7. Register of Deeds vs. Ung Siu Temple, G.R. No. L-6776 May 21, 1955
By: Chua
Doctrine:
The Constitution makes no exception in favor of religious associations. Neither is there any such saving
found in sections 1 and 2 of Article XIII, restricting the acquisition of public agricultural lands and other
natural resources to "corporations or associations at least sixty per centum of the capital of which is owned
by such citizens" (of the Philippines).
Name of the parties:
Petitioner: THE REGISTER OF DEEDS RIZAL
Respondents: UNG SIU SI TEMPLE
Applicable Law: 1935 Constitution under provisions on ” CONSERVATION AND UTILIZATION OF
NATURAL RESOURCES”
SEC. 2. No private corporation or association may acquire, lease, or hold public agricultural lands in excess of
one thousand and twenty-four hectares, nor may any individual acquire such lands by purchase in excess of one
hundred and forty-four hectares, or by lease in excess of one thousand and twenty-four hectares, or by
homestead in excess of twenty-four hectares. Lands adapted to grazing, not exceeding two thousand hectares,
may be leased to an individual, private corporation, or association.
SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned
except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the
Philippines.
Facts:
1. The Register of Deeds for the province of Rizal refused to accept for record a deed of donation executed
in due form on January 22, 1953, by Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. Record No. 11267, in favor of the
unregistered religious organization "Ung Siu Si Temple", operating through three trustees all of Chinese
nationality. The donation was duly accepted by Yu Juan, of Chinese nationality, founder and deaconess of
the Temple, acting in representation and in behalf of the latter and its trustees.
Contention of Ung Siu Si Temple
1. that the acquisition of the land in question, for religious purposes, is authorized and permitted by Act No.
271 of the old Philippine Commission, providing as follows:
SECTION 1. It shall be lawful for all religious associations, of whatever sort or denomination, whether
incorporated in the Philippine Islands or in the name of other country, or not incorporated at all, to hold land in
the Philippine Islands upon which to build churches, parsonages, or educational or charitable institutions.
SECTION. 2. Such religious institutions, if not incorporated, shall hold the land in the name of three
Trustees for the use of such associations.
2. that the refusal of the Register of Deeds violates the freedom of religion clause of our Constitution [Art.
III, Sec. 1(7)].
Ruling of the lower court: CFI decision in favor the Register of Deeds of Rizal
Issue:
Whether a deed of donation of a parcel of land executed in favor of a religious organization whose
founder, trustees and administrator are Chinese citizens should Can registered.- No
Ruling:
a. Basis of the ruling: The Constitution makes no exception in favor of religious associations.
Neither is there any such saving found in sections 1 and 2 of Article XIII, restricting the
acquisition of public agricultural lands and other natural resources to "corporations or associations
at least sixty per centum of the capital of which is owned by such citizens" (of the Philippines).
b. Act No. 271 of the old Philippine Commission must be deemed repealed since the Constitution
was enacted, in so far as incompatible therewith. In providing that, —
Save in cases of hereditary succession, no private agricultural land shall be
transferred or assigned except to individuals, corporations or associations qualified
to acquire or hold lands of the public domain in the Philippines,
c. The fact that the appellant religious organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to ensure that corporations or associations
allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos;
and the spirit of the Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to acquire agricultural lands would be
to drive the opening wedge to revive alien religious land holdings in this country. We can not
ignore the historical fact that complaints against land holdings of that kind were among the factors
that sparked the revolution of 1896.
Disposition: Resolution appealed is REAFFIRMED
_____________________________________________________________________________________
8. Roman Catholic Apostolic Administrator of Davao v. LRC, G.R. No. L-8451 (1957)
Author: Princess Cariño
Petitioner: The Roman Catholic Apostolic Administrator of Davao, Inc.
Respondents: Land Registration Commission and The Register of Deeds of Davao City
Doctrines:
· The nationality of a corporation sole is determined by the nationality of its members and not by the
nationality of the sole corporator.
· The constitutional provision requiring 60 per centum Filipino ownership is not applicable in
corporation sole.
Laws applicable:
1. 1935 Constitution:
SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain in the Philippines.
SEC 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the
Philippines belong to the State, and their disposition, exploitation, development, or utilization
shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per
centum of the capital of which is owned by such citizens, SUBJECT TO ANY EXISTING
RIGHT, grant, lease, or concession AT THE TIME OF THE INAUGURATION OF THE
GOVERNMENT ESTABLISHED UNDER THIS CONSTITUTION. X X X
FACTS:
· Petitioner (Roman Catholic Apostolic Administrator of Davao Inc.) is corporation sole organized and
existing in accordance with Philippine Laws. Msgr. Clovis Thibault, a Canadian citizen, is its actual incumbent.
· Mateo Rodis, a resident of Davao City, executed a deed of sale of a parcel of land in Davao in favor of
the petitioner.
· When the deed of sale was presented to the Register of Deeds for the registration, the latter required said
corporation sole to submit an affidavit declaring that 60 per cent of the members thereof were Filipino citizens.
(similar to previous applicant in Metro Manina – Carmelite Nuns of Davao)
· The petitioner expressed its willingness to submit an affidavit but not in the same tenor as that made by
the Prioress of the Carmelite Nuns because the two cases were not similar, for whereas the congregation of the
Carmelite Nuns had five incorporators, the corporation sole has only one; that according to their articles of
incorporation, the organization of the Carmelite Nuns became the owner of properties donated to it, whereas the
case at bar, the totality of the Catholic population of Davao would become the owner of the property sought to
be registered.
· The Register of Deeds then referred the matter to the Land Registration Commissioner for resolution.
LRC – DENIED the petition for registration. (main basis is “control”)
As per the constitutional requirement, the vendee (petitioner) is not qualified to acquire lands in the Philippines
in the absence of proof that at least 60 per centum of the capital, properties or assets of the Roman Catholic
Apostolic Administrator of Davao, Inc., is actually owned or controlled by Filipino citizens. (Petitoner then
filed with SC an action for mandamus)
Petitioner’s contention:
Under the Corporation Law, the Canon Law as well as the settled jurisprudence on the matter, the deed of sale
executed in its favor was actually a deed of sale in favor of the Catholic Church which is qualified to acquire
private agricultural lands for the establishment and maintenance of places of worship, and prayed that judgment
be rendered reserving and setting aside the resolution of the Land Registration Commissioner in question.
ISSUE: Whether the petitioner can is qualified to acquire lands in the Philippines. – YES.
RULING:
Meaning of a Corporation Sole
· a special form of corporation usually associated with the clergy designed to facilitate the exercise of the
functions of ownership of the church which was regarded as the property owner
· it consists of one person only, and his successors (who will always be one at a time), in some particular
station, who are incorporated by law in order to give them some legal capacities and advantages particularly that
of perpetuity which in their natural persons they could not have.
· Through this legal fiction, church properties acquired by the incumbent of a corporation sole pass, by
operation of law, upon his death not to his personal heirs but to his successor in office.
· A corporation sole, therefore, is created not only to administer the temporalities of the church or
religious society where he belongs, but also to hold and transmit the same to his successor in said office.
The nationality of a corporation sole is determined by the nationality of its members and not by the
nationality of the sole corporator.
· Although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in
different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the
country where it is located, is considered an entity or person with all the rights and privileges granted to such
artificial being under the laws of that country, separate and distinct from the personality of the Roman Pontiff
or the Holy See, without prejudice to its religious relations with the latter which are governed by the Cannon
Law or their rules and regulations.
Corporation sole can purchase private land in its name
· Under the circumstances of the present case, it is safe to state that even before the establishment of the
Philippine Commonwealth and of the Republic of the Philippines every corporation sole then organized and
registered had by express provision of law (Corporation Law, Public Act No. 1459) the necessary power
and qualification to purchase in its name private lands located in the territory in which it exercised its
functions or ministry and for which it was created, independently of the nationality of its incumbent unique and
single member and head, the bishop of the diocese.
· It can be also maintained that the Roman Catholic Apostolic Church in the Philippines has no nationality
and that the framers of the Constitution did not have in mind the religious corporation sole when they
provided that 60 per centum of the capital thereof be owned by Filipino citizens. Thus, if this constitutional
provision were not intended for corporation sole, it is obvious that this could not be regulated or restricted by
said provision.
The constitutional requirement is limited to “ownership” and not to control
· Both the Corporation Law and the Canon Law are explicit in their provisions that a corporation sole or
"ordinary" is not the owner of the properties that he may acquire but merely the administrator thereof
and holds the same in trust for the church to which the corporation is an organized and constituent part.
· Being mere administrator of the temporalities or properties titled in his name, the constitutional
provision requiring 60 per centum Filipino ownership is not applicable. The said constitutional provision is
limited by its terms to ownership alone and does not extend to control unless the control over the property
affected has been devised to circumvent the real purpose of the constitution.
The corporation sole in this case are owned by Filipinos
· The corporation sole by reason of their peculiar constitution and form of operation have no designed
owner of its temporalities, although by the terms of the law it can be safely implied that they ordinarily hold
them in trust for the benefit of the Roman Catholic faithful of their respective locality or diocese.
· They cannot be considered as aliens because they have no nationality at all.
· In determining, therefore, whether the constitutional provision requiring 60 per centum Filipino capital is
applicable to corporations sole, the nationality of the constituents of the diocese, and not the nationality of the
actual incumbent of the parish, must be taken into consideration.
· In the present case, even if the question of nationality be considered, the aforesaid constitutional
requirement is fully met and satisfied, considering that the corporation sole in question is composed of an
overwhelming majority of Filipinos.
