Corporation Law

(Revised Corporation Law)

A. Attributes of a Corporation
1. REYNALDO M. LOZANO vs. HON. ELIEZER R. DE
Commercial Law Review LOS SANTOS (Presiding Judge of RTC-Br.58, Angeles
City) and ANTONIO ANDA
G.R. No. 125221. June 19, 1997.]
[Case Digest Team]
Ponente: Puno, J.

Parties:
Members:
● Petitioner—Reynaldo Lozano/President of
KAMAJDA
Bautista ● Pub. Respondent—Hon. Eliezer R. De Los Santos
● Private Respondent—Antonio Anda/ President
Baybayon of SAMAJODA
Beringuel ● KAMAJDA—Kapatirang Mabalacat-Angeles
Jeepney Drivers' Association, Inc.
Borata
● SAMAJODA—Samahang Angeles-Mabalacat
Borces Jeepney Operators' and Drivers' Association, Inc.
Colegado
Doctrinal Pronouncement:
Dacalos i. An association registered with SEC acquires a separate
Dulanas and distinct personality (juridical) from that of its members
or people composing such association.
Fajardo
Guanzon ii. Consolidation of associations, in compliance with
requirements set by SEC, becomes effective not upon mere
Ho
agreement of the members but only upon issuance of the
Kinaadman certificate of consolidation by the SEC; makes the new
Perez consolidated corporation come into existence.

Ricalde iii. This jurisdiction is determined by a concurrence of two

Riel elements: (1) the status or relationship of the parties; and
(2) the nature of the question that is the subject of their
Saberon controversy.
Silverio
iv. Dispute between members of two separate and distinct
Velasquez corporations who have no intracorporate relation, does not
Villaester fall within the jurisdiction of securities and exchange
commission
Zalavarria

1
 COMMERCIAL LAW REVIEW (RVP)

Relevant Facts: Issue: Whether or not SEC has jurisdiction.

This case is originally one for Action for Damages. Ruling: NO.

In August 1995, upon the request of the Sangguniang Bayan

The grant of jurisdiction to the SEC must be viewed in the
of Mabalacat, Pampanga, petitioner Lozano (alleged
light of its nature and function under the law. This
president of the KAMAJDA) and private respondent Anda
jurisdiction is determined by a concurrence of two elements:
(alleged president of SAMAJODA):
(1) the status or relationship of the parties; and (2) the
nature of the question that is the subject of their
i. agreed to consolidate their respective associations
controversy.
and form the Unified Mabalacat-Angeles Jeepney
Operators' and Drivers' Association, Inc. (UMAJODA)
1st element requires that the controversy must arise out of
intracorporate or partnership relations between and
ii. agreed to elect one set of officers who shall be given
among stockholders, members, or associates; between any
the sole authority to collect the daily dues from the
or all of them and the corporation, partnership or
members of the consolidated association.
association of which they are stockholders, members or
associates, respectively; and between such corporation,
Elections were held on October 1995 and both petitioner
partnership or association and the State in so far as it
and private respondent ran for president; petitioner won;
concerns their individual franchises.
private respondent protested and, alleging fraud, refused
to recognize the results of the election; private respondent
2nd element requires that the dispute among the parties be
also refused to abide by their agreement and continued
intrinsically connected with the regulation of the
collecting the dues from the members of his association
corporation, partnership or association or deal with the
despite several demands to desist.
internal affairs of the corporation, partnership or
association. After all, the principal function of the SEC is the
In December 1995, Lozano filed a complaint for damages
supervision and control of corporations, partnerships and
against Anda before the MCTC-Mabalacat and Magalang,
associations with the end in view that investments in these
Pampanga. Lozano alleged that he was the president of the
entities may be encouraged and protected, and their
KAMAJDA while respondent Anda was the president of
activities pursued for the promotion of economic
SAMAJODA. Petitioner was thus constrained to file the
development.
complaint to restrain private respondent from collecting
the dues and to order him to pay damages in the amount of
ITCAB, there is no intracorporate nor partnership relation
P25,000.00 and attorney's fees of P500.00.
between petitioner and private respondent. The
controversy between them arose out of their plan to
Anda moved to dismiss the complaint for lack of jurisdiction,
consolidate their respective jeepney drivers' and operators'
claiming that jurisdiction was lodged with the Securities and
associations into a single common association. This unified
Exchange Commission (SEC). This was denied as well as the
association was, however, still a proposal. It had not been
MFR that followed.
approved by the SEC, neither had its officers and members
submitted their articles of consolidation in accordance with
Petition for Certiorari before the RTC-Br. 58, Angeles City:
Sections 78 and 79 of the Corporation Code. Consolidation
found that there is intracorporate dispute, hence subject to
becomes effective not upon mere agreement of the
the JD of SEC and ordered MCTC to dismiss the case.
members but only upon issuance of the certificate of
consolidation by the SEC. When the SEC, upon processing
Contention of Petitioner: The respondent judge acted with
and examining the articles of consolidation, is satisfied that
grave abuse of discretion amounting to lack or excess of
the consolidation of the corporations is not inconsistent
jurisdiction and serious error of law in concluding that the
with the provisions of the Corporation Code and existing
SEC has jurisdiction over a case of damages between
laws, it issues a certificate of consolidation which makes the
heads/presidents of two (2) associations who intended to
reorganization official. The new consolidated corporation
consolidate/merge their associations but not yet approved
comes into existence and the constituent corporations
and registered with the SEC.
dissolve and cease to exist.

2

The KAMAJDA and SAMAJODA to which petitioner and
private respondent belong are duly registered with the SEC,
but these associations are two separate entities. The
dispute between petitioner and private respondent is not
within the KAMAJDA nor the SAMAJODA. It is between
members of separate and distinct associations. Petitioner
and private respondent have no intracorporate relation
much less do they have an intracorporate dispute. The SEC
therefore has no jurisdiction over the complaint.
IN VIEW WHEREOF, the petition is granted and the decision
dated April 1996 and the order dated May 1996 of the RTC-
Br. 58, Angeles City are set aside. The MCTC of Mabalacat
and Magalang, Pampanga is ordered to proceed with
dispatch in resolving the civil case
Legal basis: The jurisdiction of the Securities and Exchange
Commission (SEC) is set forth in Section 5 of Presidential Decree
No. 902-A.. Section 5 reads as follows:
"Section 5. . . . [T]he Securities and Exchange Commission [has]
original and exclusive jurisdiction to hear and decide cases
involving:
(a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the
Commission. cdtai
(b) Controversies arising out of intracorporate or partnership
relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members, or associates, respectively; and between such
corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity.
(c) Controversies in the election or appointment of directors,
trustees, officers or managers of such corporations, partnerships
or associations.
(d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the management of a Rehabilitation
Receiver or Management Committee created pursuant to this
Decree
COMMERCIAL LAW REVIEW (RVP)
2. SAN JUAN STRUCTURAL AND STEEL
FABRICATORS, INC. V CA
G.R. NO. 129459, September 29, 1998
Doctrinal Pronouncements:
The property of the corporation is not the property of its
stockholders or members and may not be sold by the
stockholders or members without express authorization
from the corporation's board of directors.
The mere ownership by a single stockholder of all or capital
stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities (not a
ground to pierce the veil of corporate fiction).
Relevant Facts:
Plaintiff, San Juan Structural and Steel Fabricators, alleged
that it entered into an agreement with defendant, Motorich
Sales Corporation, for the transfer to it of a parcel of land at
the Acropolis Greens Subdivision in Quezon City.
As agreed, it paid the downpayment of P100,000 the
balance to be paid on or before March 2, 1989. On said
date, plaintiff was ready with the amount corresponding to
the balance and that the parties agreed to meet in plaintiff’s
office but defendant’s treasurer, Nenita Gruenberg, did not
appear. Despite repeated demands and in utter disregard
of its commitments, defendant refused to execute the
Transfer of Rights/Deed of Assignment for the transfer of
certificate of title.
That defendant ACL Development and Motorich Sales
Corporation entered into a Deed of Absolute Sale whereby
the former transferred to the latter the subject property
and that the Registry of Deeds issued a new title in the
name of Motorich Sales Corporation, represented by
defendant Nenita and Reynaldo Gruenberg.
In its answer, defendants Motorich Sales Corporation and
Nenita Gruenberg (treasurer) interposed the ff. defenses:
● the President and Chairman of Motorich did not
sign the agreement;
● Mrs. Gruenberg's signature on the agreement is
inadequate to bind Motorich. The other
signature, Mr. Reynaldo Gruenberg’s, President
and Chairman of Motorich, is still required
● granting the enforceability of the agreement,
plaintiff nonetheless failed to pay in legal tender
within the stipulated period;
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● that it was the understanding between
Gruenberg and the plaintiff that the Transfer of
Rights/Deed of Assignment will be signed only
upon receipt of cash payment; thus if the
payment be in check, they will meet at a
designated bank to encash the check and sign the
Transfer of Rights/Deed. However, the plaintiff
informed of the alleged availability of the check,
by phone, only after banking hours.
The RTC dismissed the complaint on the ground that there
is no evidence that defendant Nenita Gruenberg was
authorized by defendant-corporation to dispose of the
subject property. Under Sec. 40 of the Corporation Code, by
a majority vote of the BOD, a corporation may sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets when authorized
by the vote of the stockholders representing at least 2/3 of
the outstanding capital stock. No such vote was obtained by
defendant Gruenberg for that proposed sale; neither was
there evidence to show that the supposed transaction was
ratified by the corporation.
In its recourse before the CA, petitioner’s arguments were
debunked and the decision of the RTC was affirmed.
Issue/s:
1. Was there a valid contract of sale between
petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate
fiction be applied to Motorich?
Ruling:
First Issue: Validity of Agreement
True, Gruenberg and Co signed the Agreement. Such
contract, however, cannot bind Motorich, because it never
authorized or ratified such sale.
A corporation is a juridical person separate and distinct
from its stockholders or members. The property of the
corporation is not the property of its stockholders or
members and may not be sold by the stockholders or
members without express authorization from the
corporation's board of directors.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its
board resolution, through its officers or agents in the
COMMERCIAL LAW REVIEW (RVP)
normal course of business. The general principles of agency
govern the relation between the corporation and its officers
or agents, subject to the articles of incorporation, bylaws,
or relevant provisions of law.
Thus, "a corporate officer or agent may represent and bind
the corporation in transactions with third persons to the
extent that the authority to do so has been conferred upon
him. This includes powers which have been intentionally
conferred, and powers as, in the usual course of the
particular business, are incidental to, or may be implied
from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular
officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or
agent to believe that it has conferred."
Furthermore, the Court also recognized the rule that
"persons dealing with an assumed agent, if they would hold
the principal liable, to ascertain not only the fact of agency
but also the nature and extent of authority. Unless duly
authorized, a treasurer, whose powers are limited, cannot
bind the corporation in a sale of its assets.
In this case, Motorich categorically denies that it authorized
its treasurer to sell the subject parcel of land. Consequently,
the petitioner had the burden of proving that Gruenberg
was in fact authorized to represent and bind Motorich in
the transaction. Petitioner failed to discharge this burden.
Petitioner cannot assume that Nenita, by virtue of her
position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate
treasurer's function, which generally has been described as
"to receive and keep the funds of the corporation, and to
disburse them in accordance with the authority given him
by the board or the properly authorized officers."
Neither was such real estate sale shown to be a normal
business activity of Motorich. The primary purpose of
Motorich is marketing, distribution, export and import in
relation to a general merchandising business.
Unmistakably, its treasurer is not cloaked with actual or
apparent authority to buy or sell real property, an activity
which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code provides:
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Art. 1874. When a sale of a piece of land or any interest
therein is through an agent, the authority of the latter shall
be in writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the
following case:
xxx
(5) To enter any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or
for a valuable consideration.
Petitioner contends that Motorich has ratified the contract
of sale because of its "acceptance of benefits," as evidenced
by the receipt issuedby Gruenberg.
Untenable. As a general rule, the acts of corporate officers
within the scope of their authority are binding on the
corporation. But when these officers exceed their authority,
their actions "cannot bind the corporation, unless it has
ratified such acts or is estopped from disclaiming them."
In this case, there is a clear absence of proof that Motorich
ever authorized Gruenberg, or made it appear to any third
person that she had the authority, to sell its land or to
receive the earnest money. Neither was there any proof
that Motorich ratified, expressly or impliedly, the contract.
Petitioner rests its argument on the receipt which,
however, does not prove the fact of ratification. The
document is a hand-written one, not a corporate receipt,
and it bears only Gruenberg's signature. Certainly, this
document alone does not prove that her acts were
authorized or ratified.
Void contract of sale; cannot be ratified
Because Motorich had never given a written authorization
to Gruenberg to sell its parcel of land, the Agreement
entered into by the latter with petitioner is void under
Article 1874 of the Civil Code. Being inexistent and void
from the beginning, said contract cannot be ratified.
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner argues that since "Spouses Gruenberg owned all
or almost all or 99.866% of the subscribed capital stock" of
Motorich, Nenita needed no authorization from the BOD to
enter into the subject contract. Being solely owned by the
Spouses, the company can be treated as a close corporation
which can be bound by the acts of its principal stockholder
who needs no specific authority.
COMMERCIAL LAW REVIEW (RVP)
Untenable. First, the issue was raised belatedly, not having
done so during the trial, but only when petitioner filed its
sur-rejoinder before the CA.
Second, even if the argument were to be addressed, the
Court still finds no reason to uphold it. True, one of the
advantages of a corporate form of business organization is
the limitation of an investor's liability to the amount of the
investment. This feature flows from the legal theory that a
corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of
a corporate veil may be used only for legitimate purposes.
On equitable considerations, the veil can be disregarded
when it is utilized as a shield to commit fraud, illegality or
inequity; defeat public convenience; confuse legitimate
issues; or serve as a mere alter ego or business conduit of a
person or an instrumentality, agency or adjunct of another
corporation.
Thus, the Court has consistently ruled that "when the fiction
is used as a means of perpetrating a fraud or an illegal act
or as vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of
a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who
compose it will be lifted to allow for its consideration
merely as an aggregation of individuals."
In this case, however, the Court finds no reason to pierce
the corporate veil. Petitioner failed to establish that
respondent was formed, or that it is operated, for the
purpose of shielding any alleged fraudulent or illegal
activities of its officers or stockholders; or that the said veil
was used to conceal fraud, illegality or inequity at the
expense of third persons.
Not a close corporation
Section 96 of the Corporation Code defines a close
corporation as follows:
Sec. 96. Definition and Applicability of Title. — A close
corporation, within the meaning of this Code, is one whose
articles of incorporation provide that: (1) All of the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding 20; (2) All of the
issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or
5

make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall be
deemed not a close corporation when at least 2/3 of its
voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation within
the meaning of this Code.
The AOI of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall
not exceed 20, or (2) a preemption of shares is restricted in
favor of any stockholder or of the corporation, or (3) listing
its stocks in any stock exchange or making a public offering
of such stocks is prohibited. Motorich does not become a
close corporation, just because Spouses Gruenberg owned
99.866% of its subscribed capital stock. The "mere
ownership by a single stockholder or by another
corporation of all or capital stock of a corporation is not of
itself sufficient ground for disregarding the separate
corporate personalities." So, too, a narrow distribution of
ownership does not, by itself, make a close corporation.
The Court is not unaware that there are exceptional cases
where "an action by a director, who singly is the
controlling stockholder, may be considered as a binding
corporate act and a board action as nothing more than a
mere formality." The present case, however, is not one of
them.
Since Nenita is not the sole controlling stockholder of
Motorich, the aforementioned exception does not apply.
Granting arguendo that the corporate veil is to be
disregarded, the subject parcel of land would then be
treated as conjugal property of the spouses because it was
acquired during their marriage. There being no indication
that the spouses, who got married before the effectivity of
the Family Code, have agreed to a different property
regime, their property relations would be governed by
conjugal partnership of gains. As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot
because "there is no co-ownership between the spouses in
the properties of the conjugal partnership of gains.
Hence, neither spouse can alienate in favor of another his
or interest in the partnership or in any property belonging
to it; neither spouse can ask for a partition of the properties
before the partnership has been legally dissolved."
Assuming further, for the sake of argument, that the
spouses' property regime is the absolute community of
property, the sale would still be invalid. Under this regime,
"alienation of community property must have the written
COMMERCIAL LAW REVIEW (RVP)
consent of the other spouse or the authority of the court
without which the disposition or encumbrance is void."
Both requirements are manifestly absent in the instant
case.
3.Monfort Hermanos v. Monfort
GR Nos. 152542 & 155472, July 8, 2004
Ponente: Ynares-Santiago, J
Doctrinal Pronouncement: Please see ruling
Relevant Facts (including important contention of
parties): Monfort Hermanos Agricultural Development
Corporation, a domestic private corporation, is the
registered owner of a farm, fishpond and sugar cane
plantation known as Haciendas San Antonio II, Marapara,
Pinanoag and Tinampa-an, all situated in Cadiz City.It also
owns one unit of motor vehicle and two units of tractors.4
The same allowed Ramon H. Monfort, its Executive Vice
President, to breed and maintain fighting cocks in his
personal capacity at Hacienda San Antonio.5
In 1997, the group of Antonio Monfort III (respondents),
through force and intimidation, allegedly took possession of
the 4 Haciendas, the produce thereon and the motor
vehicle and tractors, as well as the fighting cocks of Ramon
H. Monfort.
This is a consolidated petition of two cases, with each case
having the following premise:
· GR No. 152542 – Petition by the
corporation, represented by it’s president, Ma.
Antonia Salvatierra a complaint6 for delivery of motor
vehicle, tractors and 378 fighting cocks, with prayer for
injunction and damages, docketed as Civil Case No.
506-C, before the Regional Trial Court of Negros
Occidental, Branch 60. The group of Monfort III filed a
motion to dismiss contended that that Ma. Antonia M.
Salvatierra has no capacity to sue on behalf of the
Corporation because the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the
Corporation is void as the purported Members of the
Board who passed the same were not validly elected
officers of the Corporation. The trial court denied
6

