MAGSAYSAY-LABRADOR v.
CA tangible asset of the corporation and that it appears that
Facts: In 1958, Adelaida Rodriguez-Magsaysay and her
husband Senator Genaro Magsaysay acquired, thru
conjugal funds, a parcel of land with improvements,
known as "Pequena Island" covered by TCT No. 3258.
After the death of Genaro, Adelaida discovered an
annotation at the back of TCT No. 3258 that "the land
was acquired by her husband from his separate capital;"
and that a registration of a Deed of Assignment was
purportedly executed by the late Senator in favor of Subic
Land Corporation, as a result of which TCT No. 3258 was
cancelled and TCT No. 22431 issued in the name of
SUBIC. A of Deed of Mortgage in the amount of P
2,700,000.00 was executed by SUBIC in favor of Filipinas
Manufacturer's Bank. As special administratix of the
estate of the late Senator Genaro, Adelaida brought
before the CFI of Olongapo an action against Artemio
Panganiban, (SUBIC), (FILMANBANK) and the Register of
Deeds of Zambales. She alleged that the assignment and
the mortgage were void and done in an attempt to
defraud the conjugal partnership considering that the
land is conjugal, her marital consent to the annotation on
TCT No. 3258 was not obtained, the change made by the
Register of Deeds of the titleholders was effected without
the approval of the Commissioner of Land Registration
and that the late Senator did not execute the purported
Deed of Assignment or his consent thereto, if obtained,
was secured by mistake, violence and intimidation. She
further alleged that the assignment in favor of SUBIC was
without consideration and consequently null and void.
She prayed that the Deed of Assignment and the Deed of
Mortgage be annulled and that the Register of Deeds be
ordered to cancel TCT No. 22431 and to issue a new title
in her favor.
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD
MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ,
assisted be her husband, Dr. Jose Corpuz, FELICIDAD P.
MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, sisters
of the late Genaro, filed a motion for intervention on the
ground that heir brother conveyed to them one-half of his
shareholdings in SUBIC or a total of 416,566.6 shares and
as assignees of around 41 % of the total outstanding
shares of such stocks of SUBIC, they have a substantial
and legal interest in the subject matter of litigation and
that they have a legal interest in the success of the suit
with respect to SUBIC. They strongly argue that their
ownership of 41.66% of the entire outstanding capital
stock of SUBIC entitles them to a significant vote in the
corporate affairs; that they are affected by the action of
the widow of their late brother for it concerns the only
they are more vitally interested in the outcome of the case
than SUBIC.
The court denied the motion for intervention, and ruled
that petitioners have no legal interest whatsoever in the
matter in litigation and their being alleged assignees or
transferees of certain shares in SUBIC cannot legally
entitle them to intervene because SUBIC has a personality
separate and distinct from its stockholders. CA affirmed.
Issue: Whether or not the sisters of Genaro should be
allowed to intervene
Held: NO.
To allow intervention, [a] it must be shown that the
movant has legal interest in the matter in litigation, or
otherwise qualified; and [b] consideration must be given
as to whether the adjudication of the rights of the original
parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the
first is not more important than the second.
The interest which entitles a person to intervene in a suit
between other parties must be in the matter in litigation
and of such direct and immediate character that the
intervenor will either gain or lose by the direct legal
operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily
complicated, expensive and interminable. And this is not
the policy of the law.
The words "an interest in the subject" mean a direct
interest in the cause of action as pleaded, and which
would put the intervenor in a legal position to litigate a
fact alleged in the complaint, without the establishment
of which plaintiff could not recover.
Here, the interest, if it exists at all, of Concepcion, et.al.
is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
thereof and in the properties and assets thereof on
dissolution, after payment of the corporate debts and
obligations.
While a share of stock represents a proportionate or
aliquot interest in the property of the corporation, it does
not vest the owner thereof with any legal right or title to
any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are
OCRA Notes | 1
in no legal sense the owners of corporate property, which
is owned by the corporation as a distinct legal person.
That the movant's interest may be protected in a separate
proceeding is a factor to be considered in allowing or
disallowing a motion for intervention. It is significant to
note at this juncture that as per records, there are four
pending cases involving the parties herein.
Concepcion, et.al. cannot claim the right to intervene on
the strength of the transfer of shares allegedly executed
by the late Senator. The corporation did not keep books
and records. Perforce, no transfer was ever recorded,
much less effected as to prejudice third parties. The
transfer must be registered in the books of the
corporation to affect third persons. The law on
corporations is explicit. Section 63 of the Corporation
Code provides, thus: "No transfer, however, shall be valid,
except as between the parties, until the transfer is
recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and
the number of shares transferred."