Wherefore, the Resolution of the respondent Land Registration Commission x x x is hereby REVERSED. x x x
No pronouncement is made as to costs. It is so ordered.
____________________________________________________________________________________
9. THE PEOPLE OF THE PHILIPPINES, vs. WILLIAM H. QUASHA, G.R. No. L-6055, June 12, 1953
Digest author: Bulacan
Plaintiff-appellee: PEOPLE OF THE PHILIPPINES
Defendant-appellant: WILLIAM H. QUASHA
Ponente: REYES, J
DOCTRINE: The moment for determining whether a corporation is entitled to operate as a public utility is
when it applies for a franchise, certificate, or any other form of authorization for that purpose. And that can
be done after the corporation has already come into being and not while it is still being formed.
APPLICABLE LAW: Section 8, Article XIV of the Constitution “" no franchise, certificate, or any other form
of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to
corporation or other entities organized under the law of the Philippines, sixty per centum of the capital of which
is owned by citizens of the Philippines . . . .” (OLD CONSTI)
FACTS:
l William H. Quasha, a member of the Philippine bar, was entrusted with the preparation and
registration of the article of incorporation of the Pacific Airways Corporation.
l Article of Incorporation:
 -Primary purpose of the corporation was to carry on the business of a common carrier by air, land or
water.
-Capital stock was P1,000,000.-Amount capital stock actually subscribed was P200,000, by Arsenio
Baylon, a Filipino and five others, all Americans.
-Baylon's subscription was for 1,145 preferred shares (P114,500) and for 6,500 common shares
(P6,500).
l Quasha caused it to appear in AOI that Baylon, had subscribed to and was the owner of 60.005 % of
the subscribed capital stock when in reality, as the accused well knew that the owner of the capital
stock subscribed to by Baylon and the money paid thereon were American citizen whose name did
not appear in the article of incorporation and that the purpose for making this false statement was
to circumvent the constitutional mandate that no corporation shall be authorize to operate as a
public utility in the Philippines unless 60 per cent of its capital stock is owned by Filipinos.
l In short, Baylon was made a trustee for the American incorporators.
l In November 4,1946, the Pacific Airways Corporation registered its articles of incorporation with the
SEC.
l AOI was accepted for registration and a certificate of incorporation was issued by the SEC
l Quasha was charged with the crime of falsification of a public and commercial document under article
172 paragraph 1, in connection with article 171, paragraph 4, of the Revised Penal Code. He was
found guilty.
l Falsification imputed in the accused consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee of his American co-incorporators, thus giving the impression that
Baylon was the owner of the shares subscribed to by him which, as above stated, amount to 60.005
per cent of the sub-scribed capital stock.
RULING OF THE LOWER COURTS:
1. Non disclosure is a malicious perversion of the truth made with the wrongful intent circumventing
section 8, Article XIV of the Constitution.
2. Accused was obliged to disclose the whole truth about the nationality of the subscribed capital stock of
the corporation by revealing that Baylon was a mere trustee or dummy of his American co-
incorporators, and that in not making such disclosure defendant's intention was to circumvent the
Constitution to the detriment of the public interests.
ISSUE: Whether the non-disclosure violated Section 8, Article XIV of the Constitution-NO
RULING + RATIO:
Trial court’s opinion is predicated on the erroneous assumption that the constitutional provision was meant to
prohibit the mere formation of a public utility corporation without 60 per cent of its capital being owned by the
Filipinos.
The Constitution does not prohibit the mere formation of a public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization
for the operation of a public utility to a corporation already in existence but without the requisite proportion of
Filipino capital.
The constitutional provision itself qualifies the terms " franchise", "certificate", or "any other form of
authorization" with the phrase "for the operation of a public utility," thereby making it clear that the franchise
meant is not the "primary franchise" that invest a body of men with corporate existence but the "secondary
franchise" or the privilege to operate as a public utility after the corporation has already come into being.
For a corporation to be entitled to operate a public utility it is not necessary that it be organized with 60 per cent
of its capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of shares to Filipino citizens. Conversely, a
corporation originally formed with Filipino capital may subsequently change the national status of said capital
through transfer of shares to foreigners.
The moment for determining whether a corporation is entitled to operate as a public utility is when it applies for
a franchise, certificate, or any other form of authorization for that purpose. And that can be done after the
corporation has already come into being and not while it is still being formed. And at that moment, the
corporation must show that it has complied not only with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements of the Civil Aviation Law if it is a common carrier by
air, the Revised Administrative Code if it is a common carrier by water, and the Public Service Law if it is a
common carrier by land or other kind of public service.
Because the Constitution does not prohibit the mere formation of a public utility corporation with the alien
capital, then accused was therefore was not obliged to disclose that Baylon was a mere trustee of his American
co-incorporation making the subscribed capital stock of the corporation was wholly American.
DECISION: Acquitted.
ADDITIONAL NOTES:
ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. — The penalty of
prision mayor and a fine not to exceed 5,000 pesos shall be imposed upon any public officer, employee, or
notary who, taking advantage of his official position, shall falsify a document by committing any of the
following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of falsified documents. — The penalty of prision
correccional in its medium and maximum period and a fine of not more than 5,000 pesos shall be imposed
upon:
xxx xxx xxx
1. Any private individual who shall commit any of the falsifications enumerated in the next preceding
article in any public or official document or letter of exchange or any other kind of commercial document.
______________________________________________________________________________
10. Kilosbayan vs. Guingona, Jr, - Bernal
This is a special civil action for prohibition and injunction, with a prayer for a temporary restraining order and
preliminary injunction, which seeks to prohibit and restrain the implementation of the "Contract of Lease"
executed by the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Gaming Management
Corporation (PGMC) in connection with the on- line lottery system, also known as "lotto."
FACTS:
Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock domestic corporation
composed of civic-spirited citizens, pastors, priests, nuns, and lay leaders who are committed to the cause of
truth, justice, and national renewal. The rest of the petitioners, except Senators Freddie Webb and Wigberto
Tañada and Representative Joker P. Arroyo, are suing in their capacities as members of the Board of Trustees of
KILOSBAYAN and as taxpayers and concerned citizens. Senators Webb and Tañada and Representative
Arroyo are suing in their capacities as members of Congress and as taxpayers and concerned citizens of the
Philippines.
In 1993, the Philippine Charity Sweepstakes Office decided to put up an on-line lottery system which will
establish a national network system that will in turn expand PCSO’s source of income.
A bidding was made, making PGMC or Philippine Gaming Management Corporation as the winning bidder.
Thereafter, a “Contract of Lease” was initiated in favour of PGMC.
PETITIONERS CONTENTION
Petitioners submit that the PCSO cannot validly enter into the assailed Contract of Lease with the PGMC
because it is an arrangement wherein the PCSO would hold and conduct the on-line lottery system in
"collaboration" or "association" with the PGMC, in violation of Section 1(B) of R.A. No. 1169, as amended by
B.P. Blg. 42, which prohibits the PCSO from holding and conducting charity sweepstakes races, lotteries, and
other similar activities "in collaboration, association or joint venture with any person, association, company or
entity, foreign or domestic." Even granting arguendo that a lease of facilities is not within the contemplation of
"collaboration" or "association," an analysis, however, of the Contract of Lease clearly shows that there is a
"collaboration, association, or joint venture between respondents PCSO and PGMC in the holding of the On-
Line Lottery System," and that there are terms and conditions of the Contract "showing that respondent PGMC
is the actual lotto operator and not respondent PCSO."
The petitioners also point out that paragraph 10 of the Contract of Lease requires or authorizes PGMC to
establish a telecommunications network that will connect all the municipalities and cities in the territory.
However, PGMC cannot do that because it has no franchise from Congress to construct, install, establish, or
operate the network pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75% foreign-
owned or controlled corporation and cannot, therefore, be granted a franchise for that purpose because of
Section 11, Article XII of the 1987 Constitution. Furthermore, since "the subscribed foreign capital" of the
PGMC "comes to about 75%, as shown by paragraph EIGHT of its Articles of Incorporation," it cannot
lawfully enter into the contract in question because all forms of gambling — and lottery is one of them — are
included in the so-called foreign investments negative list under the Foreign Investments Act (R.A. No. 7042)
where only up to 40% foreign capital is allowed. 20
Finally, the petitioners insist that the Articles of Incorporation of PGMC do not authorize it to establish and
operate an on-line lottery and telecommunications systems.
RESPONDENTS CONTENTION
private respondent PGMC asserts that "(1) [it] is merely an independent contractor for a piece of work, (i.e., the
building and maintenance of a lottery system to be used by PCSO in the operation of its lottery franchise); and
(2) as such independent contractor, PGMC is not a co-operator of the lottery franchise with PCSO, nor is PCSO
sharing its franchise, 'in collaboration, association or joint venture' with PGMC — as such statutory limitation is
viewed from the context, intent, and spirit of Republic Act 1169, as amended by Batas Pambansa 42." It further
claims that as an independent contractor for a piece of work, it is neither engaged in "gambling" nor in "public
service" relative to the telecommunications network, which the petitioners even consider as an "indispensable
requirement" of an on-line lottery system. Finally, it states that the execution and implementation of the contract
does not violate the Constitution and the laws; that the issue on the "morality" of the lottery franchise granted to
the PCSO is political and not judicial or legal, which should be ventilated in another forum; and that the
"petitioners do not appear to have the legal standing or real interest in the subject contract and in obtaining the
reliefs sought."
Public Respondent also maintained that the contract of lease in question does not violate Section 1 of R.A. No.