Monfort III’s motion to dismiss and the case went up
to the SC.
· GR No. 155472 - Ma. Antonia M.
Salvatierra filed on behalf of the Corporation a
complaint for forcible entry, preliminary mandatory
injunction with temporary restraining order and
damages against the group of Antonio Monfort III,
before the Municipal Trial Court (MTC) of Cadiz City.11
It contended that the latter through force and
intimidation, unlawfully took possession of the 4
Haciendas and deprived the Corporation of the
produce thereon.
In their answer, the group of Antonio Monfort III alleged
that they are possessing and controlling the Haciendas and
harvesting the produce therein on behalf of the corporation
and not for themselves.They likewise raised the affirmative
defense of lack of legal capacity of Ma. Antonia M.
Salvatierra to sue on behalf of the Corporation.
Digesters Note: Basically, ga-away sila kay there is doubt
whether Ma. Antonia Salvatierra has the legal capacity to
file on behalf of the corporation because the respondents
are contending that the board which gave the authority to
Salvatierra was not duly elected.
Issue/s: Whether or not Ma. Antonia M. Salvatierra has
the legal capacity to sue on behalf of the Corporation.
Ruling: A corporation has no power except those expressly
conferred on it by the Corporation Code and those that are
implied or incidental to its existence.In turn, a corporation
exercises said powers through its board of directors and/or
its duly authorized officers and agents.Thus, it has been
observed that the power of a corporation to sue and be
sued in any court is lodged with the board of directors that
exercises its corporate powers.In turn, physical acts of the
corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the
board of directors.18
Corollary thereto, corporations are required under Section
26 of the Corporation Code to submit to the SEC within
thirty (30) days after the election the names, nationalities
and residences of the elected directors, trustees and
officers of the Corporation.In order to keep stockholders
and the public transacting business with domestic
COMMERCIAL LAW REVIEW (RVP)
corporations properly informed of their organizational
operational status, the SEC issued the following rules:
xxx
2.A General Information Sheetshall be filed with this
Commission within thirty (30) days following the date of the
annual stockholders meeting.No extension of said period
shall be allowed, except for very justifiable reasons stated
in writing by the President, Secretary, Treasurer or other
officers, upon which the Commission may grant an
extension for not more than ten (10) days.
2.A.Should a director, trustee or officer die, resign or in any
manner, cease to hold office, the corporation shall report
such fact to the Commission with fifteen (15) days after
such death, resignation or cessation of office.
3.If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in
writing of such postponement.
The General Information Sheet shall state, among others,
the names of the elected directors and officers, together
with their corresponding position title.
In the instant case, the six signatories to the March 31, 1997
Board Resolution authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the Corporation,
were: Ma. Antonia M. Salvatierra, President; Ramon H.
Monfort, Executive Vice President; Directors Paul M.
Monfort, Yvete M. Benedicto and Jaqueline M. Yusay; and
Ester S. Monfort, Secretary.19 However, the names of the
last four (4) signatories to the said Board Resolution do not
appear in the 1996 General Information Sheet submitted by
the Corporation with the SEC.Under said General
Information Sheet the composition of the Board is as
follows:
1.Ma. Antonia M. Salvatierra (Chairman) ;
2.Ramon H. Monfort (Member);
3.Antonio H. Monfort, Jr., (Member);
4.Joaquin H. Monfort (Member);
5.Francisco H. Monfort (Member) and
6.Jesus Antonio H. Monfort (Member).
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There is thus a doubt as to whether Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort,
were indeed duly elected Members of the Board legally
constituted to bring suit in behalf of the Corporation.21
In the case at bar, the fact that four of the six Members of
the Board listed in the 1996 General Information Sheet 23
are already dead24 at the time the March 31, 1997 Board
Resolution was issued, does not automatically make the
four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto,
Jaqueline M. Yusay and Ester S. Monfort) to the said Board
Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of
the Board.This is because it was not established that they
were duly elected to replace the said deceased Board
Members.
To correct the alleged error in the General Information
Sheet, the retained accountant of the Corporation informed
the SEC in its November 11, 1998 letter that the non-
inclusion of the lawfully elected directors in the 1996
General Information Sheet was attributable to its oversight
and not the fault of the Corporation.25 This belated attempt,
however, did not erase the doubt as to whether an election
was indeed held.As previously stated, a corporation is
mandated to inform the SEC of the names and the change
in the composition of its officers and board of directors
within 30 days after election if one was held, or 15 days
after the death, resignation or cessation of office of any of
its director, trustee or officer if any of them died, resigned
or in any manner, ceased to hold office.This, the
Corporation failed to do.The alleged election of the
directors and officers who signed the March 31, 1997 Board
Resolution was held on October 16, 1996, but the SEC was
informed thereof more than two years later, or on
November 11, 1998.The 4 Directors appearing in the 1996
General Information Sheet died between the years 1984
1987,26 but the records do not show if such demise was
reported to the SEC.
What further militates against the purported election of
those who signed the March 31, 1997 Board Resolution was
the belated submission of the alleged Minutes of the
October 16, 1996 meeting where the questioned officers
were elected.The issue of legal capacity of Ma. Antonia M.
Salvatierra was raised before the lower court by the group
of Antonio Monfort III as early as 1997, but the Minutes of
said October 16, 1996 meeting was presented by the
Corporation only in its September 29, 1999 Comment
before the Court of Appeals.27 Moreover, the Corporation
failed to prove that the same October 16, 1996 Minutes was
COMMERCIAL LAW REVIEW (RVP)
submitted to the SEC.In fact, the 1997 General Information
Sheet28 submitted by the Corporation does not reflect the
names of the 4 Directors claimed to be elected on October
16, 1996.
Considering the foregoing, we find that Ma. Antonia M.
Salvatierra failed to prove that four of those who authorized
her to represent the Corporation were the lawfully elected
Members of the Board of the Corporation.As such, they
cannot confer valid authority for her to sue on behalf of the
corporation.
B. Advantages and Disadvantages of
the Corporate Medium
C. Doctrine of Separate Juridical
Personality and the Veil of Corporate
Fiction
4. RICARDO S. SILVERIO, JR., ESSES DEVELOPMENT
CORPORATION, and TRI-STAR FARMS, INC., vs.
FILIPINO BUSINESS CONSULTANTS, INC.||
G.R. No. 143312 August 12, 2005
Ponente: Carpio, J.
Doctrinal Pronouncement:
A corporation has a personality distinct from that of its
stockholders. A corporation is a juridical person distinct
from the members composing it. Properties registered in
the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of
stock constitute personal property, they do not represent
property of the corporation. The corporation has property
of its own which consists chiefly of real estate. A share of
stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent
when distributed according to law and equity, but its holder
is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any
definite portion of its property or assets. The stockholder is
not a co-owner or tenant in common of the corporate
property.||
8

Relevant Facts (including important contention of
parties):
The parties are wrangling over possession of a 62 hectare-
land in Calatagan, Batangas after Esses and Tri-Star failed to
redeem the Calatagan Property from FBCI. During the
pendency of the case, FBCI filed with the an Urgent Ex-Parte
Motion to Suspend Enforcement of Writ of Possession. FBCI
pointed out that it is now the new owner of Esses and Tri-
Star having purchased the substantial and controlling
shares of stocks of the two corporations. It claimed that
since it is now the owner of the controlling shares of stocks,
the property must be awarded in its favor.
Daghan pa ning procedural issues pero mao rani ang
relevant.
Issue/s:
Whether FBCI’s acquisition of shares of stocks of Esses and
Tristar representing a controlling interest of the two
corporations would also give FBCI a proprietary right over
the Calatagan Property owned by both Esses Corp. and
Tristar.
Ruling:
No. FBCI’s alleged controlling shareholdings in Esses and
Tristar merely represent a proportionate interest in the
properties of the two corporations. Such controlling
shareholdings do not vest FBCI with any legal right or title
to any of Esses and Tristar’s corporate properties.
As a stockholder, FBCI has an interest in Esses and Tri-Star’s
corporate properties that is only equitable or beneficial in
nature. Even assuming that FBCI is the controlling
shareholder of Esses and Tri-Star, it does not legally make it
the owner of the Calatagan Property, which is legally owned
by Esses and Tri-Star as distinct juridical persons. As such,
FBCI is not entitled to the possession of any definite portion
of the Calatagan Property or any of Esses and Tri-Star’s
properties or assets. FBCI is not a co-owner or tenant in
common of the Calatagan Property or any of Esses and Tri-
Star’s corporate properties.
A corporation is a juridical person distinct from the
members composing it. Properties registered in the name
of the corporation are owned by it as an entity separate and
distinct from its members.
COMMERCIAL LAW REVIEW (RVP)
5. Kukan International Corporation v. Ho. Judge
Amor Reyes
GR NO. 182729; DATE: September 29, 2010.
Ponente: VELASCO, JR., J.
Doctrinal Pronouncement:
- Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction.
-Those who seek to pierce the veil must clearly establish that
the separate and distinct personalities of the corporations
are set up to justify a wrong, protect fraud, or perpetrate a
deception.
Relevant Facts:
On March 1998, Kukan, Inc. conducted a bidding for the
supply and installation of signages in a building being
constructed in Makati City. Morales tendered the winning
bid and was awarded the PhP 5 million contract. Contract
price was later reduced to Php 3,388,502 due to exclusions
of other items. Despite compliance to the contract, Morales
was only paid the amount of PhP 1,976,371.07, leaving a
balance of PhP 1,412,130.93, which Kukan, Inc. refused to
pay despite demands. Then, Morales filed a Complaint with
the RTC against Kukan, Inc. for a sum of money.
Kukan, Inc. filed an answer with counterclaim, trial ensued.
However, starting November 2000, Kukan, Inc. no longer
appeared and participated in court proceedings, prompting
the RTC to declare Kukan, Inc. in default.
On November 28, 2002, the RTC rendered a Decision
finding Kukan, Inc. liable to pay for the sum of Php
1,201,724 with legal interest of 12% per annum until flly
paid, Php 50k for moral damages, Php 20k for attorney’s
fees, and Php 7,960.06 for litigation expenses.
Morales moved for and secured a writ of execution against
Kukan, Inc, pursuant to the court’s decision. The sheriff
then levied upon various personal properties found at what
was supposed to be Kukan, Inc.’s office in Makati City.
Alleging that it owned the properties thus levied and that it
was a different corporation from Kukan, Inc., Kukan
International Corporation (KIC) filed an Affidavit of Third-
Party Claim.
9

In reaction to the third party claim, Morales interposed an
Omnibus Motion dated April 30, 2003. In it, Morales prayed,
applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the
judgment debt of Kukan, Inc. with the properties under the
name or in the possession of KIC, it being alleged that both
corporations are but one and the same entity.
Before the RTC, Morales filed a Motion to Pierce the Veil
of Corporate Fiction to declare KIC as having no existence
separate from Kukan, Inc. This time around, after being
denied a couple of times, the RTC, by Order dated March
12, 2007, granted the motion. The RTC held that Kukan
International Corp. and Michael Chan (a major stockholder
of both Kukan and KIC) are jointly and severally liable to pay
the amount awarded to plaintiff pursuant to the decision of
November [28], 2002 which has long been final and
executory.
KIC went to the CA on a petition for certiorari to nullify the
aforesaid orders. The CA denied the petition and affirmed
the assailed orders of the RTC. KIC filed for a motion for
reconsideration but was denied by the CA.
Hence this petition for review.
Contention of the Petitioner:
CA had no legal basis in declaring petitioner to be liable for
the judgment obligations of the corporation "Kukan, Inc."
to private respondent – as petitioner is a stranger to the
case and was never made a party in the case before the trial
court nor was it ever served a summons. And that CA erred
in declaring that KIC and Kukan Inc are one and the same
entity.
Issue/s:
1. Whether the trial court can, after the
judgment against Kukan, Inc. has attained
finality, execute it against the property of
KIC.
2. Whether the trial court acquired jurisdiction
over KIC.
3. Whether the trial and appellate courts
correctly applied, under the premises, the
principle of piercing the veil of corporate
fiction. (issue relevant to topic)
COMMERCIAL LAW REVIEW (RVP)
Ruling: Petition is meritorious.
1. NO.
Deeply ingrained in our jurisprudence is the principle that a
decision that has acquired finality becomes immutable and
unalterable. As such, it may no longer be modified in any
respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court
of the land. The only exceptions to the general rule are the
correction of clerical errors, the so-called nunc pro tunc
entries which cause no prejudice to any party, void
judgments, and whenever circumstances transpire after the
finality of the decision which render its execution unjust
and inequitable.
As may be noted, the subject decision, in unequivocal
terms, directed Kukan, Inc. to pay the aforementioned
awards to Morales. Thus, making KIC, thru the medium of a
writ of execution, answerable for the above judgment
liability is a clear case of altering a decision, an instance of
granting relief not contemplated in the decision sought to
be executed. Thus, on this ground alone, the instant
petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be
proper.
2. NO
The jurisdiction over the defendants in a civil case is
acquired either through the service of summons upon them
or through their voluntary appearance in court and their
submission to its authority.
In the instant case, KIC was not made a party-defendant in
Civil Case. KIC never abandoned its challenge, however
implicit, to the RTC’s jurisdiction over its person.
Pertinently, in its Comment and Opposition to Plaintiff’s
Omnibus Motion, KIC entered its "special but not voluntary
appearance" alleging therein that it was a different entity
and has a separate legal personality from Kukan, Inc. Thus,
KIC cannot be deemed to have waived its objection to the
court’s lack of jurisdiction over its person.
3. Morales’ contention is untenable.
● A new action for piercing the veil of corporate
fiction should have been filed, as piercing the veil
10

of corporate fiction applies to determine liability
and not jurisdiction.
The principle of piercing the veil of corporate fiction, and
the resulting treatment of two related corporations as one
and the same juridical person with respect to a given
transaction, is basically applied only to determine
established liability; it is not available to confer on the court
a jurisdiction it has not acquired, in the first place, over a
party not impleaded in a case. Elsewise put, a corporation
not impleaded in a suit cannot be subject to the court’s
process of piercing the veil of its corporate fiction. Piercing
the veil of corporate entity applies to determination of
liability not of jurisdiction.
This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the
case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be
applied, based on the evidence presented, it is imperative
that the court must first have jurisdiction over the
corporation.
Thus, (1) the court must first acquire jurisdiction over the
corporation or corporations involved before its or their
separate personalities are disregarded; and (2) the doctrine
of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the
authority of the court by way of service of summons or what
passes as such service.
The principle of piercing the veil of corporate fiction finds
no application to the instant case. It must be noted that the
motion that Morales filed had a new cause of action which
was to held KIC liable for the liability of Kukan, Inc. This new
cause of action should have been properly ventilated in a
new complaint and subsequent trial where the doctrine of
piercing the corporate veil can be applied.
● Respondents failed to establish that the separate
and distinct personalities of the corporations are
set up to justify a wrong, protect fraud, or
perpetrate a deception.
Notably in this case, the court stated that to justify the
piercing of the veil of corporate fiction, it must be shown
by clear and convincing proof that the separate and
distinct personality of the corporation was purposefully
COMMERCIAL LAW REVIEW (RVP)
employed to evade a legitimate and binding commitment
and perpetuate a fraud or like wrongdoings.
When the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following
factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred
to a second corporation to avoid a financial
liability of the first corporation; and
3. Both corporations are owned and controlled by
the same persons such that the second
corporation should be considered as a
continuation and successor of the first
corporation.
In the instant case, however, the second and third factors
are conspicuously absent. There is, therefore, no
compelling justification for disregarding the fiction of
corporate entity separating Kukan, Inc. from KIC.
The suggestion that KIC is but a continuation and successor
of Kukan, Inc., owned and controlled as they are by the
same stockholders, stands without factual basis. It is true
that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such
circumstance, standing alone, is insufficient to establish
identity. For this ground to hold sway in this case, there
must be proof that Chan had control or complete dominion
of Kukan and KIC’s finances, policies, and business
practices; he used such control to commit fraud; and the
control was the proximate cause of the financial loss
complained of by Morales.There must be at least a
substantial identity of stockholders for both corporations in
order to consider this factor to be constitutive of corporate
identity.
6. HALLEY VS. PRINTWELL INC.
GR NO. 157549, 30 MAY 2011
BERSAMIN, J.
Doctrinal Pronouncement:
Stockholders of a corporation are liable for the debts of the
corporation up to the extent of their unpaid subscriptions.
11

They cannot invoke the veil of corporate identity as a shield
from liability, because the veil may be lifted to avoid
defrauding corporate creditors.
Relevant Facts:
The petitioner (Halley) was an incorporator and original
director of Business Media Philippines, Inc. (BMPI).
Printwell is engaged in commercial and industrial printing.
BMPI commissioned Printwell for the printing of the
magazine Philippines, Inc. (together with wrappers and
subscription cards) that BMPI published and sold.
In the period from October 11, 1988 until July 12, 1989,
BMPI placed with Printwell several orders on credit,
evidenced by invoices and delivery receipts totaling
₱316,342.76. Considering that BMPI paid only₱25,000.00,
Printwell sued BMPI for the collection of the unpaid
balance of ₱291,342.76 in the RTC.
On February 8, 1990,Printwell amended the complaint in
order to implead as defendants all the original stockholders
and incorporators to recover on their unpaid subscriptions.
The defendants filed a consolidated answer, averring that
they all had paid their subscriptions in full; that BMPI had a
separate personality from those of its stockholders; and
that the directors and stockholders of BMPI had resolved to
dissolve BMPI during the annual meeting held on February
5, 1990.
RTC rendered a decision in favor of Printwell, rejecting the
allegation of payment in full of the subscriptions in view of
an irregularity in the issuance of the ORs and observing that
the defendants had used BMPI’s corporate personality to
evade payment and create injustice.
The CA affirmed the RTC, holding that the defendants’
resort to the corporate personality would create an
injustice because Printwell would thereby be at a loss
against whom it would assert the right to collect.
Issues:
1.) Whether or not Printwell may directly sue the
stockholders of BMPI and thus piercing the
corporate veil – YES
2.) Whether or not an unpaid creditor may satisfy its
claim from unpaid subscriptions based on trust
fund doctrine - YES
COMMERCIAL LAW REVIEW (RVP)
3.) Whether or not the petitioner was able to prove
her payment for the unpaid subscription - NO
Ruling:
> FIRST ISSUE:
Printwell impleaded the petitioner and the other
stockholders of BMPI for two reasons, namely: (a) to reach
the unpaid subscriptions because it appeared that such
subscriptions were the remaining visible assets of BMPI;
and (b) to avoid multiplicity of suits.
The corporate personality may be disregarded, and the
individuals composing the corporation will be treated as
individuals, if the corporate entity is being used as a cloak
or cover for fraud or illegality; as a justification for a
wrong; as an alter ego, an adjunct, or a business conduit
for the sole benefit of the stockholders.
In this case, Petitioner’s personal liability, together with
that of her co-defendants, was apparent. She and the other
defendant stockholders were in charge of the operations of
BMPI at the time the unpaid obligation was transacted and
incurred. They were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said
transactions. In view of the unpaid subscriptions, BMPI
failed to pay appellee of its liability, hence appellee in order
to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny
appellee from recovering from appellants would place
appellee in a limbo on where to assert their right to collect
from BMPI since the stockholders who are appellants
herein are availing the defense of corporate fiction to evade
payment of its obligations.
It follows, therefore, that whether or not the petitioner
persuaded BMPI to renege on its obligations to pay, and
whether or not she induced Printwell to transact with BMPI
were not good defenses in the suit.
> SECOND ISSUE:
The trust fund doctrine enunciates a rule that the property
of a corporation is a trust fund for the payment of creditors,
but such property can be called a trust fund ‘only by way of
analogy or metaphor.’ As between the corporation itself
and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for
the payment of its debts.
12

It is established doctrine that subscriptions to the capital of
a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts.
We clarify that the trust fund doctrine is not limited to
reaching the stockholder’s unpaid subscriptions. The scope
of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other
property and assets generally regarded in equity as a trust
fund for the payment of corporate debts. All assets and
property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the
possession of the stockholders, regardless of full payment
of their subscriptions, may be reached by the creditor in
satisfaction of its claim.
Also, under the trust fund doctrine, a corporation has no
legal capacity to release an original subscriber to its capital
stock from the obligation of paying for his shares, in whole
or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors. The creditor is
allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the
corporation for the satisfaction of its debt. To make out a
prima facie case in a suit against stockholders of an
insolvent corporation to compel them to contribute to the
payment of its debts by making good unpaid balances upon
their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the
stocks of the corporation.
To determine the liability, the prevailing rule is that a
stockholder is personally liable for the financial obligations
of the corporation to the extent of his unpaid subscription.
In view of the petitioner’s unpaid subscription being worth
₱262,500.00, she was liable up to that amount.
> THIRD ISSUE:
The petitioner posits that the finding of irregularity
attending the issuance of the receipts (ORs) issued to the
other stockholders/subscribers should not affect her
because her receipt did not suffer similar irregularity.
A receipt is the written acknowledgment of the fact of
payment in money or other settlement between the seller
and the buyer of goods. Although a receipt is the best
evidence of the fact of payment, it is not conclusive, but
COMMERCIAL LAW REVIEW (RVP)
merely presumptive; nor is it exclusive evidence,
considering that parole evidence may also establish the fact
of payment.
The petitioner’s OR No. 227, presented to prove the
payment of the balance of her subscription, indicated that
her supposed payment had been made by means of a
check. Thus, to discharge the burden to prove payment of
her subscription, she had to adduce evidence satisfactorily
proving that her payment by check was regarded as
payment under the law.
Settled is the rule that payment must be made in legal
tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable
instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the
payment by commercial document is actually realized.
To establish their defense, the respondents therefore had
to present proof, not only that they delivered the checks to
the petitioner, but also that the checks were encashed. The
respondents failed to do so
Because of this failure of the respondents to present
sufficient proof of payment, it was no longer necessary for
the petitioner to prove non-payment, particularly proof
that the checks were dishonored.
Ostensibly, therefore, the petitioner’s mere submission of
the receipt issued in exchange of the check did not
satisfactorily establish her allegation of full payment of her
subscription. Indeed, she could not even inform the trial
court about the identity of her drawee bank, and about
whether the check was cleared and its amount paid to
BMPI. In fact, she did not present the check itself.
The income tax return (ITR) and statement of assets and
liabilities of BMPI, albeit presented, had no bearing on the
issue of payment of the subscription because they did not
by themselves prove payment.
It is notable, too, that the petitioner and her co-
stockholders did not support their allegation of complete
payment of their respective subscriptions with the stock
and transfer book of BMPI. That she tendered no
explanation why the stock and transfer book was not
13

presented warrants the inference that the book did not
reflect the actual payment of her subscription.
Nor did the petitioner present any certificate of stock issued
by BMPI to her. Such a certificate covering her subscription
might have been a reliable evidence of full payment of the
subscriptions, considering that under Section 65 of the
Corporation Code a certificate of stock issues only to a
subscriber who has fully paid his subscription.
Although the articles of incorporation may possibly reflect
only the pre-incorporation status of a corporation, the
lower courts’ reliance on that document to determine
whether the original subscribers already fully paid their
subscriptions or not was neither unwarranted nor
erroneous. Their failure to substantiate their averment of
full payment, as well as their failure to counter the reliance
on the recitals found in the articles of incorporation simply
meant their failure or inability to satisfactorily prove their
defense of full payment of the subscriptions.
7. HEIRS OF FE TAN UY VS. INTERNATIONAL BANK,
GR NO. 166282, FEB. 13, 2013
GOLDKEY DEVELOPMENT CORPORATION VS.
INTERNATIONAL EXCHANGE BANK, GR. NO. 166283,
FEB. 13, 2013
Ponente: MENDOZA, J.
Doctrinal Pronouncement:
- A director, officer or employee of a corporation is
generally not held personally liable for obligations
incurred by the corporation nevertheless, this
legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as
a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse
legitimate issues.
- Under a variation of the doctrine of piercing the
veil of corporate fiction, when two business
enterprises are owned, conducted and controlled
by the same parties, both law and acuity equity
will, necessary to protect the rights of third
parties, disregard the legal fiction that two
corporations are distinct entities and treat them
as identical or one and the same.
COMMERCIAL LAW REVIEW (RVP)
Relevant Facts:
Respondent iBank granted loans to Hammer. These were
made pursuant to Letter-Agreement, between iBank and
Hammer, represented by its president and GM, Chua,
granting Hammer a P25M Ominubis Line. The loans were
secured by Goldkey Development Corporation over several
properties and P25M-Peso Surety Agreement.
Hammer defaulted in the payment of its loans, prompting
iBank to foreclose on Goldkey’s third-party Real Estate
Mortgage but it only amounted to P12M and there is still
unpaid loan of P13, 420,177.72. For failure of Hammer to
pay the deficiency, iBank filed a complaint for sum of
money.
Chua and Hammer were declared default. But in her
separate answer, Uy claimed that she was not liable to
iBank because she never executed a surety agreement in
favor of the iBank. Goldkey, denies liability, averred that
it acted only as third-party mortgagor and that it was a
corporate separate and distinct from Hammer.
RTC Decision
Rule in favor of iBank. While it made pronouncement that
the signature of Uy on the Surety Agreement was forgery it
nevertheless held her liable for outstanding obligation of
Hammer because she was an officer and stockholder of the
said corporation.
As to Goldkey, it came to the conclusion that Goldkey and
Hammer were one and the same entity.
CA Decision
Affirmed the RTC.
Issues:
1. Whether Uy can be held liable to iBank for the
loan obligation of Hammer as an officer and
stockholder of the corporation
2. Whether Goldkey can be held liable for the
obligation of Hammer for being a mer alter ego of
Hammer.
Ruling: Partially granted.
First Issue: Uy is not liable; The piercing of the veil of
corporate fiction is not justified
A corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and
14