SULO NG BAYAN v. ARANETA
Facts: Sulo ng Bayan, Inc. is a corporation organized and
existing under the laws of the Philippines, with its
principal office and place of business at San Jose del
Monte, Bulacan. The members of Sulo ng Bayan through
themselves and their predecessors-in-interest, had
pioneered in the clearing of a large tract of land in San
Jose del Monte, Bulacan, containing an area of
27,982,250 square meters, more or less, cultivated the
same since the Spanish regime and continuously
possessed the said property openly and public under
concept of ownership adverse against the whole world.
Sometime in the year 1958, Gregorio Araneta, Inc.,
through force and intimidation, ejected the members of
Sulo ng Bayan from their possession of the vast tract of
land. Upon investigation conducted by the members and
officers of Sulo ng Bayan, they found out for the first time
in the year 1961 that the land in question "had been either
fraudelently or erroneously included, by direct or
constructive fraud, in Original Certificate of Title No. 466
of the Land of Records of the province of Bulacan", which
title is fictitious, non-existent and devoid of legal efficacy
due to the fact that "no original survey nor plan
whatsoever" appears to have been submitted as a basis
thereof and that the Court of First Instance of Bulacan
which issued the decree of registration did not acquire
jurisdiction over the land registration case because no
notice of such proceeding was given to the members of
the plaintiff corporation who were then in actual
possession of said properties. As a consequence of its
nullity, the subsequent titles derived therefrom issued in
favor of Gregorio Araneta and Carmen Zaragoza, which
was subsequently cancelled by another in the name of
Gregorio Araneta, and its subsequent transferors
(National Waterworks & Sewerage Authority (NWSA),
then to Hacienda Caretas, Inc.,) are therefore void. Sulo
ng Bayan filed an accion de revindicacion against Araneta,
NWSA, HCI and the Register of Deeds of Bulacan to
recover the ownership and possession of the subject land.
Issue: Whether or not Sulo ng Bayan has standing to file
the case as a real-party-in-interest
Held: NO.
Sulo ng Bayan does not have an interest in the subject
matter of the controversy, and cannot, therefore,
represent its members or stockholders who claim to own
in their individual capacities ownership of the said
property. Moreover, as correctly stated by Araneta et. al,
a class suit does not lie in actions for the recovery of
property where several persons claim Partnership of their
respective portions of the property, as each one could
allege and prove his respective right in a different way for
each portion of the land, so that they cannot all be held
to have Identical title through acquisition prescription.
A corporation is a distinct legal entity to be considered as
separate and apart from the individual stockholders or
members who compose it, and is not affected by the
personal rights, obligations and transactions of its
stockholders or members. The property of the corporation
is its property and not that of the stockholders, as owners,
although they have equities in it. Properties registered in
the name of the corporation are owned by it as an entity
separate and distinct from its members. Conversely, a
corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the
corporation, "even in the case of a one-man corporation.
The mere fact that one is president of a corporation does
not render the property which he owns or possesses the
property of the corporation, since the president, as
individual, and the corporation are separate similarities.
Similarly, stockholders in a corporation engaged in buying
and dealing in real estate whose certificates of stock
entitled the holder thereof to an allotment in the
distribution of the land of the corporation upon surrender
of their stock certificates were considered not to have
such legal or equitable title or interest in the land, as
would support a suit for title, especially against parties
other than the corporation.
OCRA Notes | 2
It must be noted, however, that the juridical personality
of the corporation, as separate and distinct from the
persons composing it, is but a legal fiction introduced for
the purpose of convenience and to subserve the ends of
justice. This separate personality of the corporation may
be disregarded, or the veil of corporate fiction pierced, in
cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to
achieve equity.
Thus, when "the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or
defend crime, ... the law will regard the corporation as an
association of persons, or in the case of two corporations,
merge them into one, the one being merely regarded as
part or instrumentality of the other. The same is true
where a corporation is a dummy and serves no business
purpose and is intended only as a blind, or an alter ego
or business conduit for the sole benefit of the
stockholders. This doctrine of disregarding the distinct
personality of the corporation has been applied by the
courts in those cases when the corporate entity is used
for the evasion of taxes or when the veil of corporate
fiction is used to confuse legitimate issue of employer-
employee relationship, or when necessary for the
protection of creditors, in which case the veil of corporate
fiction may be pierced and the funds of the corporation
may be garnished to satisfy the debts of a principal
stockholder. The aforecited principle is resorted to by the
courts as a measure protection for third parties to prevent
fraud, illegality or injustice.