1169, as amended by B.P. Blg. 42, and that the petitioner's interpretation of the phrase "in collaboration,
association or joint venture" in Section 1 is "much too narrow, strained and utterly devoid of logic" for it
"ignores the reality that PCSO, as a corporate entity, is vested with the basic and essential prerogative to enter
into all kinds of transactions or contracts as may be necessary for the attainment of its purposes and objectives."
What the PCSO charter "seeks to prohibit is that arrangement akin to a "joint venture" or partnership where
there is "community of interest in the business, sharing of profits and losses, and a mutual right of control," a
characteristic which does not obtain in a contract of lease." With respect to the challenged Contract of Lease,
the "role of PGMC is limited to that of a lessor of the facilities" for the on-line lottery system; in "strict
technical and legal sense," said contract "can be categorized as a contract for a piece of work as defined in
Articles 1467, 1713 and 1644 of the Civil Code."
They further claim that the establishment of the telecommunications system stipulated in the Contract of Lease
does not require a congressional franchise because PGMC will not operate a public utility; moreover, PGMC's
"establishment of a telecommunications system is not intended to establish a telecommunications business," and
it has been held that where the facilities are operated "not for business purposes but for its own use," a
legislative franchise is not required before a certificate of public convenience can be granted. Even granting
arguendo that PGMC is a public utility, pursuant to Albano S.
Reyes, "it can establish a telecommunications system even without a legislative franchise because not every
public utility is required to secure a legislative franchise before it could establish, maintain, and operate the
service"; and, in any case, "PGMC's establishment of the telecommunications system stipulated in its contract
of lease with PCSO falls within the exceptions under Section 1 of Act No. 3846 where a legislative franchise is
not necessary for the establishment of radio stations."
They also argue that the contract does not violate the Foreign Investment Act of 1991; that the Articles of
Incorporation of PGMC authorize it to enter into the Contract of Lease; and that the issues of "wisdom, morality
and propriety of acts of the executive department are beyond the ambit of judicial review."
Finally, the public respondents allege that the petitioners have no standing to maintain the instant suit.
ISSUES:
1) Whether or not petitioner ha a locus standi.
2) Whether or not PCSO, under Section 1 of its charter (RA 1169), is prohibited from holding and
conducting lotteries “in collaboration, association or joint venture with any person, association, company
or entity”
RULING:
PROCEDURAL
1. As to Locus Standi
"The unchallenged rule is that the person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain, direct injury as a result of its
enforcement
The preliminary issue on the locus standi of the petitioners should, indeed, be resolved in their favor. A party's
standing before this Court is a procedural technicality which it may, in the exercise of its discretion, set aside in
view of the importance of the issues raised. In the landmark Emergency Powers Cases, 29 this Court brushed
aside this technicality because "the transcendental importance to the public of these cases demands that they be
settled promptly and definitely, brushing aside, if we must, technicalities of procedure. (Avelino vs. Cuenco,
G.R. No. L-2821)." Insofar as taxpayers' suits are concerned, this Court had declared that it "is not devoid of
discretion as to whether or not it should be entertained," 30 or that it "enjoys an open discretion to entertain the
same or not."
SUBSTANTIVE
2. As to
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from holding and conducting
lotteries "in collaboration, association or joint venture with any person, association, company or entity, whether
domestic or foreign." Section 1 provides:
Sec. 1. The Philippine Charity Sweepstakes Office. — The Philippine Charity Sweepstakes Office, hereinafter
designated the Office, shall be the principal government agency for raising and providing for funds for health
programs, medical assistance and services and charities of national character, and as such shall have the general
powers conferred in section thirteen of Act Numbered One thousand four hundred fifty-nine, as amended, and
shall have the authority:
A. To hold and conduct charity sweepstakes races, lotteries and other similar activities, in such frequency and
manner, as shall be determined, and subject to such rules and regulations as shall be promulgated by the Board
of Directors.
B. Subject to the approval of the Minister of Human Settlements, to engage in health and welfare-related
investments, programs, projects and activities which may be profit-oriented, by itself or in collaboration,
association or joint venture with any person, association, company or entity, whether domestic or foreign,
except for the activities mentioned in the preceding paragraph (A), for the purpose of providing for permanent
and continuing sources of funds for health programs, including the expansion of existing ones, medical
assistance and services, and/or charitable grants: Provided, That such investment will not compete with the
private sector in areas where investments are adequate as may be determined by the National Economic and
Development Authority.
The language of the section is indisputably clear that with respect to its franchise or privilege "to hold and
conduct charity sweepstakes races, lotteries and other similar activities," the PCSO cannot exercise it "in
collaboration, association or joint venture" with any other party. This is the unequivocal meaning and import of
the phrase "except for the activities mentioned in the preceding paragraph (A)," namely, "charity sweepstakes
races, lotteries and other similar activities."
No interpretation of the said provision to relax or circumvent the prohibition can be allowed since the privilege
to hold or conduct charity sweepstakes races, lotteries, or other similar activities is a franchise granted by the
legislature to the PCSO. It is a settled rule that "in all grants by the government to individuals or corporations of
rights, privileges and franchises, the words are to be taken most strongly against the grantee .... [o]ne who
claims a franchise or privilege in derogation of the common rights of the public must prove his title thereto by a
grant which is clearly and definitely expressed, and he cannot enlarge it by equivocal or doubtful provisions or
by probable inferences. Whatever is not unequivocally granted is withheld. Nothing passes by mere
implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of its charter, the PCSO cannot share
its franchise with another by way of collaboration, association or joint venture. Neither can it assign, transfer, or
lease such franchise. It has been said that "the rights and privileges conferred under a franchise may, without
doubt, be assigned or transferred when the grant is to the grantee and assigns, or is authorized by statute. On the
other hand, the right of transfer or assignment may be restricted by statute or the constitution, or be made
subject to the approval of the grantor or a governmental agency, such as a public utilities commission, exception
that an existing right of assignment cannot be impaired by subsequent legislation." 60
It may also be pointed out that the franchise granted to the PCSO to hold and conduct lotteries allows it to hold
and conduct a species of gambling. It is settled that "a statute which authorizes the carrying on of a gambling
activity or business should be strictly construed and every reasonable doubt so resolved as to limit the powers
and rights claimed under its authority."
We agree with the petitioners that it does, notwithstanding its denomination or designation as a (Contract of
Lease). We are neither convinced nor moved or fazed by the insistence and forceful arguments of the PGMC
that it does not because in reality it is only an independent contractor for a piece of work, i.e., the building and
maintenance of a lottery system to be used by the PCSO in the operation of its lottery franchise. Whether the
contract in question is one of lease or whether the PGMC is merely an independent contractor should not be
decided on the basis of the title or designation of the contract but by the intent of the parties, which may be
gathered from the provisions of the contract itself. Animus hominis est anima scripti. The intention of the party
is the soul of the instrument. In order to give life or effect to an instrument, it is essential to look to the intention
of the individual who executed it. And, pursuant to Article 1371 of the Civil Code, "to determine the intention
of the contracting parties, their contemporaneous and subsequent acts shall be principally considered." To put it
more bluntly, no one should be deceived by the title or designation of a contract.
Collaboration is defined as the acts of working together in a joint project. Association means the act of a
number of persons in uniting together for some special purpose or business. Joint venture is defined as an
association of persons or companies jointly undertaking some commercial enterprise; generally all contribute
assets and share risks. It requires a community of interest in the performance of the subject matter, a right to
direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share
both in profit and
losses.
The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither funds of its own nor
the expertise to operate and manage an on-line lottery system, and that although it wished to have the system, it
would have it "at no expense or risks to the government." Because of these serious constraints and
unwillingness to bear expenses and assume risks, the PCSO was candid enough to state in its RFP that it is
seeking for "a suitable contractor which shall build, at its own expense, all the facilities needed to operate and
maintain" the system; exclusively bear "all capital, operating expenses and expansion expenses and risks"; and
submit "a comprehensive nationwide lottery development plan . . . which will include the game, the marketing
of the games, and the logistics to introduce the game to all the cities and municipalities of the country within
five (5) years"; and that the operation of the on-line lottery system should be "at no expense or risk to the
government" — meaning itself, since it is a government-owned and controlled agency. The facilities referred to
means "all capital equipment, computers, terminals, software, nationwide telecommunications network, ticket
sales offices, furnishings and fixtures, printing costs, costs of salaries and wages, advertising and promotions
expenses, maintenance costs, expansion and replacement costs, security and insurance, and all other related
expenses needed to operate a nationwide on-line lottery system."
This joint venture is further established by the following:
(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as compensation for the
fulfillment of its obligations under the contract, including, but not limited to the lease of the Facilities. However,
this rent is not actually a fixed amount. Although it is stated to be 4.9% of gross receipts from ticket sales,
payable net of taxes required by law to be withheld, it may be drastically reduced or, in extreme cases, nothing
may be due or demandable at all because the PGMC binds itself to "bear all risks if the revenue from the ticket
sales, on an annualized basis, are insufficient to pay the entire prize money." This risk-bearing provision is
unusual in a lessor-lessee relationship, but inherent in a joint venture.
(b) In the event of pre-termination of the contract by the PCSO, or its suspension of operation of the on-line
lottery system in breach of the contract and through no fault of the PGMC, the PCSO binds itself "to promptly,
and in any event not later than sixty (60) days, reimburse the Lessor the amount of its total investment cost
associated with the On-Line Lottery System, including but not limited to the cost of the Facilities, and further
compensate the LESSOR for loss of expected net profit after tax, computed over the unexpired term of the
lease." If the contract were indeed one of lease, the payment of the expected profits or rentals for the unexpired
portion of the term of the contract would be enough.