on its behalf and in general, from the people compromising
it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and
employees, are its sole liabilities.
Director, officer or employee of a corporation is generally
not held personally liable for the obligation incurred by the
corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or
illegal act, or a vehicle for the evasion of an existing
obligation, the circumvention statutes, or to confuse
legitimate issues. Thi is consistent with the provision of
Corporation Code. Sec. 31. Liability of directors, trustees or
officers.
Solidary liability will then attach to the directors, officer or
employees of the corporation in certain circumstances,
such as:
1. When directors and trustees or, in appropriate
cases, the officers of corporation: a. Vote for or
assent to patently unlawful acts of the
corporation; b. Act in bad faith or with gross
negligence in directing the corporate affairs; c.
are guilty of conflict of interest to the prejudice of
the corporation, its stockholders or members,
and other persons;
2. When a directors or officer has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has
contractually agreed or stipulated to hold himself
personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by
specific provision of law personally liable.
Before a director or officer of a corporation can be held
liable for corporate liabilities the following requisites must
concur:
1. Complainant must allege in the complaint that
the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith
2. The complaint must clearly and convincingly
prove such unlawful acts, negligence or bad faith.
ITCAB, in reading the complaint it reveals with regard to Uy,
iBank did not demand she be held liable for the obligations
of Hammer because she was a corporate officer who
COMMERCIAL LAW REVIEW (RVP)
committed bad faith or gross negligence in the performance
of her duties such that the lifting of the corporate mask
would be merited. The complaint simply stated that she,
together with her errant husband Chua, acted as surety of
Hammer, as evidenced by her signature on the Surety which
was later found by RTC to be forged. Utmost Uy could have
been charged with negligence in the performance of her
duties as treasurer of Hammer allowing the company to
contract a loan despite precarious financial position.
It also pointed out that she claims she no longer performed
functions of a treasurer, she she should have formally
resigned. But nevertheless these shortcomings of Uy are
not sufficient to justify the piercing of the corporate veil
which requires negligence of the officer must be so gross
that it could amount to bad faith and must be established
by clear and convincing evidence.
Second Issue: Goldkey is a mer alter ego of Hammer
Goldkey’s argument that iBank is barred from pursuing
Goldkey for the satisfaction of the unpaid obligation
because it is limited its liability to the REM is completely
absurd. Goldkey needs to be reminded that it is being sued
not as a consequence of the real estate mortgage, but
rather, because it acted as alter ego of Hammer.
What iBank sought was redress from Goldkey by
demanding that the veil of corporate fiction be lifted so that
it could not raise the defense of having a separate juridical
personality to evade liability for the obligations of Hammer.
Under a variation of the doctrine of piercing the veil of
corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical
or one and the same.
The following are some probative factors of identity that
will justify the application of doctrine of piercing the
corporate veil:
1. Stock ownership by one or common ownership of
both corporations
2. Identity of directors and officers
3. The manner of keeping corporate books and
records; and
4. Methods of conducting the business
15

ITCAB, with Hammer and Goldkey
1. Both are family corporation of defendant Chua
and Uy other incorporators are their brother and
sister
2. Share the same office and practically transact
their business of the same place
3. Defendant Chua is the president and COO of both
corporations. All transactions of two corporation
has his authorization
4. Assets of Hammer and Goldkey are co-mingled.
Therefore apparent that Goldkey was merely an adjunct of
hammer and, such legal fiction it has a separate personality
from that of Hammer should be brushed aside as they are,
undeniably, one and the same.
8. DEVELOPMENT BANK OF THE PHILIPPINES v. HYDRO
RESOURCES CONTRACTORS CORPORATION, G.R. No.
167530
PHILIPPINE NATIONAL BANK v. HYDRO RESOURCES
CONTRACTORS CORPORATION, G.R. No. 167561
ASSET PRIVATIZATION TRUST v. HYDRO RESOURCES
CONTRACTORS CORPORATION, G.R. No. 167603,
March 13, 2013
Ponente: LEONARDO-DE CASTRO, J.
Doctrinal Pronouncements:
By virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or
credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.
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 action 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.
Relevant Facts (including important contention of
parties):
These are three (3) consolidated petitions.
COMMERCIAL LAW REVIEW (RVP)
Sometime in 1984, petitioners DBP and PNB foreclosed on
certain mortgages made on the properties of Marinduque
Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the
defunct MMIC by organizing Nonoc Mining and Industrial
Corporation (NMIC). DBP and PNB owned 57% and 43% of
the shares of NMIC, respectively, except for five qualifying
shares. As of September 1984, the members of the Board of
Directors of NMIC, were either from DBP or PNB.
Subsequently, NMIC engaged the services of Hercon, Inc.
for NMIC’s Mine Stripping and Road Construction Program
in 1985. After computing the payments already made by
NMIC, Hercon, Inc. found that NMIC still has an unpaid
balance. Hercon, Inc. made several demands on NMIC,
including a letter of final demand and when these were not
heeded, a complaint for sum of money was filed in the RTC
seeking to hold petitioners NMIC, DBP, and PNB solidarily
liable for the amount owing Hercon, Inc.
Subsequent to the filing of the complaint, Hercon, Inc. was
acquired by HRCC in a merger. This prompted the
amendment of the complaint to substitute HRCC for
Hercon, Inc.
Thereafter, on December 1986, President Corazon C.
Aquino issued Proclamation No. 50 creating the Asset
Privatization Trust (APT) for the expeditious disposition and
privatization of certain government corporations and/or
the assets thereof. Pursuant to the said Proclamation, DBP
and PNB executed their respective deeds of transfer in favor
of the National Government assigning, transferring and
conveying certain assets and liabilities, including their
respective stakes in NMIC. In turn and on even date, the
National Government transferred the said assets and
liabilities to the APT as trustee under a Trust Agreement.
Thus, the complaint was amended for the second time to
implead and include the APT as a defendant.
In its answer, NMIC claimed that HRCC had no cause of
action. It also asserted that its contract with HRCC was
entered into by its then President without any authority.
Moreover, the said contract allegedly failed to comply with
laws, rules and regulations concerning government
contracts. NMIC further claimed that the contract amount
was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the
amounts already paid to Hercon, Inc. and attorney's fees, as
well as payment for equipment rental for four trucks,
16

replacement of parts and other services, and damage to
some of NMIC's properties.
DBP, PNB and APT’s Main Arguments:
HRCC had no cause of action because NMIC has a separate
juridical personality.
RTC Ruling:
It pierced the corporate veil of NMIC and held DBP and PNB
solidarily liable with NMIC. It applied the alter ego theory
and penetrated the corporate cover of NMIC based on two
factors: (1) the ownership by DBP and PNB of effectively all
the stocks of NMIC, and (2) the alleged interlocking
directorates of DBP, PNB and NMIC.
CA Ruling:
Affirmed the RTC Ruling.
Issue:
Whether or not there is sufficient ground to pierce the veil
of corporate fiction.
Ruling:
No, the Court finds that none of the tests in determining
the application of the alter ego theory has been
satisfactorily met in this case.
In Sarona v. National Labor Relations Commission has
defined the scope of application of the doctrine of piercing
the corporate veil only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing
obligation;
2) fraud cases or when the corporate entity is used to justify
a wrong, protect fraud, or defend a crime; or
3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person,
COMMERCIAL LAW REVIEW (RVP)
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 this connection, case law lays down a three-pronged test
to determine the application of the doctrine piercing the
corporate veil based on the alter ego theory, which is also
known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
The first prong is the “instrumentality” or “control” test.
This test requires that the subsidiary be completely under
the control and dominion of the parent. It examines the
parent corporation’s relationship with the subsidiary.
The second prong is the “fraud” test. This test requires that
the parent corporation’s conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful.
The third prong is the “harm” test. This test requires the
plaintiff to show that the defendant’s control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered.
To summarize, piercing the corporate veil based on the alter
ego theory requires the concurrence of three elements.
The absence of any of these elements prevents piercing the
corporate veil.
In applying the alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation
operated and the individual defendant’s relationship to that
operation. With respect to the control element, it refers
not to paper or formal control by majority or even complete
stock control but actual control which amounts to “such
17

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.” In addition, the control must be shown to have
been exercised at the time the acts complained of took
place.
The conclusion of the trial and appellate courts that the DBP
and PNB fit the alter ego theory with respect to NMIC’s
transaction with HRCC on the premise of complete stock
ownership and interlocking directorates involved a
quantum leap in logic and law exposinga. Gap in reason and
fact.
While ownership by one corporation of all or a great
majority of stocks of another corporation and their
interlocking directorates may serve as indicia of control, by
themselves and without more, however, these
circumstances are insufficient to establish an alter ego
relationship or connection between DBP and PNB on the
one hand and NMIC on the other hand, that will justify the
puncturing of the latter’s corporate cover. This 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.” This
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.”
In this case, nothing in the records shows that the corporate
finances, policies and practices of NMIC were dominated by
DBP and PNB in such a way that NMIC could be considered
to have no separate mind, will or existence of its own but a
mere conduit for DBP and PNB. On the contrary, the
evidence establishes that HRCC knew and acted on the
knowledge that it was dealing with NMIC, not with NMIC’s
stockholders. The letter proposal of Hercon, Inc., HRCC’s
predecessor-in-interest, regarding the contract for NMIC’s
mine stripping and road construction program was
addressed to and accepted by NMIC. The various billing
reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMIC’s
mine stripping and road construction program in 1985
concerned NMIC and NMIC’s officers, without any
indication of or reference to the control exercised by DBP
and/or PNB over NMIC’s affairs, policies and practices.
Also, DBP and PNB maintain an address different from that
of NMIC. There was insufficient proof of interlocking
COMMERCIAL LAW REVIEW (RVP)
directorates. There was not even an allegation of
similarity of corporate officers. Instead of evidence that
DBP and PNB assumed and controlled the management of
NMIC, HRCC’s evidence shows that NMIC operated as a
distinct entity endowed with its own legal personality.
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or
unjust act in contravention of a plaintiff’s legal rights must
be clearly and convincingly established; it cannot be
presumed. Without a demonstration that any of the evils
sought to be prevented by the doctrine is present, it does
not apply. There being a total absence of evidence pointing
to a fraudulent, illegal or unfair act committed against HRCC
by DBP and PNB under the guise of NMIC, there is no basis
to hold that NMIC was a mere alter ego of DBP and PNB.
As regards the third element, in the absence of both control
by DBP and PNB of NMIC and fraud or fundamental
unfairness perpetuated by DBP and PNB through the
corporate cover of NMIC, no harm could be said to have
been proximately caused by DBP and PNB on HRCC for
which HRCC could hold DBP and PNB solidarily liable with
NMIC.
Considering that, under the deeds of transfer executed by
DBP and PNB, the liability of the APT as transferee of the
rights, titles and interests of DBP and PNB in NMIC will
attach only if DBP and PNB are held liable, the APT incurs no
liability for the judgment indebtedness of NMIC. As such
assignee, therefore, the APT incurs no liability with respect
to NMIC other than whatever liabilities may be imputable
to its assignors, DBP and PNB.
Only NMIC as a distinct and separate legal entity is liable to
pay its corporate obligation to HRCC in the amount of
P8,370,934.74, with legal interest thereon from date of
demand.
Wherefore, the petitions are hereby granted.
9. WPM International Trading Inc v. Labayen
[G.R. No. 182770; September 17, 2014]
Ponente
Brion
Doctrinal Pronouncement:
18

Piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
The absence of any of these elements prevents piercing the
corporate veil.
Relevant Facts (including important contention of
parties):
WPM International Trading, Inc. (WPM), is a domestic
corporation engaged in the restaurant business, while
Warlito P. Manlapaz (Manlapaz) is its president.
WPM entered into a management agreement with the
respondent, by virtue of which the respondent was
authorized to operate, manage and rehabilitate Quickbite,
a restaurant owned and operated by WPM. As part of her
tasks, the respondent looked for a contractor who would
renovate the two existing Quickbite outlets.
Pursuant to the agreement, the respondent engaged the
services of CLN Engineering Services (CLN) to renovate
Quickbite-Divisoria at the cost of ₱432,876.02. Upon
completion of the renovation, respondent was only able to
pay ₱320,000.00 which pushed CLN to file a complaint for
sum of money against respondent. Eventually respondent
was found liable to pay the balance with interest.
COMMERCIAL LAW REVIEW (RVP)
Because of that, respondent instituted a complaint for
damages against the petitioners, WPM and Manlapaz.
Respondent’s arguments:
· She is entitled to reimbursement when she was
adjudged liable for a contract that she entered into for
and in behalf of the petitioners.
· Her participation in the management agreement
was limited only to introducing Manlapaz to Engineer
Carmelo Neri (Neri), CLN’s general manager
· It was actually Manlapaz and Neri who agreed on
the terms and conditions of the agreement;
Manlapaz’ defense:
· When he found the amount quoted by CLN too
high, he instructed the respondent to either
renegotiate for a lower price or to look for another
contractor;
· Since the respondent had exceeded her authority
as agent of WPM, the renovation agreement should
only bind her; and
· Since WPM has a separate and distinct
personality, Manlapaz cannot be made liable for the
respondent’s claim.
RTC: respondent is entitled to indemnity from Manlapaz
Manlapaz is liable in his personal capacity to reimburse the
respondent the amount she paid to CLN inconnection with
the renovation agreement. WPM is a mere instrumentality
or business conduit of Manlapaz and as such, WPM and
Manlapaz are considered one and the same.
CA: affirmed the RTC ruling that WPM and Manlapaz are
one and the same based on the following:
(1) Manlapaz is the principal stockholder of WPM;
19

(2) Manlapaz had complete control over WPM because he
concurrently held the positions of president, chairman of
the board and treasurer, in violation of the Corporation
Code;
(3) two of the four other stockholders of WPM are
employed by Manlapaz either directly or indirectly;
(4) Manlapaz’s residence is the registered principal office of
WPM; and
(5) the acronym "WPM" was derived from Manlapaz’s
initials. The CA applied the principle of piercing the veil of
corporate fiction and agreed with the RTC that Manlapaz
cannot evade his liability by simply invoking WPM’s
separate and distinct personality.
Issue/s:
(1) whether WPM is a mere instrumentality, alter-ego, and
business conduit of Manlapaz; NO
(2) whether Manlapaz is jointly and severally liable with
WPM to the respondent for reimbursement, damages and
interest. NO
Ruling:
We have reviewed the records and found that the
application of the principle of piercing the veil of corporate
fiction is unwarranted in the present case.
A corporation has a personality separate and distinct from
the persons acting for and, in its behalf, and, in general,
from the people comprising it. Following this principle, the
obligations incurred by the corporate officers, or other
persons acting as corporate agents, are the direct
accountabilities of the corporation they represent, and not
theirs.
Thus, a director, officer or employee of a corporation is
generally not held personally liable for obligations incurred
by the corporation; it is only in exceptional circumstances
that solidary liability will attach to them.
Doctrine of Piercing the Corporate Veil
The doctrine of piercing the corporate veil applies only in
three (3) basic instances, namely:
COMMERCIAL LAW REVIEW (RVP)
a) when the separate and distinct corporate personality
defeats public convenience, as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation;
b) in fraud cases, or when the corporate entity is used to
justify a wrong, protect a fraud, or defend a crime; or
c) is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so
organized and controlled and its affairs so conducted as to
make it merely an instrumentality, agency, conduit or
adjunct of another corporation. (See doctrine for the 3
elements for piercing the veil on the alter ego theory)
In the present case, the attendant circumstances do not
establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal
stockholder of WPM, records do not show that WPM was
organized and controlled, and its affairs conducted in a
manner that made it merely an instrumentality, agency,
conduit or adjunct of Manlapaz.
The mere ownership by a single stockholder of even all or
nearly all of the capital stocks of a corporation is not by itself
a sufficient ground to disregard the separate corporate
personality. To disregard the separate juridical personality
of a corporation, the wrongdoing must be clearly and
convincingly established.
No 1st Element: Control
Likewise, the records of the case do not support the lower
courts’ finding that Manlapaz had control or domination
over WPM or its finances. That Manlapaz concurrently held
the positions of president, chairman and treasurer, or that
the Manlapaz’s residence is the registered principal office
of WPM, are insufficient considerations to prove that he
had exercised absolute control over WPM.
The control necessary to invoke the instrumentality or alter
ego 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.
20

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.
Here, the respondent failed to prove that Manlapaz, acting
as president, had absolute control over WPM. Even granting
that he exercised a certain degree of control over the
finances, policies and practices of WPM, in view of his
position as president, chairman and treasurer of the
corporation, such control does not necessarily warrant
piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the
respondent, or that Manlapaz was guilty of bad faith or
fraud.
On the contrary, the evidence establishes that CLN and the
respondent knew and acted on the knowledge that they
were dealing with WPM for the renovation of the latter’s
restaurant, and not with Manlapaz. That WPM later
reneged on its monetary obligation to CLN, resulting to the
filing of a civil case for sum of money against the
respondent, does not automatically indicate fraud, in the
absence of any proof to support it.
This Court also observed that the CA failed to demonstrate
how the separate and distinct personality of WPM was used
by Manlapaz to defeat the respondent’s right for
reimbursement. Neither was there any showing that WPM
attempted to avoid liability or had no property against
which to proceed.
Only WPM is Liable
Since no harm could be said to have been proximately
caused by Manlapaz for which the latter could be held
solidarily liable with WPM, and considering that there was
no proof that WPM had insufficient funds, there was no
sufficient justification for the RTC and the CA to have ruled
that Manlapaz should be held jointly and severally liable to
the respondent for the amount she paid to CLN. Hence, only
WPM is liable to indemnify the respondent.
Piercing the Veil of Corporate Fiction Frowned Upon
Finally, we emphasize that the piercing of the veil of
corporate fiction is frowned upon and thus, must be done
with caution. It can only be done if it has been clearly
established that the separate and distinct personality of the
COMMERCIAL LAW REVIEW (RVP)
corporation is used to justify a wrong, protect fraud, or
perpetrate a deception. The court 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; it cannot be presumed.
10. Rosales v. New A.N.J.H. Enterprises
G.R. No. 203355. August 18, 2015.
VELASCO, JR., J
Doctrinal Pronouncement:
Mere ownership by a single stockholder of all or nearly all of the capital
stock of the corporation does not by itself justify piercing the corporate
veil. Nonetheless, in this case, other circumstances show that the buyer
of the assets of petitioners' employer is none other than his alter ego.
Facts:
Respondent New ANJH Enterprises (New ANJH) is a sole
proprietorship owned by respondent Noel Awayan (Noel).
Petitioners are its former employees who worked as
machine operators, drivers, helpers, lead and boiler men.
Allegedly due to dwindling capital, Noel wrote the Director
of the Department of Labor and Employment (DOLE) a
letter regarding New ANJH's impending cessation of
operations and the sale of its assets to respondent NH Oil
Mill Corporation (NH Oil), as well as the termination of
thirty-three (33) employees by reason thereof. Noel met
with the 33 affected employees/Petitioners, to inform them
of his plan through Notices informing them of the cessation
of operations of New ANJH effective March 15, 2010 and
the sale of its assets to a corporation.
Petitioners filed a complaint for illegal dismissal. They
alleged in their complaint that while New ANJH stopped its
operations on March 15, 2010, it resumed its operations as
NH Oil using the same machineries and with the same
owners and management. Petitioners thus claimed that the
sale of the assets of New ANJH to NH Oil was a
circumvention of their security of tenure.
Executive Labor Arbiter ruled in favor of petitioners. NLRC,
however, reversed the decision which was affirmed by the
CA.
Issue/s:
Whether or not the application of the doctrine of piercing
the veil of corporate fiction is justified in the present case.
21
 COMMERCIAL LAW REVIEW (RVP)

5. The buyer in the "impending sale" undisclosed in the

Ruling: notices to complainants is divulged by subsequent
YES. development to be practically the same as the seller.