(c) The PGMC cannot "directly or indirectly undertake any activity or business in competition with or adverse
to the On-Line Lottery System of PCSO unless it obtains the latter's prior written consent." If the PGMC is
engaged in the business of leasing equipment and technology for an on-line lottery system, we fail to see any
acceptable reason why it should allow a restriction on the pursuit of such business.
(d) The PGMC shall provide the PCSO the audited Annual Report sent to its stockholders, and within two years
from the effectivity of the contract, cause itself to be listed in the local stock exchange and offer at least 25% of
its equity to the public. If the PGMC is merely a lessor, this imposition is unreasonable and whimsical, and
could only be tied up to the fact that the PGMC will actually operate and manage the system; hence, increasing
public participation in the corporation would enhance public interest.
(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the requirements of the RFP,
which it may, at its option, maintain as its initial performance bond required to ensure its faithful compliance
with the terms of the contract.
(f) The PCSO shall designate the necessary personnel to monitor and audit the daily performance of the on-line
lottery system; and promulgate procedural and coordinating rules governing all activities relating to the on-line
lottery system. The first further confirms that it is the PGMC which will operate the system and the PCSO may,
for the protection of its interest, monitor and audit the daily performance of the system. The second admits the
coordinating and cooperative powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or bankrupt or is unable to
pay its debts, or if it stops or suspends or threatens to stop or suspend payment of all or a material part of its
debts.
All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit, operation,
conduct, and management of the On-Line Lottery System. They exhibit and demonstrate the parties' indivisible
community of interest in the conception, birth and growth of the on-line lottery, and, above all, in its profits,
with each having a right in the formulation and implementation of policies related to the business and sharing,
as well, in the losses — with the PGMC bearing the greatest burden because of its assumption of expenses and
risks, and the PCSO the least, because of its confessed unwillingness to bear expenses and risks. In a manner of
speaking, each is wed to the other for better or for worse. In the final analysis, however, in the light of the
PCSO's RFP and the above highlighted provisions, as well as the "Hold Harmless Clause" of the Contract of
Lease, it is even safe to conclude that the actual lessor in this case is the PCSO and the subject matter thereof is
its franchise to hold and conduct lotteries since it is, in reality, the PGMC which operates and manages the on-
line lottery system for a period of eight years.
Considering the above citizenship requirement, the PGMC claims that the Berjaya Group "undertook to reduce
its equity stakes in PGMC to 40%," by selling 35% out of the original 75% foreign stockholdings to local
investors.
SUMMARY
There is undoubtedly a collaboration between PCSO and PGMC and not merely a contract of lease. The
relations between PCSO and PGMC cannot be defined simply by the designation they used, i.e., a contract of
lease. Pursuant to the wordings of their agreement, PGMC at its own expense shall build, operate, and
manage the network system including its facilities needed to operate a nationwide online lottery system.
PCSO bears no risk and all it does is to provide its franchise – in violation of its charter. Necessarily, the use of
such franchise by PGMC is a violation of Act No. 3846.
DISPOSITION
We thus declare that the challenged Contract of Lease violates the exception provided for in paragraph B,
Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid for being contrary to law.
This conclusion renders unnecessary further discussion on the other issues raised by the petitioners.
WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract of Lease executed on 17
December 1993 by respondent Philippine Charity Sweepstakes Office (PCSO) and respondent Philippine
Gaming Management Corporation (PGMC) is hereby DECLARED contrary to law and invalid.
The Temporary Restraining Order issued on 11 April 1994 is hereby MADE PERMANENT
______________________________________________________________________
11. TATAD v. GARCIA, JR., G.R. No. 114222, 243 SCRA 436, 6 April 1995
Digest Author: Barredo
Petitioners: Francisco S. Tatad, John H. Osmeña, and Rodolfo G. Biazon
 Respondents: Hon. Jesus B. Garcia, Jr. (Secretary of the Department of Transportation and Communications)
and EDSA LRT Corporation, Ltd.
DOCTRINE: The Constitution, in no uncertain terms, requires a franchise for the operation of a public
utility. However, it does not require a franchise before one can own the facilities needed to operate a public
utility so long as it does not operate them to serve the public. In law, there is a clear distinction between the
"operation" of a public utility and the ownership of the facilities and equipment used to serve the public.
LAWS APPLICABLE: Section 11, Article IX of the 1987 Constitution
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.
FACTS:
· DOTC planned to construct a light railway transit line along EDSA (EDSA Light Rail Transit III)
which was intended to provide a mass transit system along EDSA and alleviate the congestion and
growing transportation problem in the metropolis.
· After the evaluation of the prequalification bids, only the EDSA LRT Consortium (composed of 10
foreign and domestic corporations – Kaiser Engineers International, Inc., ACER Consultants (Far
East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics,
TCGI Engineering All Asia Capital and Leasing Corporation, The Salim Group of Jakarta, E. L.
Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz & co.,
Inc.) met the requirements to be the contractor for the financing and implementation of the project.
· DOTC and EDSA LRT Corporation, Ltd. (in substitution of the EDSA LRT Consortium) then entered
into agreements wherein the latter shall undertake and finance the entire project required for a complete
operational light rail transit system. Upon full or partial completion and viability thereof, private
respondent shall deliver the use and possession of the completed portion to DOTC which shall operate
the same. DOTC shall pay private respondent rentals on a monthly basis. After 25 years and DOTC
shall have completed payment of the rentals, ownership of the project shall be transferred to the latter
for a consideration of only U.S. $1.00.
· Secretary Garcia submitted the two Agreements to President Ramos for his consideration and
approval.
· Petitioners, as members of the Philippine Senate, sued in their capacities as Senators and as taxpayers
and filed petition to prohibit respondents from further implementing and enforcing their agreements.
· Petitioners averred that EDSA LRT Corporation is a foreign corporation as it was organized under
Hong Kong laws; that as such, it cannot own a public utility such as the EDSA LRT III as the ownership
and operation thereof is limited by the Constitution to Filipino citizens and domestic corporations.
· Respondents contend that the nationality requirement for public utilities mandated by the
Constitution does not apply to EDSA LRT Corporation, Ltd.
ISSUE: Whether the agreements between DOTC and EDSA LRT Corporation, Ltd. violate the Constitution. –
NO.
RULING + RATIO:
Petitioners phrased their question as “can respondent EDSA LRT Corporation, Ltd., a foreign corporation own
EDSA LRT III; a public utility?” However, such phrasing is erroneous in the case at bar. What EDSA LRT
Corporation, Ltd. owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power
plant, not a public utility. While a franchise is needed to operate these facilities to serve the public, they do not
by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to
serve the public.
The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it
does not require a franchise before one can own the facilities needed to operate a public utility so long as it does
not operate them to serve the public. In law, there is a clear distinction between the "operation" of a public
utility and the ownership of the facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is completely
subjected to his will in everything not prohibited by law or the concurrence with the rights of another. The
exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used
to serve the public as a public utility unless the operator has a franchise. The operation of a rail system as a
public utility includes the transportation of passengers from one point to another point, their loading and
unloading at designated places and the movement of the trains at pre-scheduled times.
The right to operate a public utility may exist independently and separately from the ownership of the facilities
thereof. One can own said facilities without operating them as a public utility, or conversely, one may operate a
public utility without owning the facilities used to serve the public. The devotion of property to serve the public
may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof. This
dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public
can be very well appreciated when we consider the transportation industry.
In this case, while EDSA LRT Corporation, Ltd. is the owner of the facilities necessary to operate the EDSA
LRT III, it admits that it is not enfranchised to operate a public utility. In view of this incapacity, private
respondent and DOTC agreed that on completion date, private respondent will immediately deliver possession of
the LRT system by way of lease for 25 years, during which period DOTC shall operate the same as a common
carrier and private respondent shall provide technical maintenance and repair services to DOTC. Private
respondent shall also train DOTC personnel for familiarization with the operation, use, maintenance and repair of
the rolling stock, power plant, substations, electrical, signaling, communications and all other equipment as
supplied in the agreement. Personnel of DOTC will work under the direction and control of private respondent
only during training. The training objectives, however, shall be such that upon completion of the EDSA LRT III
and upon opening of normal revenue operation, DOTC shall have in their employ personnel capable of
undertaking training of all new and replacement personnel. In other words, by the end of the 3-year construction
period and upon commencement of normal revenue operation, DOTC shall be able to operate the EDSA LRT III
on its own and train all new personnel by itself. In sum, private respondent will not run the light rail vehicles and
collect fees from the riding public. It will have no dealings with the public and the public will have no right to
demand any services from it.
Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility. Even the mere
formation of a public utility corporation does not ipso facto characterize the corporation as one operating a public
utility. The moment for determining the requisite Filipino nationality is when the entity applies for a franchise,
certificate or any other form of authorization for that purpose. Petition is dismissed.
______________________________________________________________
12. Land Bank of the Philippines v. CA, G.R. No. 127181, September 4, 2001
Digest Author: Agorilla
Petitioner/s: Land Bank of the Philippines
Respondent/s: The Court of Appeals, Eco Management Corporation and Emmanuel C. Oñate
Doctrine: A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may be related. By
this attribute, a stockholder may not, generally, be made to answer for acts or liabilities of the said
corporation, and vice versa.
The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the
personality of the corporation as a means to perpetrate fraud and/or escape a liability and responsibility
demanded by law. In the absence of any malice or bad faith, a stockholder or an officer of a corporation
cannot be made personally liable for corporate liabilities.
APPLICABLE LAWS:
The case only cited jurisprudence as reference.