The application of the doctrine of piercing the veil of These things are inconsistent with good faith.
corporate fiction is frowned upon. However, this Court will
Other circumstances justifying the application of the
not hesitate to disregard the corporate fiction if it is used to
doctrine:
such an extent that injustice, fraud, or crime is committed
against another in disregard of his rights. The subscribed capital stock of Noel and Heidi [in NH Oil]
are worth Php790,000.00 and Php190,000.00, respectively,
In this case, petitioners advance the application of the
or the total of Php980,000.00. Respondents claim that Noel
doctrine because they were terminated from employment
was managing ANJH and Heidi was its Secretary. The Deed
on the pretext that there will be an impending permanent
of Sale is signed by Noel and Heidi, Noel as [seller], and
closure of the business as a result of an intended sale of its
Heidi as representative of NH Oil Mill.
assets to an undisclosed corporation, and that there will be
a change in the management. Respondents did not enumerate what were the equipment
etc. subject of the "sale," and how they were depreciated,
Subsequent events, however, revealed that the buyer of
and what were the equipment/machines owned by Avelino
the assets of their employer was a corporation owned by
and rented by NH Oil Mill and for how much? Therefrom, it
the same employer and members of his family.
is extremely difficult to conclude by quantum of evidence
Furthermore, the business re-opened in less than a month
acceptable to a reasonable mind, that the "sale to a distinct
under the same management.
entity" is genuine.
Admittedly, mere ownership by a single stockholder of all
And while the notices of termination state that there would
or nearly all of the capital stock of the corporation does not
be a change in management, this Office (ELA) notes that
by itself justify piercing the corporate veil. Nonetheless, in
respondents do not deny that Noel and Heidi continue to
this case, other circumstances show that the buyer of the
manage NH Oil Mill.
assets of petitioners' employer is none other than his alter
ego. Therefore, as far as complainants' employment is
concerned, this Office pierces the veil of corporate fiction
The SC quoted with approval the observations of the
of NH Oil Mill and finds that the purported sale thereto of
Executive Labor Arbiter:
the assets of ANJH is insufficient to validly terminate such
1. Respondents did not allege that they informed employment. This Office cannot rule otherwise without
complainants neither did they state in the notices of running afoul to the mandate of the Constitution securing
termination that the buyer in the "impending sale" is NH Oil to the workingman his employment, and guaranteeing to
Mill. him full protection. So this Office declares that
complainants were illegally dismissed. (emphasis and
2. The information disclosed by the Certificate of underscoring supplied).
Registration and Articles of Incorporation of NH Oil Mill
explains respondents' motive. Its stockholders are
members of [Noel's] family known to complainants, and 11. INTERNATIONAL ACADEMY OF MANAGEMENT
Noel is the controlling stockholder and director. AND ECONOMICS (I/AME) V LITTON AND
COMPANY INC.
3. The immediate resumption of operation after cessation
GR NO. 191525, 13 DECEMBER 2017
of operation.

4. respondents did not dispute that there was no change in SERENO, C.J.
the management people, premises, tools, devices,
equipment, and machinery under NH Oil Mill. Doctrinal Pronouncement:

22

A party whose corporation is vulnerable to piercing of its
corporate veil cannot argue violation of due process.
Determination of the applicability of piercing the veil of
corporate fiction never put in issue whether a corporation is
a stock or non-stock.
The piercing of the corporate veil may apply to corporations
as well as persons involved with corporations, i.e., natural
persons.
Relevant Facts:
Santos defaulted in the payment of his rentals, as such,
Litton instituted an action against him for unlawful
detainer. The case was decided against him and has
attained finality.
To execute the judgment, the MeTC levied a piece of
property that was registered under the name of I/AME. The
title of the said property bears the annotation: “only up to
the extent of the share of Emmanuel T. Santos.
I/AME filed a motion before the court to remove the
annotations inscribed in its title. It avers that it is a separate
and distinct personality from Santos, therefore, its
properties cannot be made to answer for the latter’s
obligations.
MeTC initially denied the motion, but later on reversed it.
On appeal to the RTC, it reinstated the earlier denial of the
lower court.
On appeal to the CA, the court upheld the decision of the
RTC. It ruled that Santos utilized I/AME to insulate the
property from execution. Its decision is founded on the
following facts:
1. Deed of Absolute Sale dated 1979 indicated
Santos as president of I/AME when the latter was
only organized as a juridical entity in 1985.
2. The property was transferred to I/AME during the
pendency of the appeal made by Litton on the
revival of the judgment of the unlawful detainer
case.
3. The title was issued by the ROD 14 years after the
execution of the Deed of Absolute Sale and more
than 8 years after I/AME incorporated.
I/AME now avers that their right to due process was
violated when their property was made a subject to the
execution of Santos’ case when they were not impleaded as
COMMERCIAL LAW REVIEW (RVP)
parties in the unlawful detainer case. Furthermore, it is a
non-stock corporation, as such, the doctrine of piercing the
corporate veil does not apply to it. Lastly, they insisted that
the doctrine cannot be made to apply to natural persons.
Issue/s:
Whether or not the doctrine of piercing the corporate veil
is proper?
Ruling:
As to the issue on the violation of due process:
As settled, corporations, whether stock or non-stock, are
treated as separate and distinct legal entities from natural
persons composing them. However, the piercing of this
corporate veil is warranted when the corporation is used as
a means to perpetrate fraud, illegal act, evasion of existing
obligations, circumvention of statutes, confuse legitimate
claims, or when the corporation is merely a farce.
As a rule, the piercing of the corporate veil may only lie
when summons have been properly served to the
corporation concerned or that the latter is properly
subjected to the court a quo. In other words, it cannot be a
subject of a writ of execution meant for another. Exception
this rule is: if by clear and convincing proof, it is shown that
the separate and distinct personality of the corporation is
purposefully used to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings.
In such case, the corporation is vulnerable to piercing of the
corporate veil and cannot argue violation of due process.
In this case, Santos has used I/AME as a means to defeat his
obligation with Litton, the latter is therefore vulnerable to
piercing its corporate bail and cannot claim violation of due
process.
As to the argument that the doctrine of piercing the
corporate veil cannot apply to non-stock corporations:
The SC categorically ruled that in the application of the
doctrine the law does not distinguish between a stock and
non-stock corporation. It reiterated, that in a long line of
jurisprudence, the determination of the applicability of
piercing the veil of corporate fiction never put in issue
whether a corporation is a stock or non-stock.
As to the application of the doctrine to natural persons:
23

The Court ruled that the same can be made under two rules:
A. When the Corporation is the Alter Ego of a
Natural Person
The doctrine of alter ego is base upon the misuse of a
corporation by an individual for wrongful and inequitable
purposes. In which case, the court holds the individual
responsible for acts knowingly and intentionally done in the
name of the corporation.
SC held that the case is similar to Arcilla v CA where the
court allowed the piercing of the corporate veil against a
natural person. The are similar as to the following:
1. Santos was adjudged liable to pay on judgment
against him
2. He became a president of a corporation
3. He formed a corporation to conceal assets which
are supposed to pay for the judgment against him
4. The corporation which has Santos as its President,
is being asked by the court to pay on the judgment;
and
5. He may not use as a defense that he is no longer
President of I/AME.
Conversely, I/AME is the alter ego of Santos and vice
versa. This was proven by the following facts:
1. Santos falsely represented himself as the
president of I/AME in the Deed of Absolute Sale.
2. Santos is the conceptualizer of I/AME
3. He contributed P1.2 million out of the P1.5
million, making him the majority contributor of I/AME;
and
4. The building occupied by I/AME is named after
Santos (Noli Santos International Tower)
B. Reverse Piercing of the Corporate Veil (Reverse
Corporate Piercing or Piercing the Corporate Veil in
Reverse)
Under this rule, the corporation is made liable for the
debt of its shareholders.
COMMERCIAL LAW REVIEW (RVP)
The 2 types of reverse piercing are:
1. Outsider reverse piercing – occurs when a party
with a claim against an individual or corporation
attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant
2. Insider reverse piercing – the controlling
members will attempt to ignore the corporate fiction
in order to take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or
protection of personal assets.
The SC ruled that the first type is applicable in this case.
Litton, being the judgment creditor, sought the Court’s
intervention to pierce the corporate veil of I/AME in
order to make the property answer for a judgment
against Santos, who formerly owned and still
substantially controls I/AME.
From the foregoing, the SC ruled that it cannot
condone the action of Santos in hiding behind the
corporate form to evade paying his obligations. The
decision of the CA was affirmed by the Court.
12. MARICALUM MINING CORP. V. FLORENTINO,
G.R. NOS. 221813 & 222723, 23 JULY 2018
GESMUNDO, J.
Doctrinal Pronouncement:
A holding company may be held liable for the acts of its
subsidiary only when it is adequately proven that: a) there
was control over the subsidiary; b) such control was used to
protect a fraud (or gross negligence amounting to bad faith)
or evade an obligation; and c) fraud was the proximate
cause of another's existing injury.
Relevant Facts:
The dispute traces its roots back to when the Philippine
National Bank and the Development Bank of the Philippines
transferred its ownership of Maricalum Mining to the
National Government for disposition or privatization
because it had become a non-performing asset.
On October 2, 1992, the National Government thru the
Asset Privatization Trust executed a Purchase and Sale
24

Agreement (PSA) with G Holdings, a domestic corporation
primarily engaged in the business of owning and holding
shares of stock of different companies. G Holding bought
90% of Maricalum Mining's shares and financial claims in
the form of company notes.
Upon the signing of the PSA and paying the stipulated down
payment, G Holdings immediately took physical possession
of Maricalum Mining's Sipalay Mining Complex, as well as
its facilities, and took full control of the latter's
management and operations.
Afterwards, some of Maricalum Mining's employees retired
and formed several manpower cooperatives. Each of the
said cooperatives executed identical sets of Memorandum
of Agreement with Maricalum Mining wherein they
undertook, among others, to provide the latter with a
steady supply of workers, machinery and equipment for a
monthly fee.
On June 1, 2001, Maricalum Mining's Vice President and
Resident Manager Jesus H. Bermejo wrote a Memorandum
to the cooperatives informing them that Maricalum Mining
has decided to stop its mining and milling operations in
order to avert continuing losses brought about by the low
metal prices and high cost of production. Thereafter, the
properties of Maricalum Mining, which had been
mortgaged to secure the PNs, were extrajudicially
foreclosed and eventually sold to G Holdings as the highest
bidder.
On September 23, 2010, some of Maricalum Mining's
workers, including complainants, and some of Sipalay
General Hospital's employees jointly filed a Complaint with
the LA against G Holdings, its president, and officer-in-
charge, and the cooperatives and its officers for illegal
dismissal, underpayment and nonpayment of salaries,
among others.
LA:
The LA ruled in favor of complainants. It held that G
Holdings guilty of labor-only contracting with the
manpower cooperatives thereby making all of them
solidarily and directly liable to the complainants.
The LA reasoned that G Holdings connived with Maricalum
Mining in orchestrating the formation of manpower
cooperatives to circumvent the complainant’s labor
standards rights. The LA found it highly unlikely that the
complainants (except Sipalay Hospital’s employees) would
COMMERCIAL LAW REVIEW (RVP)
spontaneously form manpower cooperatives on their own
and in unison without the guidance of G Holdings and
Maricalum Mining.
NLRC:
Modified the LA ruling.
The NLRC imposed the liability of paying the monetary
awards against Maricalum Mining, instead of G Holdings. It
was Maricalum Mining – not G Holdings – who entered into
service contracts by way of a MOA with each of the
manpower cooperatives.
CA:
Affirmed the decision of the NLRC.
Issue/s:
Whether or not liability can be imposed against G Holdings
under the doctrine of piercing the veil of a corporate entity.
(NO)
Ruling:
The doctrine of piercing the corporate veil applies only in
three (3) basic areas, namely: (a) defeat of public
convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; (b) fraud
cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or (c) alter ego
cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. This
principle is basically applied only to determine established
liability. However, the piercing of the veil of corporate
fiction is frowned upon and must be done with caution. This
is because a corporation is invested by law with a
personality separate and distinct from those of the
persons composing it as well as from that of any other
legal entity to which it may be related.
A parent or holding company is a corporation which owns
or is organized to own a substantial portion of another
company's voting shares of stock enough to control or
influence the latter's management, policies or affairs thru
election of the latter's board of directors or otherwise.
However, the term "holding company" is customarily used
25

interchangeably with the term "investment company"
which, in turn, is defined by Section 4 (a) of Republic Act
(R.A.) No. 2629 as "any issuer (corporation) which is or
holds itself out as being engaged primarily, or proposes to
engage primarily, in the business of investing, reinvesting,
or trading in securities."
In other words, a "holding company" is organized and is
basically conducting its business by investing substantially
in the equity securities of another company for the
purposes of controlling their policies (as opposed to directly
engaging in operating activities) and "holding" them in a
conglomerate or umbrella structure along with other
subsidiaries. Significantly, the holding company itself -
being a separate entity - does not own the assets of and
does not answer for the liabilities of the subsidiary or
affiliate. The management of the subsidiary or affiliate still
rests in the hands of its own board of directors and
corporate officers. It is in keeping with the basic rule a
corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and
in its behalf and, in general, from the people comprising it.
The corporate form was created to allow shareholders to
invest without incurring personal liability for the acts of the
corporation.
While the veil of corporate fiction may be pierced under
certain instances, mere ownership of a subsidiary does not
justify the imposition of liability on the parent company. It
must further appear that to recognize a parent and a
subsidiary as separate entities would aid in the
consummation of a wrong. Thus, a holding corporation has
a separate corporate existence and is to be treated as a
separate entity; unless the facts show that such separate
corporate existence is a mere sham, or has been used as
an instrument for concealing the truth.
In the case at bar, complainants mainly harp their cause on
the alter ego theory. Under this theory, piercing the veil of
corporate fiction may be allowed only if the following
elements concur:
1) Control-not mere stock control, but complete
domination-not only of finances, but of policy and
business practice in respect to the transaction
attacked, must have been such that the corporate
entity as to this transaction had at the time no
separate mind, will or existence of its own;
2) Such control must have been used by the
defendant to commit a fraud or a wrong, to
COMMERCIAL LAW REVIEW (RVP)
perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust
act in contravention of plaintiffs legal right; and
3) The said control and breach of duty must have
proximately caused the injury or unjust loss
complained of.
The elements of the alter ego theory were discussed in
Philippine National Bank v. Hydro Resources Contractors
Corporation, to wit:
The first prong is the "instrumentality" or
"control" test. This test requires that the
subsidiary be completely under the control and
domination of the parent. It examines the parent
corporation's relationship with the subsidiary. It
inquires whether a subsidiary corporation is so
organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or
agent of the parent corporation such that its
separate existence as a distinct corporate entity
will be ignored. It seeks to establish whether the
subsidiary corporation has no autonomy and the
parent corporation, though acting through the
subsidiary in form and appearance, "is operating
the business directly for itself."
The second prong is the "fraud" test. This test
requires that the parent corporation's conduct in
using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test
requires the plaintiff to show that the defendant's
control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant's
26

exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the
alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or
parent corporation, fraud or fundamental unfairness
imposed on the plaintiff, and harm or damage caused to
the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements
prevents piercing the corporate veil.
In the instant case, there is no doubt that G Holdings-being
the majority and controlling stockholder-had been
exercising significant control over Maricalum Mining. This is
because this Court had already upheld the validity and
enforceability of the PSA between the APT and G Holdings.
It was stipulated in the PSA that APT shall transfer 90% of
Maricalum Mining's equity securities to G Holdings and it
establishes the presence of absolute control of a
subsidiary's corporate affairs. Moreover, the Court evinces
its observation that Maricalum Mining's corporate name
appearing on the heading of the cash vouchers issued in
payment of the services rendered by the manpower
cooperatives is being superimposed with G Holding's
corporate name. Due to this observation, it can be
reasonably inferred that G Holdings is paying for Maricalum
Mining's salary expenses. Hence, the presence of both
circumstances of dominant equity ownership and provision
for salary expenses may adequately establish that
Maricalum Mining is an instrumentality of G Holdings.
However, mere presence of control and full ownership of
a parent over a subsidiary is not enough to pierce the veil
of corporate fiction. It has been reiterated by this Court
time and again 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.
In this case, the complainants did not satisfy the requisite
quantum of evidence to prove fraud on the part of G
Holdings. They merely offered allegations and suppositions
that, since Maricalum Mining's assets appear to be
continuously depleting and that the same corporation is a
subsidiary, G Holdings could have been guilty of fraud. Bare
allegations do not prove anything. There must be proof
that fraud-not the inevitable effects of a previously
executed and valid contract such as the PSA-was the cause
of the latter's total asset depletion.
COMMERCIAL LAW REVIEW (RVP)
Further, complainants have not yet even suffered any
monetary injury. They have yet to enforce their claims
against Maricalum Mining. It is apparent that complainants
are merely anxious that their monetary awards will not be
satisfied because the assets of Maricalum Mining were
allegedly transferred surreptitiously to G Holdings.
However, as discussed earlier, since complainants failed to
show that G Holdings's mere exercise of control had a clear
hand in the depletion of Maricalum Mining's assets, no
proximate cause was successfully established.
Accordingly, complainants failed to satisfy the second and
third tests to justify the application of the alter ego theory.
This inevitably shows that the CA committed no reversible
error in upholding the NLRC's Decision declaring Maricalum
Mining as the proper party liable to pay the monetary
awards in favor of complainants.
D. Nationality of Corporations
13. GAMBOA v. TEVES
G.R. No. 176579, 28 June 2011
Ponente: Carpio, J.
Doctrinal Pronouncement:
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.
The constitutional requirement of at least 60 percent
Filipino ownership applies not only to voting control of
the corporation but also to the beneficial ownership
of the corporation. It is therefore imperative that such
requirement apply uniformly and across the board to
all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation.
Relevant Facts:
In 1969, General Telephone and Electronics
Corporation (GTE), sold 26 percent of the outstanding
common shares of PLDT to Philippine
27

Telecommunications Investment Corporation (PTIC).
In 1977, Prime Holdings, Inc. (PHI) became the owner
of 111,415 shares of stock of PTIC. In 1986, the
111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good
Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding
capital stock of PTIC, were later declared by this Court
to be owned by the Republic of the Philippines.
In 1999, First Pacific, a Bermuda-registered, Hong
Kong based company acquired the remaining 54
percent of the outstanding capital stock of PTIC. On
20 November 2006, the Inter-Agency Privatization
Council (IPC) of the Philippine Government through a
public bidding sold the same shares to Parallax
Venture who won with a bid of P25.6 billion or
US$510 million.
Thereafter, First Pacific announced that it would
exercise its right of first refusal as a PTIC stockholder
and buy the 111,415 PTIC shares by matching the bid
price of Parallax. On 14 February 2007, First Pacific,
through its subsidiary, MPAH, entered into a
Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, with the Philippine
Government for the price of P25,217,556,000. The
sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, petitioner alleges
that the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12
million shares or about 6.3 percent of the outstanding
common - or voting - shares of PLDT. With the sale,
First Pacific common shareholdings in PLDT increased
from 30.7 percent to 37 percent, thereby increasing
the common shareholdings of foreigners in PLDT to
about 81.47 percent. This, according to the
petitioner, violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more
than 40 percent.
COMMERCIAL LAW REVIEW (RVP)
On 28 February 2007, petitioner Wilson P. Gamboa, a
stockholder of PLDT, filed the instant petition for
prohibition, injunction, declaratory relief, and
declaration of nullity of sale of the 111,415 PTIC
shares.
Issue/s:
The crux of the controversy is the definition of the
term "capital." Does the term "capital" in Section 11,
Article XII of the Constitution refer to common shares
or to the total outstanding capital stock.
Ruling:
Petitioner submits that the 40 percent foreign equity
limitation in domestic public utilities refers only to
common shares because such shares are entitled to
vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the
term "capital" in Section 11, Article XII of the
Constitution refers to "the ownership of common
capital stock subscribed and outstanding, which class
of shares alone, under the corporate set-up of PLDT,
can vote and elect members of the board of
directors." It is undisputed that PLDT’s non-voting
preferred shares are held mostly by Filipino citizens.
Respondents, on the other hand, do not offer any
definition of the term "capital" in Section 11, Article
XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not
dispute that more than 40 percent of the common
shares of PLDT are held by foreigners.
[The Court partly granted the petition and
held that the term “capital” in Section 11, Article XII of
the Constitution refers only to shares of stock entitled
to vote in the election of directors of a public utility, or
in the instant case, to the total common shares of
PLDT, and not to the total outstanding capital stock
comprising both common and non-voting preferred
shares of PLDT].
28

Sec.11, Art. XII of the Constitution mandates the
Filipinization of public utilities. It says: “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...”
Indisputably, one of the rights of a stockholder is the
right to participate in the control or management of
the corporation. This is exercised through his vote in
the election of directors because it is the board of
directors that controls or manages the corporation. In
the absence of provisions in the articles of
incorporation denying voting rights to preferred
shares, preferred shares have the same voting rights
as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived
of the right to vote in the election of directors and on
other matters, on the theory that the preferred
shareholders are merely investors in the corporation
for income in the same manner as bondholders.
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.
Mere legal title is insufficient to meet the 60 percent
Filipino-owned “capital” required in the Constitution.
Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital
stock must rest in the hands of Filipino nationals in
COMMERCIAL LAW REVIEW (RVP)
accordance with the constitutional mandate.
Otherwise, the corporation is “considered as non-
Philippine national[s].”
SC’s Illustration:
To construe broadly the term “capital” as the total
outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes
the intent and letter of the Constitution that the
“State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.”
A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily
equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a
broad definition to the term “capital.” Let us assume
that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares
owned by Filipinos, with both classes of share having
a par value of one peso (P1.00) per share. Under the
broad definition of the term “capital,” such
corporation would be considered compliant with the
40 percent constitutional limit on foreign equity of
public utilities since the overwhelming majority, or
more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously
absurd.
In the example given, only the foreigners holding the
common shares have voting rights in the election of
directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On
the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the
election of directors and hence, have no control over
the public utility. This starkly circumvents the intent
of the framers of the Constitution, as well as the clear
language of the Constitution, to place the control of
public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national
economy effectively controlled by Filipinos.
29

The example given is not theoretical but can be found
in the real world, and in fact exists in the present case.
It must be stressed, and respondents do not dispute,
that foreigners hold a majority of the common shares
of PLDT. In fact, based on PLDT’s 2010 General
Information Sheet (GIS), which is a document
required to be submitted annually to the Securities
and Exchange Commission, foreigners hold
120,046,690 common shares of PLDT whereas
Filipinos hold only 66,750,622 common shares. In
other words, foreigners hold 64.27% of the total
number of PLDT’s common shares, while Filipinos
hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that
foreigners exercise control over PLDT. Such amount
of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the
Constitution.
14. HEIRS OF WILSON P. GAMBOA v.
TEVES
G.R. No. 176579 - October 9, 2012
(RESOLUTION)
Ponente: Carpio, J.
Doctrinal Pronouncement:
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.
The constitutional requirement of at least 60 percent
Filipino ownership applies not only to voting control
of the corporation but also to the beneficial
ownership of the corporation. It is therefore
imperative that such requirement apply uniformly
and across the board to all classes of shares,
regardless of nomenclature and category, comprising
the capital of a corporation.
COMMERCIAL LAW REVIEW (RVP)
Relevant Facts: 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 Filipinization 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%. 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.
Movants Philippine Stock Exchange’s (PSE) President,
Manuel V. Pangilinan, Napoleon L. Nazareno, and the
Securities and Exchange Commission (SEC) contend
that the term “capital” in Section 11, Article XII of the
Constitution has long been settled and defined to
refer to the total outstanding shares of stock,
whether voting or non-voting. In fact, movants claim
that the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement
in favor of Filipino citizens in the Constitution and
various statutes, has consistently adopted this
particular definition in its numerous opinions.
Movants point out that with the 28 June 2011
Decision, the Court in effect introduced a “new”
definition or “midstream redefinition” of the term
“capital” in Section 11, Article XII of the Constitution.
Issue: WON the term “capital” includes both voting
and non-voting shares.
Ruling:
No. The 28 June 2011 Decision declares that the 60
percent Filipino ownership required by the
Constitution to engage in certain economic activities
applies not only to voting control of the corporation,
but also to the beneficial ownership of the
30

corporation. Mere legal title is insufficient to meet
the 60 percent Filipino owned “capital” required in
the Constitution. Since the constitutional
requirement of at least 60 percent Filipino ownership
applies not only to voting control of the corporation
but also to the beneficial ownership of the
corporation, it is therefore imperative that such
requirement apply uniformly and across the board to
all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation.
Under the Corporation Code, capital stock consists of
all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which
may have different rights, privileges or restrictions as
stated in the articles of incorporation.
The Corporation Code allows denial of the right to
vote to preferred and redeemable shares, but
disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the
right to vote in the election of directors, while
preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the
right to vote in the election of directors, are entitled
to vote on the following corporate matters: (1)
amendment of articles of incorporation; (2) increase
and decrease of capital stock; (3) incurring, creating
or increasing bonded indebtedness; (4) sale, lease,
mortgage or other disposition of substantially all
corporate assets; (5) investment of funds in another
business or corporation or for a purpose other than
the primary purpose for which the corporation was
organized; (6) adoption, amendment and repeal of
by-laws; (7) merger and consolidation; and (8)
dissolution of corporation.
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without
voting rights. Preferred shares, denied the right to
vote in the election of directors, are anyway still
COMMERCIAL LAW REVIEW (RVP)
entitled to vote on the eight specific corporate
matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares,
at least 60 percent of the common shares and at least
60 percent of the preferred non-voting shares must
be owned by Filipinos. Of course, if a corporation
issues only a single class of shares, at least 60 percent
of such shares must necessarily be owned by Filipinos.
In short, the 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class of
shares, whether common, preferred non-voting,
preferred voting or any other class of shares. This
uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly
breathes life to the constitutional command that the
ownership and operation of public utilities shall be
reserved exclusively to corporations at least 60
percent of whose capital is Filipino-owned. Applying
uniformly the 60-40 ownership requirement in favor
of Filipino citizens to each class of shares, regardless
of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of
public utilities, as mandated by the Constitution. Such
uniform application to each class of shares insures
that the "controlling interest" in public utilities always
lies in the hands of Filipino citizens.
Side issues involving definition of
terms:
-"Capital" - Movants contend that the term "capital"
in Section 11, Article XII of the Constitution has long
been settled and defined to refer to the total
outstanding shares of stock, whether voting or non-
voting. For more than 75 years since the 1935
Constitution, the Court has not interpreted or defined
the term "capital" found in various economic
provisions of the 1935, 1973 and 1987 Constitutions.
There has never been a judicial precedent
interpreting the term "capital" in the 1935, 1973 and
1987 Constitutions, until now. Hence, it is patently
wrong and utterly baseless to claim that the Court in
defining the term "capital" in its 28 June 2011
Decision modified, reversed, or set aside the
purported long-standing definition of the term
31

"capital," which supposedly refers to the total
outstanding shares of stock, whether voting or non-
voting. To repeat, until the present case there has
never been a Court ruling categorically defining the
term "capital" found in the various economic
provisions of the 1935, 1973 and 1987 Philippine
Constitutions.
-"Philippine national" - a Philippine citizen, or a
domestic corporation at least "60% of the capital
stock outstanding and entitled to vote" is owned by
Philippine citizens (Foreign Investment Act).
-"Control Test" - Right to elect directors, coupled with
beneficial ownership, translates to effective control.
15. NARRA NICKEL MINING, TESORO MINING, AND
MCARTHUR MINING V. REDMONT CONSOLIDATED
MINES CORP.
G.R. No. 195580. April 21, 2014.
Velasco, Jr.
Doctrinal Pronouncement:
“Corporate layering” is admittedly allowed by the
FIA, but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal.
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.
The rule applies only when the 60-40 Filipino foreign equity
ownership is in doubt.
FACTS:
Respondent 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 Narra, Tesoro and McArthur.
McArthur obtained its MPSA from Madridejos
Mining Corporation (MMC). Narra acquired its MPSA from
Patricia Louise Minding & Development Corporation
COMMERCIAL LAW REVIEW (RVP)
(PLMDC). Tesoro acquired its MPSA from Sara Marie Mining
Inc. (SMMI).
Redmont filed before the Panel of Arbitrators
(POA) of the DENR separate petitions for the denial of
petitioners' applications for MPSA, alleging that at least
60% of the capital stock of the petitioners are owned and
controlled by MBMI Resources (MBMI), a 100% Canadian
corporation. Redmont argued that because of this,
petitioners were disqualified from engaging in mining
activities through MPSAs, which are reserved only for
Filipino citizens.
Petitioners averred that they were qualified
under the Philippine Mining Act since 60% are owned by
Filipinos. They argued that nationality is immaterial since
they applied for the conversion of their MPSA applications
into financial or technical assistance agreement (FTAA –
which is allowed for foreign corporation) applications. In
addition, the best tool in determining the nationality of the
corporation is the “control test” embodied in the Foreign
Investments Act (FIA), the pertinent provision provides:
Section 3 (a) The term Philippine national shall mean xxx
…; a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is wholly
owned by Filipinos xxx …: Provided, That were a
corporation and its non- Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of
the capital stock outstanding and entitled to vote of
each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors, in
order that the corporation shall be considered a
Philippine national.
Petitioners alleged that the grandfather rule has
no legal basis since the FIA does not provide for it, and such
rule has already been abandoned. They also opined that the
last portion (bolded part) admits the application of a
“corporate scheme” of corporations. The clear and
unambiguous wordings of the statute preclude the court
from construing it.
[Summary of Procedure - you can skip this part:
POA disqualified petitioners for the MPSA. On appeal, the
Mines Adjudication Board (MAB) ruled in favor of
petitioners. Redmont filed a petition for review before CA,
which ruled in favor of Redmont finding that through a web
of corporate layering (using grandfather rule), it is clear that
the one common controlling investor in Narra, McArthur,
32

and Tesoro, is MBMI. Redmont filed with the Office of the
President (OP) for the cancellation, this time, of the
petitioners FTAAs approved by virtue of conversion of its
MPSA applications, which the OP granted. CA affirmed this
decision. Hence, this petition. It is to be noted that
petitioners filed a manifestation that MBMI divested its
shares with the petitioners and sold it to a Filipino
corporation, DMCI.]
ISSUE:
Whether or not petitioners are foreign
corporations? YES
RULING:
Two acknowledged tests in determining the
nationality of a corporation: the control test and the
grandfather rule. DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining
to the controlling interests in enterprises engaged in the
exploitation of natural resources owned by Filipino citizens,
provides:
Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino
citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the
other 50,000 shall be recorded as belonging to aliens.
The first part of the DOJ Opinion (underlined part)
pertains to the CONTROL TEST. The second part of the
Opinion (bolded part) pertains to the stricter, more
stringent GRANDFATHER RULE.
“Corporate layering” is admittedly allowed by the
FIA, but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal. As to the allegation
that the Grandfather Rule has no legal basis, Art. XII, Sec. 2
of the Constitution provides that with respect to activities
in relation to natural resources, including mining, the state
may enter into agreements with corporations where at
least 60% of the capital is owned by Filipino citizens.
COMMERCIAL LAW REVIEW (RVP)
Further, The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship
of a corporation will be determined. A question was asked
whether the Committee adopts the grandfather rule, to
which Mr. Villegas answered “yes, as the understanding of
the Committee.” It is apparent that it is the intention of the
framers of the Constitution to apply the grandfather rule in
cases where corporate layering is present. Elementary in
statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. As
decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
DOJ Opinon No. 20 provides that: 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. Based on the said SEC
Rule and DOJ Opinion, the Grandfather 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).
The Court finds that this case calls for the
application of the grandfather rule since doubt prevails and
persists in the corporate ownership of petitioners. 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%.
DOJ Opinion No. 20, which petitioners quoted in
their petition, only made an example of an instance where
"doubt" as to the ownership of the corporation exists ( see
“i.e” part in DOJ Opinion 20 above). It would be ludicrous to
limit the application of the said word only to the instances
where the stockholdings of non-Filipino stockholders are
more than 40% of the total stockholdings in a corporation.
The corporations interested in circumventing our laws
would clearly strive to have "60% Filipino Ownership" at
face value. It would be senseless for these applying
corporations to state in their respective articles of
incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly.
Thus, various corporate schemes and layerings are utilized
to circumvent the application of the Constitution.
33

Obviously, the instant case presents a situation
which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Court's
mind. To determine, therefore, the actual participation,
direct or indirect, of MBMI, the grandfather rule must be
used.
1. McArthur Mining
McArthur acquired its MPSA application from
MMC. Out of McArthur’s 10,000 common shares, 5,997 are
owned by MMC while 3,998 are owned by the MBMI. Now
looking at the structure of MMC, out of 10,000 shares,
6,663 are owned by Filipino corporation Olympic Mines,
while 3,331 are owned by the MBMI. Interestingly, the
amount paid by Olympic Mines for its subscribed shares is
0, which is quite absurd since Olympic is the major
stockholder in MMC. This was explained by MBMI’s Annual
Report showing that it is because Olympic Mines entered
into joint venture agreements with several Philippine
companies. In these joint ventures, MBMI holds directly and
indirectly a 60% effective equity interest. Thus, McArthur,
when it is “grandfathered,” company layering was utilized
by MBMI to gain control over McArthur. It is apparent that
MBMI has more than 60% or more equity interest in
McArthur, making the latter a foreign corporation.
(Author’s Note: ako pakasabot ani is that the Canadian
Corp. MBMI (around 30%) and Olympic (60%) are
stockholders of MMC, pero murag controlled pud ni MBMI
si Olympic sa ilahang joint venture, so in reality MBMI
controls MMC. And si MMC, major stockholder pud sa
McArthur nya stockholder pud si MBMI sa McArthur. So, the
court arrived at the conclusion na MBMI apparently owns
more than 60% of McArthur through corporate layering.
Wala man gud computation kung gi unsa, mao ra ni ingon
sa court. Full text provided for the table of stockholdings)
2. Tesoro Mining – same setup, same values as
above only that it is SMMI instead of MMC.
Olympic likewise is a majority stockholder in
SMMI with 0 amount paid with its 6,663 share.
3. Narra Nickel – slightly different values and
corporations, PLMDC instead of MMC, but same
scheme by the Canadian Corp, MBMI.
The Court also took note of the fact that there is
a presence of the same stockholders in the 3 corporations.
Concluding from the above-stated facts, it is quite safe to
say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns
COMMERCIAL LAW REVIEW (RVP)
60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners' corporate owners,
namely: MMI, SMMI and PLMDC. 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.
SIDE ISSUES:
Is the case already moot and academic considering that the
MPSA Applications have already been converted into FTAA
applications and that the same have already been granted?
- No. The exceptions on the rule on mootness are
all present in this case (grave violation of
constitution, exceptional character, guide bench
and bar, capable of repetition yet evading review)
Petitioners tried to have the case dismissed for
being moot considering their acts of converting
the MPSA application to FTAA (since foreign
corps. are allowed FTAAs), and their
manifestation that MBMI already divested its
shares with the corporations and sold it to DMCI
Mining, a Filipino corporation. These acts prove
doubt on the nationality of the petitioners and
only proves that they were NOT in fact Filipino
corporations from the start.
Whether the res inter alios acta rule is applicable?
Petitioners alleged that the statements of MBMI should not
bind them since they are not partners, but merely involved
in joint venture agreements.
- NO. Joint venture agreements are “akin” to
partnerships; hence, the rule should likewise
apply.
Jurisdiction of POA – POA has jurisdiction over the
complaint of Redmont since it involves a “dispute” over the
mining area against the petitioners.
RE: MBMI’s act of selling its shares in the petitioners to
DMCI – Non-issue because already being tackled in a
separate petition before this court.
Leonen’s Dissent (summary)
- Grandfather Rule has no statutory basis. The
deliberations of the Constitutional Commission
do not clearly indicate that the entire committee
agreed that grandfather rule applies. It merely
34

indicates, at most, an understanding between
Commissioners Nolledo and Villegas, although
the latter claiming that it is the understanding of
the whole.
- The Control Test is established by congressional
dictum, being provided for in several laws,
including the mining act. DOJ Opinion 20 provides
for a qualifier, not a mere example for the
Grandfather Rule to apply.
16. NARRA NICKEL MINING AND DEVELOPMENT
CORPORATION v. REDMONT CONSOLIDATED MINES
CORP.
GR NO. 195580 (RESOLUTION) 28 JANUARY 2015
VELASCO, JR., J.
Doctrinal Pronouncement:
Please refer to the Ruling
Relevant Facts (including important contention of
parties):
This case is Motion for Reconsideration of the April 21, 2014
Decision which denied the Petition for Review on Certiorari
under R45 jointly interposed by Narra Nickel (Narra), Tesoro
Mining (Tesoro) and McArthur Mining (McArthur).
The said decision sustained the appellate court’s ruling that
petitioners, being foreign corporations, are not entitled to
Mineral Production Sharing Agreements (MPSAs). The 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 own 60% of the common stocks of the
petitioners by owning equity interest of petitioners’ other
majority corporate shareholders.
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.
Corporation Law (GRANDFATHER RULE)
To petitioners, the Court’s application of the Grandfather
Rule to determine their nationality is erroneous and
COMMERCIAL LAW REVIEW (RVP)
allegedly without basis in the Constitution, the Foreign
Investment Act, the Philippine Mining Act, and the Rules
issued by the SEC. These laws and rules supposedly espouse
the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of
determining compliance with Sec. 2, Art. XII of the
Constitution that only “corporations or associations at least
sixty per centum of whose capital is owned by such [Filipino]
citizens” may enjoy certain rights and privileges, like the
exploration and development of natural resources.
Issue/s:
Whether or not the Grandfather Rule applies or not.
Ruling:
Yes, the Grandfather Rule applies in this case and does not
eschew the Control Test.
Accordingly, the petitioners misread the clear import of the
decision. Nowhere in that decision did the Court foreclose
the application of the Control Test in determining which
corporations may be considered as Philippine nationals.
The Court used the Grandfather Rule as a “supplement” to
the Control Test so that the intent underlying the averted
Sec. 2, Art. XII of the Constitution be given effect. Borrowing
from the words of Justice Leonen:
In ending, the “control test” is still the
prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. XII of the 1987 Constitution,
entitled to undertake the exploration,
development and utilization of the natural
resources of the Philippines. When in mind of the
Court, there is doubt, based on the attendant
facts and circumstances of the case, in the 60-40
Filipino equity ownership in the corporation, then
it may apply the “grandfather rule”.
With that, the use of the Grandfather Rule as a
“supplement” to the Control Test is not proscribed by the
Constitution or the Philippine Mining Act.
THE GRANDFATHER RULE IMPLEMENTS THE INTENT OF
THE FILIPINIZATION PROVISIONS OF THE CONSTITUTION
35

The Grandfather Rule was originally conceived to look into
the citizenship of the individuals who ultimately won 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.
According to 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 shareholding in the corporation are determined.
With the legislative enactments, administrative rulings,
opinions and jurisprudence, the Grandfather Rule not only
finds basis, but more importantly, it implements the Filipino
equity requirement, in the Constitution.
APPLICATION OF THE GRANDFATHER RULE WITH THE
CONTROL TEST
The Control Test and the Grandfather Rule are not, as it
were, incompatible ownership-determinant methods that
can only be applied alternatively to each other. Rather,
these methods can, if appropriate, be used cumulatively in
the determination of the ownership and control of
corporations engaged in fully or partly nationalized
activities, as the mining operation involved in this case or
the operation of public utilities.
It is only when the Control Test is first complied with that
the Grandfather Rule may be applied. 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
COMMERCIAL LAW REVIEW (RVP)
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.
Corollary, 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.”
DOUBT refers to various indicia that the “beneficial
ownership” and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders.
The following are the significant indicators of the DUMMY
STATUS:
1. That the foreign investors provide
practically all the funds for the joint investment
undertaken by these Filipino businessmen and
their foreign partner;
2. That the foreign investors undertake to
provide practically all the technological support
for the joint venture;
3. That the foreign investors, while being
minority stockholders, manage the company and
prepare all economic viability studies.
When foreigners contribute more capital to an enterprise,
doubt exists as to the actual control and ownership of the
subject corporation even if the 60% Filipino equity threshold
is met.
The petitioners, in this case, comply with the 60-40 Filipino
to foreign equity ratio at first glance, doubt exists in the
instant case that gives rise to a reasonable suspicion that
the Filipino shareholders do not actually have the requisite
number of control and beneficial ownership in petitioners
Narra, Tesoro, and McArthur. Hence, the application of the
Grandfather Rule is justified.
A DOUBT EXISTS AS TO THE EXTENT OF CONTROL AND
BENEFICIAL OWNERSHIP OF MBMI OVER THE
PETITIONERS AND THEIR INVESTING CORPORATE
STOCKHOLDERS.
TESORO
36