FACTS:
· Land Bank of the Philippines (LBP) extended series of credit accommodations to ECO Corp., using the
trust funds of the Philippine Virginia Tobacco Administration (PVTA) in the amount of ₱26,109,000.00.
· The proceeds of the same were received by Emmanuel C. Oñate (Oñate).
· However, upon maturity of the credit accommodations, ECO Corp. failed to pay the same despite
repeated demands.
· ECO Corp. claims that the company was in financial difficulty for it was unable to collect its
investments with companies which were affected by the financial crisis brought about by the Dewey Dee
scandal.
· ECO Corp. proposed and submitted to LBP a "Plan of Payment" whereby the former would set up a
financing company which would absorb the loan obligations. It was proposed that LBP would participate in the
scheme through the conversion of P9,000,000.00 which was part of the total loan, into equity. TCHEDA
· But, LBP’s Trust Committee resolved to reject the plan of payment.
· LBP then sent a letter to the PVTA for the latter's comments. The letter stated that if LBP did not hear
from PVTA within five (5) days from the latter's receipt of the letter, such silence would be construed to be an
approval of LBP's intention to file suit against ECO and its corporate officers. PVTA did not respond to the
letter.
· Hence, the LBP filed a complaint for Collection of Sum of Money not only against ECO Corp. but also
against Oñate.
RULING OF THE LOWER COURTS:
· The trial court, held only ECO Corp. liable and absolved Oñate from personal liability for insufficiency
of evidence against him.
· The Court of Appeals affirmed this conclusion, hence the appeal before the SC.
CONTENTIONS OF PETITIONER (LBP):
· According to LBP, the ECO Corp. was formed ostensibly to allow Oñate to acquire loans from Land
Bank which he used for his personal advantage.
· Petitioner alleged among others that:
(a) Oñate owns the majority of the interest holdings in respondent corporation, specifically during the crucial
time when appellees applied for and obtained the loan from LANDBANK, sometime in September to
November, 1980.
(b) The acronym ECO stands for the initials of Emmanuel C. Oñate, which is the logical, sensible and concrete
explanation for the name ECO, in the absence of evidence to the contrary.
(c) Respondent Oñate has always referred to himself as the debtor, not merely as an officer or a representative
of respondent corporation.
(d) Respondent Oñate controlled respondent corporation by simultaneously holding two (2) corporate positions,
viz., as Chairman and as treasurer, beginning from the time of respondent corporation's incorporation and
continuously thereafter without benefit of election.
CONTENTIONS OF PRIVATE RESPONDENTS (ECO Corp. and Oñate):
· Private respondents, in turn, contend that Oñate's only participation in the transaction between petitioner
and respondent ECO was his execution of the loan agreements and promissory notes as Chairman of the
corporation's Board of Directors. There was nothing in the loan agreement nor in the promissory notes which
would indicate that Oñate was binding himself jointly and severally with ECO.
· They likewise deny that ECO stands for Emmanuel C. Oñate. They also note that Oñate is no longer a
majority stockholder of ECO and that the payment by a third person of the debt of another is allowed under the
Civil Code.
· They also alleged that there was no fraud and/or bad faith in the transactions between them and Land
Bank.
· Hence, they conclude, there is no legal ground to pierce the veil of ECO Corp.'s personality.
ISSUE:
Whether or not the corporate veil of ECO Management Corporation should be pierced||| and Oñate should be
held jointly and severally liable with ECO Management Corporation for the loans incurred from LBP. NO.
RULING + RATIO:
A corporation, upon coming into existence, is invested by law with a personality separate and distinct from
those persons composing it as well as from any other legal entity to which it may be related. By this attribute, a
stockholder may not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa.
This separate and distinct personality is, however, merely a fiction created by law for convenience and to
promote the ends of justice. For this reason, it may not be used or invoked for ends subversive to the policy and
purpose behind its creation or which could not have been intended by law to which it owes its being. This is
particularly true when the fiction is used to defeat public convenience, justify wrong, protect fraud, defend
crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. This is
likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity. In all these cases, the notion of corporate entity will
be pierced or disregarded with reference to the particular transaction involved.
The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality
of the corporation as a means to perpetrate fraud and/or escape a liability and responsibility demanded by law.
In order to disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. In the absence of any malice or bad faith, a stockholder or an officer of a corporation
cannot be made personally liable for corporate liabilities.
In this case, the mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that
Oñate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital
stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate
personalities. Neither is the fact that the name "ECO" represents the first three letters of Oñate's name sufficient
reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Oñate.
A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring
the name or as in this case, the initials of one of its shareholders.
DISPOSITIVE: The petition is DENIED for lack of merit.
_____________________________________________________________
13. PACIFIC REHOUSE CORPORATION vs COURT OF APPEALS and EXPORT AND INDUSTRY
BANK, INC G.R. No. 199687 March 24, 2014
Digest Author : Suarez
Petitioner/s : PACIFIC REHOUSE CORPORATION
Respondent/s : COURT OF APPEALS and EXPORT AND INDUSTRY
Doctrine 1 : Majority Equity Ownership and interlocking Directorship. The existence of interlocking
directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate
fiction in the absence of fraud or other public policy considerations.
Doctrine 2 : Current attitude of the court towards piercing doctrine. Any application of the doctrine of
piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is
to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.
APPLICABLE LAWS: Law (you can also site the provision itself)
FACTS :
· Pacific Rehouse Corporation won a case against EIB Securities for the unauthorized sale of 32.18M
DMCI shares owned by Pacfic Rehouse Corporation.
· When the Writ of Execution was unsatisfied, Pacific Rehaouse Corporation moved for the issuance of an
alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as E- Securities
is “a wholly-owned controlled and dominated subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a
mere alter ego and business conduit of the latter.
o 499,995 of 500,000 shares of E-Securities are owned by Export Bank.
· Export Bank was granted filed a petition for certiorari with Writ of Preliminary Injunction before the
CA. The injuction was granted.
RULING OF THE LOWER COURTS:
· RTC – In favor of Pacific Rehouse. E-Securities is a mere alter-ego of the parent corporation which
justifies the piercing of corporate fiction.
· CA – Reversed. the alter ego theory cannot be sustained because ownership of a subsidiary by the parent
company is not enough justification to pierce the veil of corporate fiction. There must be proof, apart from mere
ownership, that Export Bank exploited or misused the corporate fiction of E-Securities. The existence of
interlocking incorporators, directors and officers between the two corporations is not a conclusive indication
that they are one and the same.
CONTENTIONS OF PACIFIC REHOUSE:
· That because of the ownership (499,995/500,000) there is no need for finding of fault before the piercing
doctrine can be applied.
ISSUE: Whether majority ownership or interlocking directorship is sufficient ground to pierce the veil of
corporate entity. – NO.
RULING + RATIO:
Furthermore, ownership by Export Bank of a great majority or all of stocks of E-Securities and the existence of
interlocking directorates may serve as badges of control, but ownership of another corporation, per se,
without proof of actuality of the other conditions are insufficient to establish an alter ego relationship or
connection between the two corporations, which will justify the setting aside of the cover of corporate
fiction. The Court has declared that “mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality.” The Court has likewise ruled that the “existence of interlocking directors, corporate
officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations.”
While the courts have been granted the colossal authority to wield the sword which pierces through the veil of
corporate fiction, concomitant to the exercise of this power, is the responsibility to uphold the doctrine of
separate entity, when rightly so; as it has for so long encouraged businessmen to enter into economic endeavors
fraught with risks and where only a few dared to venture.
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court
should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its
rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application.
Others: Alter Ego Doctrine
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when
the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality”
may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control
but such domination of finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the acts complained of took place. Moreover, the
control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
________________________________________________________________________________
14. LANUZA V BF CORP, GR 174938
Digest Author: Santos
Petitioners: Gerardo Lanuza and Antonio Olbes – BOD of Shangri-La
Respondents: BF Corporation, Shangri-La Properties Inc, Alfredo C Ramos, Rufo B. Colayco, Maximo
Licauco III and Benjamin Ramos
DOCTRINE: Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a
contract entered into by the corporation they represent if there are allegations of bad faith or malice in their acts
representing the corporation.
LAWS APPLICABLE: Sec 31 of the Corporate Code
FACTS:
 This is an Appeal on Certiorari, assailing the CA's decision and resolution that affirmed the trial court's
decision holding that petitioners, as directors, should submit themselves as parties to the arbitration
proceedings between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).
 BF Corp constructed a mall and multi-level parking lot for Shangri-la edsa which remained unpaid despite
demands. Thus BF filed a collection suit.
 According to BF Corporation, ShangriLa misrepresented that it had funds to pay and the delay in payment
was simply a matter of delayed processing of BF Corporation’s progress billing statements. As a result,
BF Corp used its own funds to complete the construction.
 BF Corp also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well as
for the damages that BF Corporation incurred as a result of Shangri-La’s default.
 Shangri-La officers: A. Ramos, R. Colayco, M. Licauco III, and B. Ramos filed a motion to suspend the
proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the
arbitration clause provided in its contract – RTC denied the motion
 Petitioners filed an answer praying to be excluded from the arbitration proceedings as they have already
resigned as board of directors from Shangri-La. Thus, they are now third parties to the contract.
 The Court of Appeals ordered the arbitration proceedings to proceed.
Issue:
Whether the petitioners be made parties to the arbitration proceedings. - YES
Ruling:
 Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers
through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter
into contracts without them.