Filipino Corp. – Sara Marie Mining – 59.97%
· Filipino Corp. –
Olympic Mines – 66.63%
shares [Did not
contribute in the paid-
up capital]
· Foreign Corp. – MBMI
– 33.31% shares
[Contributed in the paid-
up capital]
Foreign Corp. – MBMI – 39.98%
MCARTHUR
Filipino Corp. – Filipino Madridejos Mining – 59.97%
· Filipino Corp. –
Olympic Mines – 66.63%
shares [Did not
contribute in the paid-
up capital]
· Foreign Corp. – MBMI
– 33.31% shares
[Contributed in the paid-
up capital]
Foreign Corp. – MBMI – 39.98%
NARRA
Filipino Corp. – Patricia Louise Mining – 59.97%
· Filipino Corp. –
PASRDC – 66.02% shares
[Did not contribute in
the paid-up capital]
· Foreign Corp. – MBMI
– 33.98% shares
[Contributed in the paid-
up capital]
Foreign Corp. – MBMI – 39.98%
Despite compliance with the requisite 60-40 equity
ratio, the shares of these Filipino Corporate Investors,
which owned shares in these three mining corporations,
were held by Filipino Corporations and the Canadian-
owned company MBMI. However, only MBMI paid 99% of
the paid-up capital of these Filipino Corporate Investors
while Filipino Corporations did not pay a single peso for
their subscribed shares. This indicates the existence of
doubt in the beneficial ownership and control of these
Filipino Corporate Investors which leads to the application
of the Grandfather Rule. MBMI, in this case, acquires the
COMMERCIAL LAW REVIEW (RVP)
beneficial ownership and control in these mining
corporations.
With the indirect participation of MBMI, through
these Filipino Corporate Investors, its direct participation to
these three mining corporations and the individual foreign
shareholders, the Court concludes that the three mining
corporations are foreign corporations since majority of the
shares amounting to almost 60% were held directly and
indirectly by the Canadian-owned company MBMI and the
individual foreign investors. In turn, MBMI has the
beneficial ownership and control over these corporations.
Hence, they are not entitled to a Mineral Production
Sharing Agreements (MPSA). [Author’s Note: Please refer to
the full text for the equity formula and computations. This is
based on the understanding of the Author on the Court’s
Resolution]
Dissenting Opinion. LEONEN, J.
Justice Leonen in his dissenting opinion maintained
that the Control Test, rather than the Grandfather Rule,
finds priority application in reckoning the nationalities of
corporations engaged in nationalized economic activities.
The Grandfather Rule finds no basis in the text of the 1987
Constitution. However, whatever references these records
make to the Grandfather Rule is not indicative of a
consensus among all members of the Constitutional
Commission.
The Control Test serves the rationale for
nationalization of economic activities. It ensures effective
control by Filipinos and satisfies the requirement of
beneficial ownership.
Justice Leonen maintained that the Grandfather Rule
properly finds application as a “supplement” to the Control
Test:
Bare ownership of 60% of a corporation’s shares
would not suffice. What is necessary is such ownership as
will ensure control of a corporation. In Gamboa, “full
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights,
is required.” With this in mind, the Grandfather Rule may be
used as a supplement to the Control Test, that is, as a
FURTHER CHECK to ensure that control and beneficial
ownership of a corporation is in fact lodged in Filipinos.
37

In instances where methods are employed to disable
Filipinos from exercising control and reaping the economic
benefits of an enterprise, the ostensible control vested by
ownership of 60% of a corporation’s capital may be pierced.
Then, the Grandfather Rule allows for a further, more
exacting examination of who actually controls and benefits
from holding such capital.
17. Roy III v. Chairperson Herbosa
G.R. No. 207246, 18 April 2017
Doctrinal Pronouncement: 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.
Relevant Facts:
On June 28, 2011, the Court issued the Gamboa Decision
stating 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).
When Gamboa Decision attained finality on October 18,
2012, and Entry of Judgment was thereafter issued on
December 11, 2012.
On November 6, 2012, the SEC posted a Notice in its
website inviting the public to attend a public dialogue and
to submit comments on the draft memorandum circular
(attached thereto) on the guidelines to be followed in
determining compliance with the Filipino ownership
requirement in public utilities under Section.
Petitioner Atty. Jose M. Roy III (“Roy”) filed a 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 Roy seeks to apply
the 60-40 Filipino ownership requirement separately to
COMMERCIAL LAW REVIEW (RVP)
each class of shares of a public utility corporation, whether
common, preferred non¬voting, preferred voting or any
other class of shares. Petitioner Roy also questions the
ruling of the SEC that respondent Philippine Long Distance
Telephone Company (“PLDT”) is compliant with the
constitutional rule on foreign ownership.
He prays that the Court declare SEC-MC No. 8
unconstitutional and direct the SEC to issue new guidelines
regarding the determination of compliance with Section
11, Article XII of the Constitution in accordance with
Gamboa.
Issue/s:
Whether or not the SEC gravely abused its discretion
in ruling that PLDT is compliant with the
constitutional limitation on foreign ownership.
Ruling:
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.
If 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.
As owners of the corporation, the economic benefits will
necessarily accrue to them. It is illogical to speculate that
they will create shares which have features that will give
greater economic interests or benefits than they are
holding and not benefit from such offering, or that they
will allow foreigners to profit more than them from their
own corporation — unless they are
dummies.Commonwealth Act No. 108, the Anti-Dummy
Law deals with that possibility.
38

Notably, even if the shares of a particular public utility
were owned 100% Filipino, that does not discount the
possibility of a dummy situation from arising. Hence,
even if the 60-40 ownership in favor of Filipinos rule is
applied separately to each class of shares of a public
utility corporation, as the petitioners insist, the rule can
easily be side-stepped by a dummy relationship.
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.
Voting Control Test and the Beneficial Ownership Test
must be applied to determine whether a corporation is a
“Philippine national” and that a “Philippine national,” as
defined in the FIA and all its predecessor statutes, is “a
Filipino citizen, or a domestic corporation “at least sixty
percent (60%) of the capital stock outstanding and entitled
to vote,” is owned by Filipino citizens. A domestic
corporation is a “Philippine national” only if at least 60% of
its voting stock is owned by Filipino citizens.”
These FIA-IRR’s provisions were echoed in the Gamboa
Decision.
The assailed SEC-MC No. 8.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting
Control Test or the controlling interest requirement. In
fact, Section 2 goes beyond requiring a 60-40 ratio in favor
of Filipino nationals in the voting stocks; it moreover
requires the 60-40 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 “[f]ull
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights
is required.” Clearly, SEC-MC No. 8 cannot be said to have
been issued with grave abuse of discretion.
While SEC-MC No. 8 does not expressly mention the
Beneficial Ownership Test or full beneficial ownership of
stocks requirement in the FIA, this will not, render it
invalid — meaning, it does not follow that the SEC will not
apply this test in determining whether the shares claimed
COMMERCIAL LAW REVIEW (RVP)
to be owned by Philippine nationals are Filipino. SEC takes
its guiding lights also from the FIA and its implementing
rules, as well as the Securities Regulation Code (Republic
Act No. 8799; “SRC”) and its implementing rules. As
defined in the SRC-IRR, “[b]eneficial owner or beneficial
ownership means any person who, directly or indirectly,
through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power
(which includes the power to vote or direct the voting of
such security) and/or investment returns or power (which
includes the power to dispose of, or direct the disposition
of such security) . . . .”
The term “full beneficial ownership” found in the FIA-IRR
is to be understood in the context of the entire paragraph
defining the term “Philippine national.” Mere legal title is
not enough to meet the required Filipino equity, which
means that it is not sufficient that a share is registered in
the name of a Filipino citizen or national, i.e., he should
also have full beneficial ownership of the share. If the
voting right of a share held in the name of a Filipino
citizenor nationalis assigned or transferred to an alien,
that share is not to be counted in the determination of the
required Filipino equity. In the same vein, if the dividends
and other fruits and accessions of the share do not accrue
to a Filipino citizen or national, then that share is also to
be excluded or not counted. Thus, if a “specific stock” is
owned by a Filipino in the books of the corporation, but
the stock’s voting power or disposing power belongs to a
foreigner, then that “specific stock” will not be deemed as
“beneficially owned” by a Filipino.
Petitioners’ insistence that the 60% Filipino equity
requirement must be applied to each class of shares is
simply beyond the literal text and contemplation of
Section 11, Article XII of the 1987 Constitution.
Given the innumerable permutations that the types and
classes of stocks may take, requiring the SEC and other
government agencies to keep track of the ever-changing
capital classes of corporations will be impracticable, if not
downright impossible. And the law does not require the
impossible. (Lex non cogit ad impossibilia.)
Moreover, the restrictive interpretation of the term
“capital” would have a tremendous impact on the country
as a whole — and to all Filipinos. Current data of the PSE
show that, if the “Effective Control Test” were applied, the
total value of shares that would be deemed in excess of
the foreign-ownership limits based on stock prices as of 30
April 2014 is One Hundred Fifty Nine Billion
(Php159,638,845,206.89).
39

This value of investments would have to be discharged by
foreign holders, and consequently must be absorbed by
Filipino investors. Needless to state, the lack of
investments may lead to shutdown of the affected
enterprises and to immeasurable consequences to the
Philippine economy.
Court rules that SEC-MC No. 8 is not contrary to the
Court’s definition and interpretation of the term
“capital.” Accordingly, the petitions must be denied for
failing to show grave abuse of discretion in the issuance
of SEC-MC No. 8.
E. Classes of Corporations
18.ENGR. RANULFO C. FELICIANO, in his
capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban
City vs. COA Chairman CELSO D. GANGAN,
Commissioners RAUL C. FLORES and
EMMANUEL M. DALMAN, and Regional
Director of COA Region VIII
G.R. No. 147402. January 14, 2004.
Ponente: CARPIO, J
Doctrinal Pronouncement:
● The Constitution recognizes two classes
of corporations. The first refers to private
corporations created under a general
law. The second refers to GOCCs
created by special charters.
● Congress cannot enact a law creating a
private corporation with a special charter.
Such legislation would be
unconstitutional. Private corporations
may exist only under a general law. If the
corporation is private, it must necessarily
exist under a general law. Stated
differently, only corporations created
under a general law can qualify as private
COMMERCIAL LAW REVIEW (RVP)
corporations. Under existing laws, that
general law is the Corporation Code.
● The phrase "government-owned and
controlled corporations with original
charters" means GOCCs created under
special laws and not under the general
incorporation law. There is no difference
between the term "original charters" and
"special charters."
Gist: This case is all about the classification of local water
districts as a GOCC with original charters. Petitioner
contends that it is not such, hence, not subject to the pre-
audit process of COA and therefore cannot be charged with
audit fees. However, the Court disagrees with petitioner as
“petitioner seeks to revive a well-settled issue. Petitioner
asks for a reexamination of a doctrine backed by a long line
of cases.”
Relevant Facts:
This is a petition for certiorari to annul the COA’s Resolution
and the Decision denying the MFR. The COA denied
petitioner Ranulfo C. Feliciano's request for COA to cease all
audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also
denied petitioner's request for COA to refund all auditing
fees previously paid by LMWD.
A Special Audit Team from COA audited the accounts of
LMWD, and thereafter received a letter requesting
payment of auditing fees, to which Petitioner replied that
LMWD could not pay it. Petitioner cited as basis for his
action Sections 6 and 20 of Presidential Decree 198 ("PD
198"), as well as Section 18 of Republic Act No. 6758 ("RA
6758")
Petitioner wrote COA through the RD asking for refund of
all auditing fees LMWD previously paid to COA; request was
denied as well as the MFR.
On 13 March 2001, petitioner filed this instant petition.
Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine
Association of Water Districts (PAWD) supporting the
petition.
40

The Ruling of the Commission on Audit: it has jurisdiction
over local water districts; denied petitioner's request for
COA to stop charging auditing fees as well as petitioner's
request for COA to refund all auditing fees already paid.
Contentions/Arguments of Petitioner:
· LWDs are not GOCCs with original charters.
· LWDs are private corporations.
· Asks the Court to consider certain interpretations of
the applicable laws, which would give a "new
perspective to the issue of the true character of
water districts."
· Theorizes that what PD 198 created was the Local
Waters Utilities Administration ("LWUA") and not
the LWDs.
· Claims that LWDs are created "pursuant to" and not
created directly by PD 198. Thus, petitioner
concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction
of COA as defined in Section 2(1), Article IX-D of the
Constitution.
· Elaborates that PD 198 does not create LWDs since it
does not expressly direct the creation of such
entities, but only provides for their formation on an
optional or voluntary basis, adding that the
operative act that creates an LWD is the approval of
the Sanggunian Resolution as specified in PD 198.
Main Issue: Whether a Local Water District ("LWD")
created under PD 198, as amended, is a government-owned
or controlled corporation subject to the audit jurisdiction of
COA.
Ruling: YES.
The Constitution recognizes two classes of corporations.
The first refers to private corporations created under a
general law. The second refers to GOCCs created by special
charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law,
provide for the formation, organization, or regulation of
COMMERCIAL LAW REVIEW (RVP)
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject
to the test of economic viability.
The Constitution emphatically prohibits the creation of
private corporations except by a general law applicable to
all citizens. The purpose of this constitutional provision is
to ban private corporations created by special charters,
which historically gave certain individuals, families or
groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private
corporation with a special charter. Such legislation would
be unconstitutional. Private corporations may exist only
under a general law. If the corporation is private, it must
necessarily exist under a general law. Stated differently,
only corporations created under a general law can qualify
as private corporations. Under existing laws, that general
law is the Corporation Code, except that the Cooperative
Code governs the incorporation of cooperatives.
The Constitution authorizes Congress to GOCCs through
special charters. Since private corporations cannot have
special charters, it follows that Congress can create
corporations with special charters only if such corporations
are government-owned or controlled.
Obviously, LWDs are not private corporations because they
are not created under the Corporation Code. LWDs are not
registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that "[A]ll
corporations organized under this code shall file with the
Securities and Exchange Commission articles of
incorporation . . .." LWDs have no articles of incorporation,
no incorporators and no stockholders or members. There
are no stockholders or members to elect the board
directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission.
The local mayor or the provincial governor appoints the
directors of LWDs for a fixed term of office. This Court has
ruled that LWDs are not created under the Corporation
Code, thus:
From the foregoing pronouncement, it is clear that
what has been excluded from the coverage of the
CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not
created under the said code, but on the contrary,
they were created pursuant to a special law and are
governed primarily by its provision.
41

LWDs exist by virtue of PD 198, which constitutes their
special charter. Since under the Constitution only
government-owned or controlled corporations may have
special charters, LWDs can validly exist only if they are
government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that
their existence is constitutionally infirm.
Unlike private corporations, which derive their legal
existence and power from the Corporation Code, LWDs
derive their legal existence and power from PD 198.
Sections 6 and 25 of PD 198 provide:
Section 6. Formation of District. —This Act is the source
of authorization and power to form and maintain a
district. For purposes of this Act, a district shall be
considered as a quasi-public corporation performing
public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges
given to private corporations under existing laws, in
addition to the powers granted in, and subject to such
restrictions imposed, under this Act.
(a) The name of the local water district, which shall
include the name of the city, municipality, or province,
or region thereof, served by said system, followed by the
words "Water District".
(b) A description of the boundary of the district. In the
case of a city or municipality, such boundary may
include all lands within the city or municipality. A district
may include one or more municipalities, cities or
provinces, or portions thereof.
(c) A statement completely transferring any and all
waterworks and/or sewerage facilities managed,
operated by or under the control of such city,
municipality or province to such district upon the 􏰐ling
of resolution forming the district.
(d) A statement identifying the purpose for which the
district is formed, which shall include those purposes
outlined in Section 5 above.
(e) The names of the initial directors of the district with
the date of expiration of term of office for each.
(f) A statement that the district may only be dissolved
on the grounds and under the conditions set forth in
Section 44 of this Title.
COMMERCIAL LAW REVIEW (RVP)
(g) A statement acknowledging the powers, rights and
obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or
infer that the local legislative body has the power to
dissolve, alter or affect the district beyond that
specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any
combination thereof, desire to form a single district, a
similar resolution shall be adopted in each city,
municipality and province.
xxx xxx xxx
Sec. 25. Authorization. — The district may exercise all
the powers which are expressly granted by this Title or
which are necessarily implied from or incidental to the
powers and purposes herein stated. For the purpose of
carrying out the objectives of this Act, a district is hereby
granted the power of eminent domain, the exercise
thereof shall, however, be subject to review by the
Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198,
which expressly confers on LWDs corporate powers.
Section 6 of PD 198 provides that LWDs "shall exercise the
powers, rights and privileges given to private corporations
under existing laws." Without PD 198, LWDs would have no
corporate powers. Thus, PD 198 constitutes the special
enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations
with a special charter.
The phrase "government-owned and controlled
corporations with original charters" means GOCCs created
under special laws and not under the general incorporation
law. There is no difference between the term "original
charters" and "special charters." The Court clarified this in
National Service Corporation v. NLRC by citing the
deliberations in the Constitutional Commission.
Davao City Water District v. Civil Service Commission: By
"government-owned or controlled corporation with
original charter," We mean government owned or
controlled corporation created by a special law and not
under the Corporation Code of the Philippines. Thus, in the
case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989,
170 SCRA 79, 82), We held:
42

"XXX government-owned and controlled corporations
with original charter refer to corporations chartered by
special law as distinguished from corporations organized
under our general incorporation statute —the
Corporation Code.”
Petitioner's contention that the Sangguniang Bayan
resolution creates the LWDs assumes that the Sangguniang
Bayan has the power to create corporations. This is a
patently baseless assumption. The Local Government Code
does not vest in the Sangguniang Bayan the power to create
corporations. What the Local Government Code empowers
the Sangguniang Bayan to do is to provide for the
establishment of a waterworks system "subject to existing
laws." Thus, Section 447(5)(vii) of the Local Government
Code provides:
SECTION 447. Powers, Duties, Functions and
Compensation. — (a) The sangguniang bayan, as the
legislative body of the municipality, shall enact
ordinances, approve resolutions and appropriate funds
for the general welfare of the municipality and its
inhabitants pursuant to Section 16 of this Code and in
the proper exercise of the corporate powers of the
municipality as provided for under Section 22 of this
Code, and shall:
xxx xxx xxx
(vii) Subject to existing laws, provide for the
establishment, operation, maintenance, and repair of
an efficient waterworks system to supply water for the
inhabitants; regulate the construction, maintenance,
repair and use of hydrants, pumps, cisterns and
reservoirs; protect the purity and quantity of the water
supply of the municipality and, for this purpose, extend
the coverage of appropriate ordinances over all
territory within the drainage area of said water supply
and within one hundred (100) meters of the reservoir,
conduit, canal, aqueduct, pumping station, or
watershed used in connection with the water service;
and regulate the consumption, use or wastage of water;
The Sangguniang Bayan may establish a waterworks system
only in accordance with the provisions of PD 198. The
Sangguniang Bayan has no power to create a corporate
entity that will operate its waterworks system. However,
the Sangguniang Bayan may avail of existing enabling laws,
like PD 198, to form and incorporate a water district.
Besides, even assuming for the sake of argument that the
Sangguniang Bayan has the power to create corporations,
COMMERCIAL LAW REVIEW (RVP)
the LWDs would remain government-owned or controlled
corporations subject to COA's audit jurisdiction. The
resolution of the Sangguniang Bayan would constitute an
LWD's special charter, making the LWD a government-
owned and controlled corporation with an original charter.
In any event, the Court has already ruled in Baguio Water
District v. Trajano that the Sangguniang Bayan resolution is
not the special charter of LWDs, thus:
While it is true that a resolution of a local sangguniang is
still necessary for the 􏰐nal creation of a district, this Court
is of the opinion that said resolution cannot be considered
as its charter, the same being intended only to implement
the provisions of said decree.
Petitioner further contends that a law must create directly
and explicitly a GOCC in order that it may have an original
charter. In short, petitioner argues that one special law
cannot serve as enabling law for several GOCCs but only for
one GOCC. Section 16, Article XII of the Constitution
mandates that "Congress shall not, except by general law,"
provide for the creation of private corporations. Thus, the
Constitution prohibits one special law to create one private
corporation, requiring instead a "general law" to create
private corporations. In contrast, the same Section 16
states that "Government-owned or controlled corporations
may be created or established by special charters." Thus,
the Constitution permits Congress to create a GOCC with a
special charter. There is, however, no prohibition on
Congress to create several GOCCs of the same class under
one special enabling charter.
The rationale behind the prohibition on private
corporations having special charters does not apply to
GOCCs. There is no danger of creating special privileges to
certain individuals, families or groups if there is one special
law creating each GOCC. Certainly, such danger will not
exist whether one special law creates one GOCC, or one
special enabling law creates several GOCCs. Thus, Congress
may create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a
class of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations
because Section 6 of PD 198 declares that LWDs "shall be
considered quasi-public" in nature. Petitioner's rationale is
that only private corporations may be deemed "quasi-
public" and not public corporations. Put differently,
petitioner rationalizes that a public corporation cannot be
deemed "quasi-public" because such corporation is already
public. Petitioner concludes that the term "quasi-public"
43

can only apply to private corporations. Petitioner’s
argument is inconsequential. Petitioner forgets that the
constitutional criterion on the exercise of COA's audit
jurisdiction depends on the government's ownership or
control of a corporation. The nature of the corporation,
whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over
"government-owned and controlled corporations with
original charters," as well as "government-owned or
controlled corporations" without original charters. GOCCs
with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-
audit. GOCCs without original charters refer to corporations
created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the
corporation is not material in determining COA's audit
jurisdiction. Neither is the manner of creation of a
corporation, whether under a general or special law.
The determining factor of COA's audit jurisdiction is
government ownership or control of the corporation.
In Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank, the Court even ruled that the
criterion of ownership and control is more important than
the issue of original charter, thus:
This point is important because the Constitution
provides in its Article IX-B, Section 2(1) that "the Civil
Service embraces all branches, subdivisions,
instrumentalities, and agencies of the Government,
including government-owned or controlled corporations
with original charters." As the Bank is not owned or
controlled by the Government although it does have an
original charter in the form of R.A. No. 3518, it clearly
does not fall under the Civil Service and should be
regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The consequence
is that the relations of the Bank with its employees
should be governed by the labor laws, under which in
fact they have already been paid some of their claims.
COMMERCIAL LAW REVIEW (RVP)
F. Pre-Incorporation
G. De Facto Corporation
19. SAWADJAAN VS. CA, G.R. No. 141735, JUNE 8,
2005
Ponente: Chico-Nazario, J.
Doctrinal Pronouncement:
1. A corporation which has failed to file its by-laws
within the prescribed period does not ipso facto lose its
powers as such. At the very least, it may be considered a de
facto corporation whose right to exercise corporate powers
may not be inquired into collaterally in any private suit to
which such corporations may be a party.
2. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation.
Relevant Facts:
Petitioner Sappari K. Sawadjaan was among the first
employees of the Philippine Amanah Bank (PAB) when it
was created by virtue of PD 264. He rose through the ranks,
working his way up from his initial designation as security
guard, to settling clerk, bookkeeper, credit investigator,
project analyst, appraiser/ inspector, and eventually, loans
analyst.
While still designated as appraiser/investigator, Sawadjaan
was assigned to inspect the properties offered as collaterals
by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a loan of 5 Million Pesos. The
properties consisted of 2 parcels of land (lot 1 and lot 2). On
the basis of his Inspection and Appraisal Report, PAB
granted the loan application.
Subsequently, Congress passed RA 6848 creating the Al-
Amanah Islamic Investment Bank of the Philippines (AIIBP)
and repealing PD 264 (which created the PAB). All assets,
liabilities and capital accounts of the PAB were transferred
to the AIIBP, and the existing personnel of the PAB were to
continue to discharge their functions unless discharged. In
the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay, AIIBP discovered that lot 1 is
non-existent, and lot 2 had a prior existing mortgage in
44

favor of one Divina Pablico. Thus, AIIBP charged Sawadjaan
with Dishonesty in the Performance of Official Duties and
preventively suspended him.
Sawadjaan’s argument in relation to Corpo:
He claimed that at the time his employment was
terminated, the AIIBP had not yet adopted its corporate by-
laws. Based on the Certification by the SEC, it was only on
27 May 1992 that the AIIBP submitted its draft by-laws to
the SEC, and that its registration was being held in abeyance
pending certain corrections being made thereon. Since the
AIIBP failed to file its by-laws within 60 days from the
passage of RA No. 6848, as required by Sec. 51 of the said
law, the bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and
operate as a corporation, and thus no longer have the legal
standing and personality to initiate an administrative case.
Issue/s:
WON Sawadjaan’s argument is meritorious.
Ruling:
No. The AIIBP was created by RA 6848. It has a main office
where it conducts business, has shareholders, corporate
officers, a board of directors, assets, and personnel. It is, in
fact, here represented by the Office of the Government
Corporate Counsel, the principal law office of government-
owned corporations. At the very least, by its failure to
submit its by-laws on time, the AIIBP may be considered a
de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private
suit to which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws
within the prescribed period does not ipso facto lose its
powers as such. The SEC Rules on Suspension/Revocation
of the Certificate of Registration of Corporations, details the
procedures and remedies that may be availed of before an
order of revocation can be issued. There is no showing that
such a procedure has been initiated in this case.
In any case, petitioner’s argument is irrelevant because this
case is not a corporate controversy, but a labor dispute; and
it is an employer’s basic right to freely select or discharge
its employees, if only as a measure of self-protection
against acts inimical to its interest. Regardless of whether
AIIBP is a corporation, a partnership, a sole proprietorship,
or a sari-sari store, it is an undisputed fact that AIIBP is the
petitioner’s employer. AIIBP chose to retain his services
COMMERCIAL LAW REVIEW (RVP)
during its reorganization, controlled the means and
methods by which his work was to be performed, paid his
wages, and, eventually, terminated his services.
And though he has had ample opportunity to do so, the
petitioner has not alleged that he is anything other than an
employee of AIIBP. He has neither claimed, nor shown, that
he is a stockholder or an officer of the corporation. Having
accepted employment from AIIBP, and rendered his
services to the said bank, received his salary, and accepted
the promotion given him, it is now too late in the day for
petitioner to question its existence and its power to
terminate his services. One who assumes an obligation to
an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact
no corporation.
Even if we were to consider the facts behind petitioner
Sawadjaan’s dismissal from service, we would be hard
pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to
conduct an ocular inspection of the properties offered by
CAMEC as collaterals and check the copies of the
certificates of title against those on file with the Registry of
Deeds. Not only did he fail to conduct these routine checks,
but he also deliberately misrepresented in his appraisal
report that after reviewing the documents and conducting
a site inspection, he found the CAMEC loan application to
be in order. Despite the number of pleadings he has filed,
he has failed to offer an alternative explanation for his
actions.
WHEREFORE, the petition is DISMISSED.
20. SEVENTH DAY ADVENTIST CONFERENCE CHURCH
OF SOUTHERN PHILIPPINES, INC. VS.
NORTHEASTERN MINDANAO MISSION OF SEVENTH
DAY ADVENTIST, INC., G.R. No. 150416, JULY 21,
2006
Ponent: Corona, J.
Doctrinal Pronouncement:
The following are the stringent requirements before one can
qualify as a de facto corporation:
(a) the existence of a valid law under which it may be
incorporated;
(b) an attempt in good faith to incorporate; and
45

(c) assumption of corporate powers.
Relevant Facts:
In 1959, Spouses Cosio donated a parcel of land to the
South Philippine Union Mission of Seventh Day Adventist
Church of Bayugan Esperanza, Agusan (SPUM-SDA
Bayugan). The donation was allegedly accepted by one
Liberato Rayos, an elder of the Seventh Day Adventist
Church, on behalf of the donee.
In 1980, 21 years later, the same parcel of land was sold by
the spouses Cosio to the Seventh Day Adventist Church of
Northeastern Mindanao Mission (SDA-NEMM).
Claiming to be the alleged donee’s successors-in-interest,
petitioners asserted ownership over the property. This was
opposed by respondents who argued that at the time of the
donation, SPUM-SDA Bayugan could not legally be a donee
because, not having been incorporated yet, it had no
juridical personality. Neither were petitioners members of
the local church then, hence, the donation could not have
been made particularly to them.
Petitioners filed a case for cancellation of title, quieting of
ownership and possession, declaratory relief and
reconveyance with prayer for preliminary injunction and
damages.
RTC upheld the sale in favor of the respondents. CA
affirmed. Hence, this petition.
Issue/s:
Should SDA-NEMM’s ownership of the land be upheld?
Ruling:
Yes.
The controversy between petitioners and respondents
involves two supposed transfers of the lot previously
owned by the spouses Cosio: (1) a donation to petitioners’
alleged predecessors-in-interest in 1959 and (2) a sale to
respondents in 1980.
Donation is undeniably one of the modes of acquiring
ownership of real property. Likewise, ownership of a
property may be transferred by tradition as a consequence
of a sale.
The alleged donation to petitioners was void.
COMMERCIAL LAW REVIEW (RVP)
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person
who accepts it. The donation could not have been made in
favor of an entity yet inexistent at the time it was made. Nor
could it have been accepted as there was yet no one to
accept it.
The deed of donation was not in favor of any informal group
of SDA members but a supposed SPUM-SDA Bayugan (the
local church) which, at the time, had neither juridical
personality nor capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners
allege that they should benefit from the donation.
But there are stringent requirements before one can
qualify as a de facto corporation:
(a) the existence of a valid law under which it may be
incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.
While there existed the old Corporation Law (Act 1459), a
law under which SPUM-SDA Bayugan could have been
organized, there is no proof that there was an attempt to
incorporate at that time.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence
of a de facto corporation.
An organization not registered with the Securities and
Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de
facto. Petitioners themselves admitted that at the time of
the donation, they were not registered with the SEC, nor did
they even attempt to organize to comply with legal
requirements.
Corporate existence begins only from the moment a
certificate of incorporation is issued. No such certificate
was ever issued to petitioners or their supposed
predecessor-in-interest at the time of the donation.
Petitioners obviously could not have claimed succession to
an entity that never came to exist. Neither could the
principle of separate juridical personality apply since there
was never any corporation15 to speak of. And, as already
stated, some of the representatives of petitioner Seventh
Day Adventist Conference Church of Southern Philippines,
46

Inc. were not even members of the local church then, thus,
they could not even claim that the donation was particularly
for them.
"The de facto doctrine thus affects a compromise between
two conflicting public interests—the one opposed to an
unauthorized assumption of corporate privileges; the other
in favor of doing justice to the parties and of establishing a
general assurance of security in business dealing with
corporations."
Generally, the doctrine exists to protect the public dealing
with supposed corporate entities, not to favor the defective
or non-existent corporation.
Therefore, there was no donation to petitioners or their
supposed predecessor-in-interest.
H. Corporation by Estoppel
21. REYNALDO M. LOZANO vs. HON. ELIEZER R. DE
LOS SANTOS( Pres. Judge of RTC-Br.58, Angeles
City) and ANTONIO ANDA
G.R. No. 125221. June 19, 1997.]
Ponente: Puno, J.
Doctrinal Pronouncement:
i. Doctrine of corporation by estoppel cannot override
jurisdictional requirements—The doctrine of corporation
by estoppel advanced by private respondent cannot
override jurisdictional requirements. Jurisdiction is fixed by
law and is not subject to the agreement of the parties. It
cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, neither
can it be conferred by the acquiescence of the court.
ii. Where there is no third person involved and the conflict
arises only among those assuming the form of a
corporation, there is no corporation by estoppel—
Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness. It
applies when persons assume to form a corporation and
exercise corporate functions and enter into business
relations with third persons. Where there is no third person
involved and the conflict arises only among those assuming
COMMERCIAL LAW REVIEW (RVP)
the form of a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel.
Relevant Facts: SAME FACTS WITH CASE NO. 1.
Issue: Whether or not the corporation by estoppel
doctrine can override the jurisdictional requirements of
P.D. 902-A.
Ruling: No. Corporation by estoppel doctrine cannot
override SEC’s jurisdictional requirements under PD 902-A
since jurisdiction is fixed by law and is not subject to the
agreement of the parties. It cannot be acquired through or
waived, enlarged or diminished by, any act or omission of
the parties, neither can it be conferred by the acquiescence
of the court.
Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness. It
applies when persons assume to form a corporation and
exercise corporate functions and enter into business
relations with third persons. Where there is no third person
involved and the conflict arises only among those assuming
the form of a corporation, who therefore know that it has
not been registered there is no corporation by estoppel.
22. ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR.,
ISAIAS ALBANO, LILY REYES, JANET BAY, JESUS R.
GALANG, AND RANDY HAGOS, vs. FRANCISCO R. CO,
JR.|||
G.R. No. 156759 June 5, 2013
Ponente: Bersamin, J.
Doctrinal Pronouncement:
Relevant Facts (including important contention of
parties):
Respondent, a retired police officer assigned at the Western
Police District in Manila, sued Abante Tonite, a daily tabloid
of general circulation; its Publisher Allen A. Macasaet; its
Managing Director Nicolas V. Quijano; its Circulation
Manager Isaias Albano; its Editors Janet Bay, Jesus R. Galang
and Randy Hagos; and its Columnist/Reporter Lily Reyes
(petitioners), claiming damages because of an allegedly
libelous article petitioners published in the June 6, 2000
issue of Abante Tonite. The sheriff twice attempted to
47

personally serve the summons to the defendant but to no
avail because due to the nature of their work they are
always out and unavailable. Hence, he resorted to
substituted service of summons.
The defendant alleged that the abante tonite should be
dropped as a defendant since it is neither a natural nor a
juridical person that could be impleaded as a party in a civil
action.
"AbanteTonite" is a daily tabloid of general circulation.
People all over the country could buy a copy of
"AbanteTonite" and read it, hence, it is for public
consumption. The persons who organized said publication
obviously derived profit from it. The information written on
the said newspaper will affect the person, natural as well as
juridical, who was stated or implicated in the news.
||
Issue/s:
W/N Abante Tonite can be sued even if it is not
incorporated?
Ruling:
YES. Abante Tonite is a corporation by estoppel as the
result of its having represented itself to the reading public
as a corporation despite its not being incorporated. The
non-incorporation of Abante Tonite with the Securities and
Exchange Commission was of no consequence, for,
otherwise, whoever of the public who would suffer any
damage from the publication of articles in the pages of its
tabloids would be left without recourse.||
AbanteTonite's newspapers are circulated nationwide,
showing ostensibly its being a corporate entity, thus the
doctrine of corporation by estoppel may appropriately
apply. An unincorporated association, which represents
itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who
relies in good faith on such representation.
|
23. THE MISSIONARY SISTERS OF OUR LADY OF
FATIMA VS. AMANDO ALZONA ET. AL
GR NO. 224307. AUGUST 6, 2013
Ponente: REYES, JR., J
COMMERCIAL LAW REVIEW (RVP)
Doctrinal Pronouncement:
The person who has contracted or otherwise dealt with a
non-existent corporation is estopped to deny the latter’s
legal existence in any action leading out of or involving such
contract or dealing.
Relevant Facts (including important contention of
parties):
Purification, a spinster, is the registered owner of land
covered by TCT T-57820. Impelled by her unmaterialized
desire to be nun, she become a benefactor of the petitioner
by giving support to the community and its works. In 1997,
it was discovered that Purification was suffering from lung
cancer and requested Mother Conception to take care of
his house, which the latter agreed. In October 1999,
Purification called Mother Conception and handed a
handwritten letter stating that she is donating her house
and lot to the petitioner. In August 2001, at the request of
Purification, Mother Conception went to see Atty. Archillas.
She was then advised to register to the SEC. On August 28,
2001 Mother Conception went to SEC and filed the
corresponding application.
August 29, 2001, Purification executed the Deed of
Donation Inter Vivos, it was notarized and witnessed by
Purification nephews and grandnephews. Thereafter
Mother Conception filed an application to BIR that
petitioner be exempted from donor’s tax as a religious
organization which was granted. However, the Register if
Deeds denied the registration on account of adverse
claimed filed by Purification brother Amando.
Amando filed before RTC, seeking to annul the Deed on the
ground that at the time the donation was made, the latter
was not registered with SEC and therefore has no juridical
personality and cannot legally accept the donation.
RTC Decision
Dismissed the case. It held that all essential elements of
donation are present. It also set aside the allegation by
respondent relating to the incapacity of the parties to enter
into the contract.
On the capacity of the donees, RTC hel that at the time of
the execution of the Deed, the petitioner was a de facto
corporation and as such has the personality to be a
beneficiary and has the power to acquire and possess
property.
CA Decision
48

It void the deed of donation. It cited the decision on the
case of Seventh Day Adventits Conference Church of
Southern Phils. Inc., vs. Northeastern Mindanao Mission of
Seventh Day Adventist Inc. (assigned case).
Issue/s: Whether or not the petitioner has legal capacity as
donees, to accept the donation.
Ruling: Petition granted.
Petitioner contends:
It is a de facto corporation. Assuming it is not the
acceptance of Mother Concepcion while the religious
organization in the process of incorporation is valid as it
then partakes the form of a pre-incorporation contract
governed by the rules of agency.
Respondent arguments:
It submits that juridical personality to enter into a contract
of donation is vested only upon the issuance of a Certificate
of incorporation from SEC. Further, the respondents posit
that the petitioner cannot even be considered as a de facto
corporation considering that for more than 20 years, there
was never any attempt on its part to incorporate, which
decision came only after Atty. Arcilla’s suggestion.
SC
For the purpose of accepting the donation, the petitioner is
deemed vested with personality to accept, and Mother
Concepcion is clothed with authority to act on latter’s
behalf.
It is correct that it is not a de facto corporation. Settled
jurisprudence is that filing of articles of incorporation and
the issuance of the certificate of incorporation are essential
for the existence of a de facto corporation. In fine, it is the
act of registration of SEC through the issuance of a
certificate of incorporation that marks the beginning of an
entity’s corporate existence.
ITCAB, petitioner filed its Articles of Incorporation and by
laws on August 28, 2001. Sec issued a corresponding
Certificate of Incorporation only on August 31, 2001, two
days after Purification executed a Deed of Donation on
August 29, 2001. Clearly, at the time the donation was
made, the Petitioner cannot be considered a corporation de
facto.
COMMERCIAL LAW REVIEW (RVP)
But in view of the circumstances it calls for the application
of the doctrine of corporation by estoppel as provided in
Sec. 21 of the Corporation Code.
Sec. 21. Corporation by estoppel. — All persons
who assume to act as a corporation knowing it to
be without authority to do so shall be liable as
general partners for all debts, liabilities and
damages incurred or arising as a result thereof:
Provided, however, That when any such
ostensible corporation issued on any transaction
entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation.
The doctrine of corporation by estoppel is founded on
principles of equity and is designed to prevent injustice and
unfairness. It applies when a non-existent corporation
enters into contracts or dealings with third persons. In which
case, the person who has contracted or otherwise dealt
with the non-existent corporation is estopped to deny the
latter's legal existence in any action leading out of or
involving such contract or dealing. While the doctrine is
generally applied to protect the sanctity of dealings with the
public, nothing prevents its application in the reverse, in
fact the very wording of the law which sets forth the
doctrine of corporation by estoppel permits such
interpretation. Such that a person who has assumed an
obligation in favor of a nonexistent corporation, having
transacted with the latter as if it was duly incorporated, is
contract.
Jurisprudence dictates that the doctrine of corporation by
estoppel applies for as long as there is no fraud and when
the existence of the association is attacked for causes
attendant at the time the contract or dealing sought to be
enforced was entered into, and not thereafter.
In this controversy, Purificacion dealt with the petitioner as
if it were a corporation. This is evident from the fact that
Purificacion executed documents conveying her properties
in favor of the petitioner.
The doctrine of corporation by estoppel rests on the idea
that if the Court were to disregard the existence of an entity
49

which entered into a transaction with a third party, unjust
enrichment would result as some form of bene􏰐t have
already accrued on the part of one of the parties. Thus, in
that instance, the Court affords upon the unorganized
entity corporate fiction and juridical personality for the sole
purpose of upholding the contract or transaction.
In this case, while the underlying contract which is sought
to be enforced is that of a donation, and thus rooted on
liberality, it cannot be said that Purificacion, as the
donor failed to acquire any benefit therefrom so as to
prevent the application of the doctrine of corporation by
estoppel. To recall, the subject properties were given
byPurificacion, as a token of appreciation for the services
rendered to her during her illness. In fine, the subject deed
partakes of the nature of a remuneratory or compensatory
donation, having been made "for the purpose of rewarding
the donee for past services, which services do not amount
to a demandable debt."
Therefore, under the premises, past services constitute
consideration, which in turn can be regarded as “benefit”
on the part of the donor, consequently, there exists no
obstacle to the application of the doctrine of corporation by
estoppel; although strictly speaking, the petitioner did not
perform these services on the expectation of something in
return.
Precisely, the existence of the petitioner as a corporate
entity is upheld in this case for the purpose of validating the
Deed to ensure that the primary objective for which the
donation was intended is achieved, that is to convey the
property for the purpose of aiding the petitioner in pursuit
of its charitable objectives.
Ultimately in this case, the subsequent incorporation of the
petitioner and affirmation of Mother Concepcion’s
authority to accept on behalf cured whatever defect that
may be attended the acceptance of donation.
I. Classification of Shares
24. REPUBLIC PLANTERS BANK V. AGANA, SR., G.R.
No. 51765, March 3, 1997
Doctrinal Pronouncements:
COMMERCIAL LAW REVIEW (RVP)
I. Preferred share of stock – one which entitles the holder
thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to
subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most
common forms may be classified into two:
(1) preferred shares as to assets (preference in the
distribution of the assets in case of liquidation); and
(2) preferred shares as to dividends (a share the holder of
which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to
the holders of common stock.
There is no guaranty, however, that the share will receive
any dividends.
Old Corporation Law (in force at the time the contract
between the petitioner and the private respondents was
entered into) - "no corporation shall make or declare any
dividend except from the surplus profits arising from its
business, or distribute its capital stock or property other
than actual profits among its members or stockholders until
after the payment of its debts and the termination of its
existence by limitation or lawful dissolution."
Present Corporation Code - the board of directors of a stock
corporation may declare dividends only out of unrestricted
retained earnings.
Dividends are thus payable only when there are profits
earned by the corporation and as a general rule, even if
there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be
declared. Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and
who can look only to what is left after corporate debts and
liabilities are fully paid.
II. Redeemable shares - are shares usually preferred, which
by their terms are redeemable at a fixed date, or at the
option of either issuing corporation, or the stockholder, or
both at a certain redemption price. A redemption by the
corporation of its stock is, in a sense, a repurchase. of it for
cancellation. The present Code allows redemption of shares
even if there are no unrestricted retained earnings on the
books of the corporation. This is a new provision which in
effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained
50