 A consequence of a corporation’s separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations, incurred through official
acts of its representatives, are its own. Hence, a corporation’s representatives are generally not bound by
the terms of the contract executed by the corporation. They are not personally liable for obligations and
liabilities incurred on or in behalf of the corporation.
 However, when there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should be treated
as one.
 Section 31 of the Corporation Code provides the instances when directors, trustees, or officers may
become solidarily liable for corporate acts:
a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate
act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
director or trustee.
 When the courts disregard the corporation’s distinct and separate personality from its directors or officers,
the courts do not say that the corporation, in all instances and for all purposes, is the same as its directors,
stockholders, officers, and agents. It does not result in an absolute confusion of personalities of the
corporation and the persons composing or representing it. Courts merely discount the distinction and treat
them as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities for
all damages to erring corporate officials who participated in the corporation’s illegal acts. This is done so
that the legal fiction cannot be used to perpetrate illegalities and injustices. – Piercing the corporate veil.
 Given this, parties who are normally treated as distinct individuals should be made to participate in the
arbitration proceedings in order to determine if such distinction should indeed be disregarded and, if so, to
determine the extent of their liabilities
 Hence, the issue of whether the corporation's acts in violation of complainant's rights, and the incidental
issue of whether piercing of the corporate veil is warranted, should be determined in a single proceeding.
 In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the
existence of circumstances that render petitioners and the other directors solidarily liable. It ruled that
petitioners and Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La
to BF Corporation. The Arbitral Tribunal’s decision was made with the participation of petitioners, albeit
with their continuing objection. In view of our discussion above, we rule that petitioners are bound by
such decision.
______________________________________________________________________________
15. Case Title: United States v. Milwaukee Refrigerator Transit Co., 142 F. 247 (1905)
GR Number and Date: 142 F. 247
Author: Santiago, Arnel
Doctrine:
1. A corporation will be looked upon as a legal entity, as a general rule, and until sufficient reason
to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons; and,
where one corporation was organized and is owned by the officers and stockholders of another, making their
interests identical, they may be treated as identical when the interests of justice require it.
Name of the parties:
Petitioner: United States
Respondent: Milwaukee Corporation
Facts:
● In a suit in equity by the United States against interstate carriers and others, brought under Elkins
Act, to enjoin the giving and receiving of unlawful rebates, in which the lawfulness of payments
made by the carriers depends upon the intent with which they were made and received, the bill is
sufficient on its face to show the Milwaukee brewing company, which was a large shipper of beer
prior to the enactment of such statute, habitually received rebates from carriers;
● Shortly after such enactment, its officers, who were also its controlling stockholders, organized a
transit company (defendant) and became its officers and the owners of practically all of its stock,
and on behalf of the brewing company, contracted with it to make all the shipments for the brewing
company;
● The transit company contracted for shipments with such interstate carriers as would pay it from one-
tenth to one-eighth of the published rate for the transportation, ostensibly as a commission for
obtaining the business, but in fact, as was well known to the' carrier defendants, as a rebate for the
benefit of the brewing company.
Issue:
Are the payments lawful commissions or unlawful rebates?
Ruling:
● The question can only be answered by finding out with what intent the acts were done. Some acts are
made criminal without respect to their intent, like counterfeiting; but in most cases intent is material.
The payments in question were innocent and lawful if in good faith intended as commissions, but
criminal if intended as rebates. The intent becomes therefore not merely material, but absolutely
vital. The bill states several facts tending to show unlawful purpose: Such as prior habitual violations
of former laws, not then sufficiently punishable, and later the creation of a dummy corporation to
escape from’the strictness of an amended statute; which corporation, though a separate legal entity,
should be substantially the some aggregation of persons, interests, and aims; scienter of the carriers
of the purposes of such manipulation
● A corporation will be looked upon as a legal entity, as a general rule, and until sufficient reason to
the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an asso ciation of
persons; and, where one corporation was organized and is owned by the officers and stockholders of
another, making their interests identical, they may be treated as identical when the interests of justice
require it.
Issue on Control
 ● That the transit company is controlled by the managing agents of the brewing company is entirely
clear. But is it controlled by the •shipper corporation? The solution of this question depends on
whether the brewing corporation, in a case like this, is an association •of individuals, rather than a
legal entity apart from those who own •and control it. No doubt the general rule that a corporation is
a legal entity, an institution, artificial, intangible, existing only by legal •contemplation, and separate
and apart from its constituents, is firmly imbedded in the common law of this country. It has been so
laid ■down in hundreds of cases. In the Dartmouth College Case Chief Justice Marshall adopted and
expressed it, almost in the exact language of Lord Coke, in Coke on Littleton, 27b; and this
definition has been universally approved, especially in cases involving the extent •of the corporate
powers.
● It is, however, most significant that the Supreme Court of the United States was the first to break
away from the notion that a ■corporation is only a legal entity, when its literal application would
■operate with injustice. If a corporation is only a legal entity, of course, it cannot be a citizen of a
state. Hence the Supreme Court, in order to sustain the most important and far-reaching jurisdiction
of the national courts over corporations, depending on the citizenship ■of the parties, was obliged to
adopt some other theory of corporate constitution than that laid down by the great chief justice. This
was accomplished by holding that a corporation is an association of persons who may have
citizenship, and following this with the adoption of a fiction of law, supported by a conclusive
presumption, by which the members of a corporation are conclusively presumed to be ■citizens of
the state creating it
________________________________________________________________________________
16. Traders Royal Bank versus CA, GR Number and Date:269 SCRA 15 – Business Organization –
Corporation Law – Piercing the Veil of Corporate Fiction
Author: George F. Rasalan
Doctrine: Piercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime
was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of
innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine
Name of the parties: (and their respective role in the case):
Petitioner: Traders Royal Bank
Respondent: Court of Appeal
Articles Applicable:
Doctrine of Piercing the Corporate Entity
Facts:
Filriters Guaranty Assurance Corporation (FGAC) is the owner of several Central Bank Certificates of
Indebtedness (CBCI). These certificates are actually proof that FGAC has the required reserve investment with
the Central Bank to operate as an insurer and to protect third persons from whatever liabilities FGAC may
incur. In 1979, FGAC agreed to assign said CBCI to Philippine Underwriters Finance Corporation (PUFC).
Later, PUFC sold said CBCI to Traders Royal Bank (TRB). Said sale with TRB comes with a right to
repurchase on a date certain. However, when the day to repurchase arrived, PUFC failed to repurchase said
CBCI hence TRB requested the Central Bank to have said CBCI be registered in TRB’s name. Central Bank
refused as it alleged that the CBCI are not negotiable; that as such, the transfer from FGAC to PUFC is not
valid; that since it was invalid, PUFC acquired no valid title over the CBCI; that the subsequent transfer from
PUFC to TRB is likewise invalid.
TRB then filed a petition for mandamus to compel the Central Bank to register said CBCI in TRB’s name. TRB
averred that PUFC is the alter ego of FGAC; that PUFC owns 90% of FGAC; that the two corporations have
identical sets of directors; that payment of said CBCI to PUFC is like a payment to FGAC hence the sale
between PUFC and TRB is valid. In short, TRB avers that that the veil of corporate fiction, between PUFC and
FGAC, should be pierced because the two corporations allegedly used their separate identity to defraud TRD
into buying said CBCI.
Issue:
Wether or not Traders Royal Bank is current in stating the veil of corporate fiction between PUFC and FGAC
should be fierce because the two corporations allegedly used their separate identity to defraud into buying said
CBCI? - NO.
Ruling:
Traders Royal Bank failed to show that the corporate fiction is used by the two corporations to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business
conduit of a person.
TRB merely showed that PUFC owns 90% of FGAC and that their directors are the same. The identity of PUFC
can’t be maintained as that of FGAC because of this mere fact; there is nothing else which could lead the court
under the circumstance to disregard their corporate personalities. Further, TRB can’t argue that it was defrauded
into buying those certificates. In the first place, TRB as a banking institution is not ignorant about these types of
transactions. It should know for a fact that a certificate of indebtedness is not negotiable because the payee
therein is inscribed specifically and that the Central Bank is obliged to pay the named payee only and no one
else
___________________________________________________________________________________
17. INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner, vs. VOLUNTARY
ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE MILLS, INC., respondents. GR
No. 96490. February 3, 1992. – Pinlac
Doctrine: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the
legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members
or stockholders may be disregarded.
The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly
liable for a corporate debt or obligation. In the instant case, petitioner Union does not seek to impose a claim
against the members of the Acrylic.
Parties:
1. Petitioner Indophil Textile Mill Workers Union-PTGWO (Indophil Workers Union)
o is a legitimate labor organization duly registered with the Department of Labor and
Employment (DOLE)
 o it is the exclusive bargaining agent of all rank-and-file employees of Indophil Textile
Mills, Inc.
2. Private respondent Indophil Textile Mills, Inc. (Indophil Company)
o Corporation engaged in the manufacture, sale and export of yarns
3. Indophil Acrylic Manufacturing Corporation (Acrylic)
o Formed and registered with the SEC
o Hired employees according to its own criteria and standards
4. Respondent Teodoro Calica
o Impleaded in his official capacity as the Voluntary Arbitrator of the National Conciliation
and Mediation Board of the DOLE
Facts:
· Indophil Workers Union and Indophil Company, executed a collective bargaining agreement (CBA)
· After the registration of Acrylic with the SEC, became operational and hired workers, the workers of
Acrylic unionized and a duly certified CBA was executed.
· A year after the workers of Acrylic have been unionized and a CBA executed, Indophil Workers Union
claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of
the facilities of Indophil Company pursuant to Section 1(c), Article I of the CBA – “This Agreement shall apply
to the Company's plant facilities and installations and to any extension and expansion thereat.” In other words, it
is the Indophil Workers Union’s contention that Acrylic is part of the Indophil bargaining unit.
· Indophil Company opposed the Union and stated that it is a juridical entity separate and distinct from
Acrylic.
· The parties jointly requested the Calica to act as voluntary arbitrator in the resolution of the pending
labor dispute with regard to the proper interpretation of the CBA provision.
· Calica stated that proper interpretation and application of the CBA do not extend to the employees of
Acrylic.
Contention of Petitioner (Indophil Workers Union):
· Arbitrator gravely erred in interpreting Section l(c), Article I of the CBA in its literal meaning that the
creation of the aforesaid Acrylic is but a devise of Indophil Company to evade the application of the CBA
between Indophil Workers Union and Indophil Company.
· It stresses that the articles of incorporation of the two corporations establish that the two entities are
engaged in the same kind of business, which is the manufacture and sale of yarns
· the two corporations have their physical plants, offices and facilities situated in the same compound, at
Barrio Lambakin, Marilao, Bulacan
· The employees of Indophil are the same persons manning and servicing the units of Acrylic
· In sum, petitioner insists that the Calica committed grave abuse of discretion amounting to lack or in
excess of jurisdiction in erroneously interpreting the CBA provision and in failing to disregard the corporate
entity of Acrylic.
Contention of Public Respondent (Calica through the SolGen):
· Acrylic is not an alter ego an adjunct or business conduit of Indophil Company because it has a separate
legitimate business purpose.
· Primary purpose of Indophil Company is engage in the business of manufacturing yarns, while, primary
purpose of Acrylic is to manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in
yarns. Hence, unlike Indophil Company, Acrylic cannot manufacture textiles while private respondent cannot
buy or import yarns.
Issue: Whether or not the operations in the Acrylic are an extension or expansion of the Indophil Company? –
NO.
Ruling:
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the corporation, that is liability will attach
directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
In the case at bar, petitioner Union seeks to pierce the veil of corporate entity of Acrylic, alleging that the
creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private
respondent Indophil Company. The fact that the businesses of Indophil Company and Acrylic are related, that
some of the employees of the private respondent are the same persons manning and providing for auxilliary
services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same
compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate
veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals, We already emphasized that "the legal corporate entity is
disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or
obligation." In the instant case, petitioner Union does not seek to impose a claim against the members of the
Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local 110 of the ULGWP v. Ople that
it is grave abuse of discretion to treat two companies as a single bargaining unit when these companies are
indubitably distinct entities with separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-file employees
working at Acrylic should not be recognized as part of, and/or within the scope of the petitioner, as the
bargaining representative of private respondent.
All premises considered, the Court is convinced that the public respondent Voluntary Arbitrator did not commit
grave abuse of discretion in its interpretation of Section l(c), Article I of the CBA that the Acrylic is not an
extension or expansion of private respondent.
________________________________________________________________________________
18. La Campana Factory, INC. and Tan Tong vs. Kaisahan ng mga Manggagawa sa La Campana
(KKM) and the Court of Industrial Relations, G.R. No. L-567, May 25, 1953
Digest Author : Francis Mundin
Petitioner/s : Tan Tong, La Campana Gaugau Packing, La Campana Factory Co., Inc
Respondent/s : Kaisahan Ng Mga Manggagawa Sa La Campana
DOCTRINE: A subsidiary or auxiliary corporation which is created by a parent corporation merely as an
agency for the latter may sometimes be regarded as identical with the parent corporation, especially if the
stockholders or officers of the two corporations are substantially the same or their system of operation
unified.
APPLICABLE LAWS: Disregarding Corporate Entity. — The doctrine that a corporation is a legal entity
existing separate and apart from the person composing it is a legal theory introduced for purposes of
convenience and to subserve the ends of justice The concept cannot, therefore, be extended to a point beyond its
reason and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the
courts. Thus, in an appropriate case and in furtherance of the ends of justice, a corporation and the individual or
individuals owning all its stocks and assets will be treated as identical, the corporate entity being disregarded
where used as a cloak or cover for fraud or illegality.
FACTS :
· Tan Tong, one of the herein petitioners, has since 1932 been engaged in the business of buying and
selling gaugau under the trade name La Campana Gaugau Packing
· Tan Tong, with himself and members of his family corporation known as La Campana Factory Co., Inc.
· Tan Tong had entered into a collective bargaining agreement with the Philippine Legion of Organized
Workers, known as PLOW for short
· Tan Tong's employees later formed their own organization known as Kaisahan Ng Mga Manggagawa
Sa La Campana
· the Kaisahan Ng Mga Manggagawa Sa La Campana, presented a demand for higher wages and more
privileges,
· the demand was not granted and an attempt at settlement through the mediation of the Conciliation
Service of the Department of Labor had given no result.
· the Secretary of Labor, on September 5, 1951, revoked the Kalipunan Ng Mga Kaisahang
Manggagawa's permit as a labor union on the strength of information received that it was dominated by
subversive elements, and, in consequence, on the 20th of the same month, also suspended the permit of its
affiliate, the respondent Kaisahan.
RULING OF THE LOWER COURTS:
· RTC – there is only one management for the business of gaugau and coffee with whom the laborers are
dealing regarding their work. Hence, the filing of action against the Ka Campana Starch and Coffee Factory is
proper and justified.
· rendered legal services to the Francisco family. Said court also found that his legal services were not
CONTENTIONS OF PETITIONER:
· That the action is directed against two different entities with distinct personalities, with "La Campana
Starch Factory" and the "La Campana Coffee Factory, Inc.";
· That the workers of the "La Campana Coffee Factory, Inc." are less than thirty-one
· That the KKM union has no legal capacity to sue, because its registration as an organized union has been
revoked by the Department of Labor on September 5, 1951.
· That there is an existing valid contract between the respondent "La Campana Gaugau Packing" and the
intervenor PLOW, where-in the petitioner's members are contracting parties bound by said contract.
· the Rules of Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
ISSUE: Whether the two company under Tan Tong can be considered one. – YES.
RULING + RATIO: La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are
operating under one single management, that is, as one business though with two trade names. True, the
coffee factory is a corporation and, by legal fiction, an entity existing separate and apart from the persons
composing it, that is, Tan Tong and his family. But it is settled that this fiction of law, which has been
introduced as a matter of convenience and to subserve the ends of justice cannot be invoked to further an
end subversive of that purpose.
Conclusion.
the attempt to make the two factories appears as two separate businesses, when in reality they are but
one, is but a device to defeat the ends of the law (the Act governing capital and labor relations) and
should not be permitted to prevail.
___________________________________________________________________________
19. Francisco Motors v. Court of Appeals, G.R. No. 100812, June 25, 1999
By: Lubag, Hurjae S.
Petitioners: FRANCISCO MOTORS CORPORATION
Respondent: COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL
Doctrine: The corporation's separate juridical personality may be disregarded, for example, when the
corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
Facts: Petitioner filed a complaint against private respondents to recover P3,412.06, representing the balance of
the jeep body purchased by the Manuels from petitioner; an additional sum of P20,454.80 representing the
unpaid balance on the cost of repair of the vehicle; and P6,000.00 for cost of suit and attorney's fees. To the
original balance on the price of jeep body were added the costs of repair.
Private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of
P50,000 which was not paid by the incorporators, directors and officers of the petitioner.
Trial court decision, in favor of the petitioner in regard to the petitioner's claim for money, but also allowed the
counter-claim of private respondents. Court of Appeals sustained the trial court's decision.
Private respondent Gregorio Manuel Contentions
1.
While he was petitioner's Assistant Legal Officer, he represented members of the Francisco family in the
intestate estate proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and officers of
petitioner. Hence to petitioner's collection suit, he filed a counter permissive counterclaim for the unpaid
attorney's fees.
Trial Court Ruling: The trial court ruled in favor of private respondents and found that Gregorio Manuel indeed
compensated despite repeated demands, and thus ordered petitioner to pay him the amount of P50,000.00.
Petitioner’s Contentions raised in the Court of Appeals
1. The trial court did not acquire jurisdiction over it because no summons was validly served on it
together with the copy of the answer containing the permissive counterclaim. Further, petitioner questions the
propriety of its being made party to the case because it was not the real party in interest but the individual
members of the Francisco family concerned with the intestate case.
Court of Appeals Ruling: A counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of
counterclaim was set up against him. Failure to serve summons, said respondent court, did not effectively
negate trial court's jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed out that
there was no reason for petitioner to be excused from answering the counterclaim. Court records showed that its
former counsel, Nicanor G. Alvarez, received the copy of the answer with counterclaim two (2) days prior to his
withdrawal as counsel for petitioner. Moreover when petitioner's new counsel, Jose N. Aquino, entered his
appearance, three (3) days still remained within the period to file an answer to the counterclaim. Having failed
to answer, petitioner was correctly considered in default by the trial court. Even assuming that the trial court
acquired no jurisdiction over petitioner, respondent court also said, but having filed a motion for reconsideration
seeking relief from the said order of default, petitioner was estopped from further questioning the trial court's
jurisdiction.
2. Being a corporation, it should not be held liable therefor because these fees were owed by the
incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad.
The personality of the corporation, vis-a-vis the individual persons who hired the services of private respondent,
is separate and distinct, hence, the liability of said individuals did not become an obligation chargeable against
petitioner.