earnings. However, while redeemable shares may be
redeemed regardless of the existence of unrestricted
retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books
to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the
corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts
as they mature.
III. Payment of dividends to a stockholder is not a matter
of right but a matter of consensus.
Relevant Facts:
On September 18, 1961, Robes-Francisco Realty &
Development Corporation (Respondent Corporation)
secured a loan from the Republic Planters Bank (petitioner
bank) in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued
to respondent corporation through its officers then, Adalia
Robes and one Carlos Robes.
In other words, instead of giving the legal tender totaling to
the full amount of the loan, which is P120,000.00, petitioner
bank lent such amount partially in the form of money and
partially in the form of stock certificates numbered 3204
and 3205, each for 400 shares with a par value of P10.00
per share, or for P4,000.00 each, for a total of P8,000.00.
Said stock certificates were in the name of Adalia Robes and
Carlos Robes, who subsequently, however, endorsed his
shares in favor of Adalia Robes.
Said certificates of stock bear some of the following terms
and conditions:
(1) Of the right to receive a quarterly dividend of 1%,
cumulative and participating.
(2) That such preferred shares may be redeemed, by the
system of drawing lots, at any time after 2 years from the
date of issue at the option of the Corporation."
On January 31, 1979, private respondents proceeded
against petitioner bank and filed a complaint anchored on
their alleged rights to collect dividends under the preferred
shares in question and to have the petitioner bank redeem
the same under the terms and conditions of the stock
certificates.
COMMERCIAL LAW REVIEW (RVP)
Petitioner’s Arguments:
Petitioner filed a Motion to Dismiss private respondents'
Complaint on the following grounds:
(1) that the trial court had no jurisdiction over the subject-
matter of the action;
(2) that the action was unenforceable under substantive
law; and
(3) that the action was barred by the statute of limitations
and/or laches.
RTC Ruling:
The RTC presided by Agana, Sr. rendered the decision in
favor of respondent corporation and Robes. It ordered the
petitioner bank to pay respondent corporation and Robes
the face value of the stock certificates as redemption price,
plus 1% quarterly interest thereon until full payment.
Aggrieved by the decision of the trial court, petitioner filed
a petition for certiorari before the Supreme Court essentially
on pure questions of law.
Issues:
1. Whether or not respondent judge committed a grave
abuse of discretion amounting to lack or excess of
jurisdiction in disregarding the order of the Central Bank to
petitioner to desist from redeeming its preferred shares
and from paying dividends thereon.
2. Whether or not the respondent judge committed a grave
abuse of discretion amounting to lack or excess of
jurisdiction in ordering petitioner to pay respondent Adalia
Robes interests on her preferred shares
3. Whether or not the claim of respondent Adalia Robes is
barred by prescription.
Ruling:
1. Yes. (Please refer to the doctrinal pronouncements for the
discussion of the nature of preferred shares and redeemable
shares.)
51
 COMMERCIAL LAW REVIEW (RVP)

representing not less than two-thirds (2/3) of the

outstanding capital stock at a regular or special meeting
What respondent judge failed to recognize was that while
duly called for the purpose. These provisions underscore
the stock certificate does allow redemption, the option to
the fact that payment of dividends to a stockholder is not
do so was clearly vested in the petitioner bank. The
a matter of right but a matter of consensus. Furthermore,
redemption therefore is clearly the type known as
"interest bearing stocks", on which the corporation agrees
"optional". Thus, except as otherwise provided in the stock
absolutely to pay interest before dividends are paid to
certificate, the redemption rests entirely with the
common stockholders, is legal only when construed as
corporation and the stockholder is without right to either
requiring payment of interest as dividends from net
compel or refuse the redemption of its stock. Furthermore,
earnings or surplus only. Clearly, the respondent judge, in
the terms and conditions set forth therein use the word
compelling the petitioner to redeem the shares in question
"may". It is a settled doctrine in statutory construction that
and to pay the corresponding dividends, committed grave
the word "may" denotes discretion, and cannot be
abuse of discretion amounting to lack or excess of
construed as having a mandatory effect. We fail to see how
jurisdiction in ignoring both the terms and conditions
respondent judge can ignore what, in his words, are the
specified in the stock certificate, as well as the clear
"very wordings of the terms and conditions in said stock
mandate of the law.
certificates" and construe what is clearly a mere option to
be his legal basis for compelling the petitioner to redeem
the shares in question.
3. Yes.

The redemption of said shares cannot be allowed. As

Anent the issue of prescription, this Court so holds that the
pointed out by the petitioner, the Central Bank made a
claim of private respondent is already barred by
finding that said petitioner has been suffering from chronic
prescription as well as laches. Art. 1144 of the New Civil
reserve deficiency, and that such finding resulted in a
Code provides that a right of action that is founded upon a
directive on the ground that said redemption would reduce
written contract prescribes in ten (10) years. The letter-
the assets of the Bank to the prejudice of its depositors
demand made by the private respondents to the petitioner
and creditors. Redemption of preferred shares was
was made only on January 5, 1979, or almost eighteen years
prohibited for a just and valid reason. The directive issued
after receipt of the written contract in the form of the stock
by the Central Bank Governor was obviously meant to
certificate. As noted earlier, this letter-demand,
preserve the status quo, and to prevent the financial ruin
significantly, was not formally offered in evidence, nor were
of a banking institution that would have resulted in
any other evidence of demand presented. Therefore, we
adverse repercussions, not only to its depositors and
conclude that the only time the private respondents saw it
creditors, but also to the banking industry as a whole. The
fit to assert their rights, if any, to the preferred shares of
directive, in limiting the exercise of a right granted by law
stock, was after the lapse of almost eighteen years. The
to a corporate entity, may thus be considered as an
same clearly indicates that the right of the private
exercise of police power. The respondent judge insists that
respondents to any relief under the law has already
the directive constitutes an impairment of the obligation of
prescribed. Moreover, the claim of the private respondents
contracts. It has, however, been settled that the
is also barred by laches. Laches has been defined as the
Constitutional guaranty of non-impairment of obligations of
failure or neglect, for an unreasonable length of time, to do
contract is limited by the exercise of the police power of the
that which by exercising due diligence could or should have
state, the reason being that public welfare is superior to
been done earlier; it is negligence or omission to assert a
private rights.
right within a reasonable time, warranting a presumption
that the party entitled to assert it either has abandoned it
or declined to assert it.
2. Yes.

Considering that the terms and conditions set forth in the

Both Sec. 16 of the Corporation Law and Sec. 43 of the
stock certificate clearly indicate that redemption of the
present Corporation Code prohibit the issuance of any stock
preferred shares may be made at any time after the lapse
dividend without the approval of stockholders,

52

of two years from the date of issue, private respondents
should have taken it upon themselves, after the lapse of the
said period, to inquire from the petitioner the reason why
the said shares have not been redeemed. As it is, not only
two years had lapsed, as agreed upon, but an additional
sixteen years passed before the private respondents saw it
fit to demand their right. The petitioner, at the time it
issued said preferred shares to the private respondents in
1961, could not have known that it would be suffering from
chronic reserve deficiency twelve years later. Had the
private respondents been vigilant in asserting their rights,
the redemption could have been effected at a time when
the petitioner bank was not suffering from any financial
crisis.
WHEREFORE, the instant petition, being impressed with
merit, is hereby GRANTED.
The challenged decision of respondent judge is set aside
and the complaint against the petitioner is dismissed.
25. Philippine Coconut Producers Foundation Inc v.
Republic
[G.R. Nos. 177857-58 ; January 24, 2012]
Ponente (if relevant esp Leonen)
Velasco, Jr.
Doctrinal Pronouncement: please see ruling since the
relevant topics are intertwined with lengthy
discussions
Relevant Facts (including important contention of
parties):
COCOFED seeks the Court’s approval of the
conversion of 753,848,312 Class "A" and Class "B"
common shares of San Miguel Corporation (SMC)
registered in the names of Coconut Industry
Investment Fund and the so-called "14 Holding
Companies" (collectively known as "CIIF companies")
into 753,848,312 SMC Series 1 Preferred Shares
(hereinafter, the Conversion).
COMMERCIAL LAW REVIEW (RVP)
Respondent (Republic)’s Contention:
● Owing to the sequestrated status of the said
common shares, only PCGG has the
authority to approve the proposed
conversion and seek the necessary Court
approval.
Intervenors’ Contentions:
● Government bears the burden of showing
that the conversion is indubitably
advantageous to the public interest or will
result in clear and material benefit.
● Even assuming that the proposal to convert
the SMC shares is beneficial to the
government, it cannot pursue the exchange
offer because it is without power to exercise
acts of strict dominion over the sequestered
shares
Note: The said shares were purchased using
coconut levy funds so these are public funds during
the presidency of Marcos. PCGG sequestered the
shares pursuant to Executive Order No. (EO) 1
which gave it the power to sequester ill-gotten
wealth.
Additional note: There are pending cases where the
ownership of the shares are to be determined that
is why it is the argument of the intervenors that the
conversion be deferred until the ownership issue
finally is resolved.
For more detailed facts, please refer to the full text.
The features of the common and preferred shares as
well as the advantages and disadvantages of such a
conversion may be found in the Information
Statement of SMC, tabulated below.
Information Statement
dated July 23, 2009
The advantages of conversion of the common
shares to Series 1 preferred shares are as follows:
1. The Series 1 preferred shares shall be entitled to
53

receive cash dividends upon declaration made at
the sole option of the Board of Directors, fixed at
8% per annum as determined by Management.
On the other hand, there is no fixed dividend rate
for common shares. Further, no dividend shall be
declared and paid to holders of common shares
unless cash dividends shall have been declared and
paid to all holders of the Series 1 preferred shares.
Moreover, the Series 1 preferred shares are
cumulative, which means that should dividend
payments get delayed, it would eventually be paid
in the future. This feature is not available for
common shareholders.
2. The Series 1 preferred shares are redeemable in
whole or in part, at the sole option of the Company
(SMC), at the end of three (3) years from the Issue
Date or on any Dividend Payment Date thereafter,
at the price equal to the Issue Price plus any
accumulated unpaid cash dividends. Series 1
preferred shares are also perpetual or have no
stated maturity.
3. Should SMC decide not to redeem the Series 1
preferred shares at the end of the fifth year from
Issue Date, the Dividend Rate will be adjusted to
the higher of 8% per annum, and the prevailing 10-
year Philippine Dealing System Treasury Fixing
(PDST-F) Rate plus a spread of up to 300 basis
points. This is an advantage because there is the
opportunity for the Series 1 Preferred Shareholders
to enjoy a higher dividend rate.
4. The Series 1 preferred shares have preference
over common shares upon liquidation.
5. The Series 1 preferred shares shall be listed with
the Philippine Stock Exchange within one year from
issue date which should provide liquidity to the
issue.
The disadvantages to the conversion are as
follows:
1. Holders of Series 1 preferred shares will have no
voting rights except as provided by law. Thus, the
PCGG’s representatives in the SMC Board will have
been effectively removed from participating in the
management of the SMC.
COMMERCIAL LAW REVIEW (RVP)
2. Series 1 preferred shares have no maturing date
as these are perpetual shares. There is no definite
assurance that the SMC will exercise its option of
redemption.
3. Holders of the Series 1 preferred shares shall not
be entitled to any participation or share in the
retained earnings remaining after dividend
payment shall have been made on Series 1
preferred shares.
4. There is no expiry date on the SMC’s option to
redeem the Series 1 Preferred Shares. Should
market interest rates fall below the Dividend Rate,
on or after the 3rd anniversary from Issue Date, the
SMC may exercise the option to redeem the Series
1 Preferred Shares.
Issue/s:
W/N the Conversion of the SMC Common shares into
SMC SERIES 1 PREFERRED SHARES should be
approved: YES
Ruling:
The Court APPROVES the conversion of the
753,848,312 SMC Common Shares registered in the
name of CIIF companies to SMC SERIES 1 PREFERRED
SHARES of 753,848,312, the converted shares to be
registered in the names of CIIF companies in
accordance with the terms and conditions specified in
the conversion offer set forth in SMC’s Information
Statement
On ownership of the shares
The Court rules that it is the PCGG, not COCOFED,
that is authorized to seek the approval of the Court
of the Series 1 preferred shares conversion.
Having shown that the coconut levy funds are not
only affected with public interest, but are in fact
prima facie public funds, this Court believes that the
government should be allowed to vote the
questioned shares, because they belong to it as the
prima facie beneficial and true owner.
54

As stated at the beginning, voting is an act of
dominion that should be exercised by the share
owner. One of the recognized rights of an owner is
the right to vote at meetings of the corporation. The
right to vote is classified as the right to control. Voting
rights may be for the purpose of, among others,
electing or removing directors, amending a charter,
or making or amending by laws.
Because the subject UCPB shares were acquired with
government funds, the government becomes their
prima facie beneficial and true owner.
Ownership includes the right to enjoy, dispose of,
exclude and recover a thing without limitations other
than those established by law or by the owner. x x x
And the right to vote shares is a mere incident of
ownership. In the present case, the government has
been shown to be the prima facie owner of the funds
used to purchase the shares. Hence, it should be
allowed the rights and privileges flowing from such
fact.
On PCGG as “Receiver”
Time and again, the Court has likened sequestration
to preliminary attachment and receivership under
Rules 57 and 59 of the Rules of Court and has
accordingly applied the said rules to sequestration
cases. So it was that in Republic v. Sandiganbayan the
Court noted that the powers and duties of the PCGG
as conservator and protector of sequestered assets
are virtually the same as those possessed by a
receiver under Rule 59, Section 6.
The PCGG, therefore, as the "receiver" of sequestered
assets and in consonance with its duty under EO 1,
Series of 1986, to protect and preserve them, has the
power to exercise acts of dominion provided that
those acts are approved by the proper court.
After a circumspect evaluation of the incident at bar,
we resolve to approve the conversion, taking into
account certain circumstances and hard economic
realities as discussed below:
COMMERCIAL LAW REVIEW (RVP)
Contrary to the assertion of intervenors Salonga, et
al., respondent Republic has satisfactorily
demonstrated that the conversion will redound to the
clear advantage and material benefit of the eventual
owner of the CIIF SMC shares in question.
Positive action must be taken in order to preserve the
value of the sequestered CIIF SMC common shares.
The worldwide economic crisis that started last year
affected the Philippines and adversely impacted on
several banks and financial institutions, resulting in
billions of losses.
The proposed conversion would provide better
protection either to the government or to the
eventually declared real stock owners, depending on
the final ruling on the ownership issue. In the event
SMC suffers serious financial reverses in the short or
long term and seeks insolvency protection, the
owners of the preferred shares, being considered
creditors, shall have, vis-à-vis common stock
shareholders, preference in the corporate assets of
the insolvent or dissolved corporation.
More importantly, the conversion will ensure a higher
cumulative and fixed dividend rate of 8% per annum
computed at an issue price of PhP 75 per share, a yield
not currently available to common shareholders. The
OSG succinctly explained the undeniable advantages
to be gained from the conversion, thus:
Assuming that the data contained in the SMC
Information Sheet is accurate and true, the closing
prices of SMC Common Class "A" and "B" Shares, as
of June 1, 2009, are Fifty-three pesos and 50/100
(P53.50) and Fifty-four Pesos (P54.00), respectively.
The proposed conversion into Series 1 Preferred
Shares would give said share an issue price of
seventy-five pesos (P75.00) per share.
Corollarily, while the current SMC Common shares
have no fixed dividend rate, the Series 1 Preferred
Shares have a determined dividend rate of eight
percent (8%) per annum. On these points alone, the
benefits to the shareholders are clearly quantifiable.
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Further still, the SMC Series 1 Preferred Shares are
deemed cumulative. As a cumulative share with
preference in the payment of dividends, it is entitled
to cumulate the dividends in those years where no
dividend is declared. Thus, if a cumulative share is
entitled to 10% of par value as cumulative dividend
yearly, where no dividends are declared in 1989, 1990
and 1991 because there are no profits, and dividends
are declared in 1992 because of surplus or
unrestricted earnings, the holder of the preferred
cumulative shares is entitled to receive 40% of par
value as his cumulative dividends for the years 1989
to 1991.
Moreover, the conversion may be viewed as a sound
business strategy to preserve and conserve the value
of the government’s interests in CIIF SMC shares.
Preservation is attained by fixing the value today at a
significant premium over the market price and
ensuring that such value is not going to decline
despite negative market conditions. Conservation is
realized thru an improvement in the earnings value
via the 8% per annum dividends versus the uncertain
and most likely lower dividends on common shares.
A fixed dividend rate of 8% per annum translates to
PhP 6 per preferred share or a guaranteed yearly
dividend of PhP 4,523,308,987.20 for the entire
sequestered CIIF SMC shares. The figures jibe with the
estimate made by intervenors Salonga, et al.14
Compare this amount to the dividends declared for
common shares for the recent past years which are in
the vicinity of PhP 1.40 per unit share or a total
amount of PhP 1,055,387,636.80 per annum. The
whopping difference is around PhP 3.5 billion
annually or PhP 10.5 billion in three (3) years. On a
year-to-year basis, the difference reflects an
estimated increase of 77% in dividend earnings. With
the bold investments of SMC in various lines of
business, there is no assurance of substantial earnings
in the coming years. There may even be no earnings.
The modest dividends that accrue to the common
shares in the recent years may be a thing of the past
and may even be obliterated by poor or unstable
COMMERCIAL LAW REVIEW (RVP)
performance in the initial years of operation of newly-
acquired ventures.
Discussion on treasury shares
The conversion, so intervenors claim, will result in the
loss of voting rights of PCGG in SMC and enable
Cojuangco, Jr. to acquire the sequestered shares,
without encumbrances, using SMC funds.
This is incorrect. The common shares after
conversion and release from sequestration become
treasury stocks or shares.
Treasury shares under Sec. 9 of the Corporation
Code are "shares of stock which have been issued and
fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption,
donation or through some other lawful means. Such
shares may again be disposed of for a reasonable
price fixed by the board of directors."
A treasury share or stock, which may be common or
preferred, may be used for a variety of corporate
purposes, such as for a stock bonus plan for
management and employees or for acquiring another
company. It may be held indefinitely, resold or
retired.
While held in the company’s treasury, the stock
earns no dividends and has no vote in company
affairs. Thus, the CIIF common shares that would
become treasury shares are not entitled to voting
rights.
And should conversion push through, SMC, not
Cojuangco, Jr., becomes the owner of the reacquired
sequestered CIIF SMC common shares. Should SMC
opt, however, to sell said shares in the future,
prospective buyers, including possibly Cojuangco, Jr.,
have to put up their own money to acquire said
common shares. Thus, it is erroneous for intervenors
to say that Cojuangco, Jr., with the use of SMC funds,
will be acquiring the CIIF SMC common shares.
On loss of voting rights
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Argument: By relinquishing its voting rights in the
SMC Board through the conversion, the government,
it is argued, would be surrendering its final arsenal in
combating the maneuverings to frustrate the
recovery of ill-gotten wealth.
This contention has no merit. At present, the mere
presence of four (4) PCGG nominated directors in the
SMC Board does not mean it can prevent board
actions that are viewed to fritter away the company
assets. Moreover, PCGG has ample powers to address
alleged strategies to thwart recovery of ill-gotten
wealth. Thus, the loss of voting rights has no
significant effect on PCGG’s function to recover ill-
gotten wealth or prevent dissipation of sequestered
assets.
It is also not correct to say that the holders of the
preferred shares lose all their voting rights.
Sec. 6 of the Corporation Code provides for the
situations where non-voting shares like preferred
shares are granted voting rights, viz:
Section 6. Classification of shares.—The shares of
stock in 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
issues 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.
xxxx
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;
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2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporation
property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately preceding
paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be
deemed to refer only to stocks with voting rights.
In addition, the holders of the preferred shares
retain the right to dissent and demand payment of
the fair value of their shares, to wit:
Sec. 81. Instances of appraisal right.—Any
stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholders or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
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the corporate property and assets as provided in this

Code, and
3. In case of merger or consolidation.
Lastly, the preferred shares will be placed under
sequestration and management of PCGG. It has
powers to protect and preserve the sequestered
preferred shares even if there are no government-
nominated directors in the SMC Board.
While the PCGG, as sequestrator, does not exercise
acts of ownership over sequestered assets, the
proper court, where the case involving the
sequestered asset is pending, may, nevertheless,
issue a positive and definite order authorizing the sale
of said assets.

In case i-ask:
Salonga, et al. also contend that PCGG cannot pursue
the exchange offer of SMC for want of power to
exercise acts of strict dominion over the sequestered
shares.

This is incorrect.

The Court, to be sure, has not barred the conversion

of any sequestered common shares of a corporation
into preferred shares. It may be argued that the
conversion scheme under consideration may later on
be treated as an indirect sale of the common shares
from the registered owner to another person if and
when SMC decides to redeem the Series 1 preferred
shares on the third anniversary from the issue date of
the preferred shares.

Even if the conversion-cum-redemption partakes of

an indirect sale, PCGG can be allowed to approve the
conversion. [as long as with Court approval in line
with past jurisprudence ruling that PCGG is akin to a
receiver]

Evidently, as long as the interests of all the parties will

be subserved by the sale of the sequestered
properties, the Court may allow the properties to be
sold. More so, the Rules would allow the mere
conversion of the shares of stock given the evident
benefit that all the parties would receive from such
conversion that far outweighs any perceived
disadvantage. Thus, the Court is clearly empowered
to allow the conversion herein pressed by the PCGG.

58