Court of Appeals Ruling: The distinct and separate personality is merely a fiction created by law for
convenience and to promote justice. Accordingly, this separate personality of the corporation may be
disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for found
illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of
creditors. Corporations are composed of natural persons and the legal fiction of a separate corporate personality
is not a shield for the commission of injustice and inequity. Francisco Motors Corporation is composed of the
heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered
legal services in the intestate estate case of their deceased mother. Considering the aforestated principles and
circumstances established in this case, equity and justice demands plaintiff-appellant's veil of corporate identity
should be pierced and the defendant be compensated for legal services rendered to the heirs, who are directors
of the plaintiff-appellant corporation.
Petitioner’s Contentions in the Supreme Court [You may skip this]
1. Court should not have resorted to piercing the veil of corporate fiction because the transaction
concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad. There was no cause of
action by said respondent against petitioner; personal concerns of the heirs should be distinguished from those
involving corporate affairs.
2. The present case does not fall among the instances wherein the courts may look beyond the distinct
personality of a corporation. The services for which respondent Gregorio Manuel seeks to collect fees from
petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity, and
not involve the corporation.
3. There was no proper service of the answer containing the permissive counterclaim. It claims that the
counterclaim is a separate case which can only be properly served upon the opposing party through summons.
By nature, a permissive counterclaim is one which does not arise out of nor is necessarily connected with the
subject of the opposing party's claim. Since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, then in effect there should be two simultaneous actions between the same
parties: each party is at the same time both plaintiff and defendant with respect to the other, requiring in each
case separate summonses.
Private respondents’ Contentions in the Supreme Court [You may skip this]
1. They defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the answer.
2. Both trial and appellate courts found that respondent Gregorio Manuel was employed as assistant
legal officer of petitioner corporation, and that his services were solicited by the incorporators, directors and
members to handle and represent them in Special Proceedings No. 7803, concerning the Intestate Estate of the
late Benita Trinidad. The members of the corporation took advantage of their positions by not compensating
respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated demands for
payment of his services. The corporate veil may be disregarded when it is used to defeat public convenience,
justify wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the corporate
entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of
another corporate entity. In these instances, the corporation should be treated merely as an association of
individual persons.
3. No provision in the Rules of Court requires service of summons upon a defendant in a counterclaim.
When the petitioner filed its complaint before the trial court it voluntarily submitted itself to the jurisdiction of
the court. As a consequence, the issuance of summons on it was no longer necessary. Private respondents
served a copy of their answer with affirmative defenses and counterclaim on petitioner's former counsel,
Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served said copy upon
Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents assert that this
contention is utterly baseless. Records disclose that the answer was received two (2) days before the former
counsel for petitioner withdrew his appearance, according to private respondents. They maintain that the present
petition is but a form of dilatory appeal, to set off petitioner's obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore claim damages against petitioner.
Issues
1. [Corporation Law] Whether the Piercing the Veil of Corporate Fiction may be properly invoked in
this case. – No.
2. [Civil Procedure] Whether summons should first be served on the defendant before an answer to
counterclaim must be made. – No.
Ruling
1. Propriety of Piercing the Veil of Corporate Fiction. [MUST READ]
A corporation has a separate personality distinct from its stockholders and from other corporations to which it
may be connected. However, under the doctrine of piercing the veil of corporate entity, the corporation's
separate juridical personality may be disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation, then its
distinct personality may be ignored. In these circumstances, the courts will treat the corporation as a mere
aggrupation of persons and the liability will directly attach to them. The legal fiction of a separate corporate
personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably
set aside.
The given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant
application here. The rationale behind piercing a corporation's identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those
who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case
at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability
of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation. Note that according to private respondent
Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them
in the intestate proceedings over Benita Trinidad's estate. These estate proceedings did not involve any business
of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but also from
petitioner corporation on the claims that its management had requested his services and he acceded thereto as an
employee of petitioner from whom it could be deduced he was also receiving a salary. His move to recover
unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of
the purchase and repair of a jeep body could only result from an obvious misapprehension that petitioner's
corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators.
Such result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders;
hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators,
directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors
and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to
allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by
piercing its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we
must always be mindful of its function and purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result
from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action — including a counterclaim — must be
prosecuted or defended in the name of the real party in interest. It is plainly an error to lay the claim for legal
fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of
the Francisco family.
2. Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered
within ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on
the defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the court
to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original complaint,
has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil When respondents failed to pay their obligations, a foreclosure proceeding was instituted by PNB-IFL, through
Procedure, if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the its attorney-in-fact, PNB.
defendant may be declared in default. This is what happened to petitioner in this case, and this Court finds no
procedural error in the disposition of the appellate court on this particular issue. Moreover, as noted by the
respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it submitted
itself to the jurisdiction of the court. Hence, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
______________________________________________________________________ injunction and/or temporary restraining order before the Regional Trial Court of Makati.
20. PNB v. Ritratto Group Inc , G.R. No. 142616, July 31, 2001
Author: Bryce King

Respondents anchored their prayer for injunction on alleged invalid provisions of the contract. Petitioner filed a
Parties:
motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity between the
Cayetano Sebastian Dado & Cruz for petitioner
petitioner and respondents.
Zulueta Puno and Associates for respondents

Lower Court Decisions:

Doctrine:
A corporation has a personality distinct and separate from its individual stockholders or members, and is not
affected by the personal rights, obligations and transactions of the latter. The mere fact that a corporation
owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as
one entity.
The regional trial court granted respondents' application for preliminary injunction and eventually denied
petitioner's motion for lack of merit. Applying the doctrine of "Piercing the Veil of Corporate Identity," the trial
court ruled that since PNB-IFL is a wholly owned subsidiary of petitioner PNB, the suit against the petitioner is
a suit against PNB-IFL.

The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine A petition for certiorari and prohibition was thereafter filed by the petitioner before the Court of Appeals, but
applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or the same was denied by the appellate court.
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. Issue:

||| W/O the lower courts were right in applying the doctrine of “piercing the veil of corporate identity?” NO

Concept Builders, Inc. v. NLRC

Test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit: Ruling:

1. Control, not mere majority or complete control, but complete domination, not only of finances but of
policies and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own. No, the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine inapplicable in
the case at bar.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal
rights; and,
The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or
when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
Facts: business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
PNB International Finance Ltd. (PNB-IFL), a subsidiary company of petitioner Philippine National Bank
(PNB), and respondents entered into loan contracts whereby the former extended credit facility in favor of the
latter secured by real estate mortgages constituted over four (4) parcels of land in Makati City.
In determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only of finances but of policies Issue: Whether there is necessity to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, to
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had determine whether they employed fraud in causing the foreclosure and subsequent sale of the real properties
at the time no separate mind, will or existence of its own. belonging to petitioners-NO
Ruling + Ratio: In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and, the real properties belonging to petitioners While we do not discount the possibility of the existence of fraud in
the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in
order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal
case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and
The absence of any one of these elements prevents "piercing the corporate veil." In applying the
stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the
impose a claim against the individual members of the three corporations involved; on the contrary, it is these
corporation operated and the individual defendant's relationship to the operation. Aside from the fact that PNB-
corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed
IFL is a wholly owned subsidiary of petitioner PNB, there was no showing of the indicative factors that the
defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the
former corporation was a mere instrumentality of the latter are present. Neither was there a demonstration that
circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold
any of the evils sought to be prevented by the doctrine of piercing the corporate veil exist.
the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely
_____________________________________________________________ seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to
21. BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to
BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. establish by clear and convincing evidence that private respondents were purposely formed and operated, and
RIVERA, petitioners, vs.COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE thereafter transacted with petitioners, with the sole intention of defrauding the latter.
MACHINERY PARTS MANUFACTURING CO., INC., respondents, G.R. No. 89561, September 13, The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a
1990- HORARIO justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was
Doctrine: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the purposely used as a shield to defraud creditors and third persons of their rights.
legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members _____________________________________________________________
or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders of the corporation will be considered as the corporation, that is,
liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
Facts:
Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe Castillo. Said land was
mortgaged to the Development Bank of the Philippines and was about to be foreclosed but then Mauricia’s
nephew, Santiago Rivera, proposed that they convert the land into 4 subdivisions so that they can raise the
necessary money to avoid foreclosure. Mauricia agreed. Rivera sought to develop said land through his
company, Slobec Realty Corporation (SRC), of which he was also the president. SRC then contracted with
Bormaheco, Inc. for the purchase of one tractor. Bormaheco agreed to sell the tractor on an installment basis. At
the same time, SRC mortgaged said tractor to Bormaheco as security just in case SRC will default. As
additional security, Mauricia and other family members executed a surety agreement whereby in case of default
in paying said tractor, the Insurance Corporation of the Philippines (ICP) shall pay the balance. The surety bond
agreement between Mauricia and ICP was secured by Mauricia’s parcel of land (same land to be developed).
SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasn’t enough hence ICP paid the
deficiency. ICP then foreclosed the property of Mauricia. ICP later sold said property to Philippine Machinery
Parts Manufacturing Corporation (PMPMC). PMPMC then demanded Mauricia et al to vacate the premises of
said property.
While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor Umali, questioned the
foreclosure made by ICP. Umali alleged that all the transactions are void and simulated hence they were
defrauded; that through Bormaheco’s machinations, Mauricia was fooled into entering into a surety agreement
with ICP; that Bormaheco even made the premium payments to ICP for said surety bond; that the president of
Bormaheco is a director of PMPMC; that the counsel who assisted in all the transactions, Atty. Martin De
Guzman, was the legal counsel of ICP, Bormaheco, and PMPMC.