It has not been claimed that the members have assigned
or transferred whatever rights they may have on the land
in question to Sulo ng Bayan. Absent any showing of
interest, therefore, a corporation, like Sulo ng Bayan, has
no personality to bring an action for and in behalf of its
stockholders or members for the purpose of recovering
property which belongs to said stockholders or members
in their personal capacities.
BATAAN SHIPYARD v. PCGG
Facts: Due to the urgent need to recover all ill-gotten
wealth, amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and close
associates both in the country and in abroad, President
Corazon C. Aquino promulgated Executive Orders Nos. 1
and 2, on February 28, 1986 and March 12, 1986,
respectively. EO No 1 created the Presidential
Commission on Good Government while EO No. 2 gave
additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed
by the leaders and supporters of the previous regime."
The law has prescribed three (3) provisional remedies.
These are: (1) sequestration; (2) freeze orders; and (3)
provisional takeover. In accordance thereto,
sequestration, takeover, and other orders were issued by
the PCGG and/or its Commissioners and agents against
Bataan Shipyard & Engineering Co., Inc.
BASECO sought to declare unconstitutional and void EO
Nos. 1 and 2 and the orders emanating therefrom, on the
ground of four fundamental considerations: First, no
notice and hearing was accorded * * (it) before its
properties and business were taken over; Second, the
PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge
in the same cause; Third, there is nothing in the issuances
which envisions any proceeding, process or remedy by
which BASECO may expeditiously challenge the validity of
the takeover after the same has been effected; and
Fourthly, being directed against specified persons, and in
disregard of the constitutional presumption of innocence
and general rules and procedures, they constitute a Bill of
Attainder."
BASECO also contends that its right against self
incrimination and unreasonable searches and seizures
had been transgressed by the order which required it "to
produce corporate records from 1973 to 1986 under pain
of contempt of the Commission if it fails to do so." The
order was issued upon the authority of Section 3 (e) of
Executive Order No. 1, treating of the PCGG's power to
"issue subpoenas requiring * * the production of such
books, papers, contracts, records, statements of accounts
and other documents as may be material to the
investigation conducted by the Commission, " and
paragraph (3), Executive Order No. 2 dealing with its
power to "require all persons in the Philippines holding *
* (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as
nominees, agents or trustees, to make full disclosure of
the same * *."
Issue: Whether or not the PCGG can go after the
properties of BASECO
Held: YES.
The actuality of the control by President Marcos of
BASECO has been sufficiently shown. Other evidence
submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO,
but also that he actually owns well nigh one hundred
percent of its outstanding stock.
OCRA Notes | 3
According to BASECO- itself, there were 218,819 shares
of stock outstanding, ostensibly owned by twenty (20)
stockholders. Four of these twenty are juridical persons:
(1) Metro Bay Drydock, recorded as holding 136,370
shares; (2) Fidelity Management, Inc., 65,882 shares; (3)
Trident Management, 7,412 shares; and (4) United Phil.
Lines, 1,240 shares. The first three corporations, among
themselves, own an aggregate of 209,664 shares of
BASECO stock, or 95.82% of the outstanding stock.
Found in Malacanang shortly after the sudden flight of
President Marcos, were certificates corresponding to more
than ninety-five percent (95%) of all the outstanding
shares of stock of BASECO, endorsed in blank, together
with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above
mentioned (which hold 95.82% of all BASECO stock),
signed by the owners thereof although not notarized. The
SolGen conclude that he could not get the original
certificates from the stockholders because they in truth
no longer have them in their possession, these having
already been assigned in blank to then President Marcos.
In the light of the affirmative showing by the Government
that, prima facie at least, the stockholders and directors
of BASECO were mere "dummies," nominees or alter egos
of President Marcos; at any rate, that they are no longer
owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to
cause the filing and prosecution of the instant proceeding;
and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets,
properties and business sequestered and taken over by
the PCGG to persons who are "dummies," nominees or
alter egos of the former president.
Furthermore, the contention that its right against self
incrimination and unreasonable searches and seizures
had been transgressed lacks merit. It is elementary that
the right against self-incrimination has no application to
juridical persons.
While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity
statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its
hand when charged with an abuse of such privileges.
As stated in the case of Wilson v. United States: “The
corporation is a creature of the state. It is presumed to
be incorporated for the benefit of the public. It received
certain special privileges and franchises, and holds them
subject to the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make no
contract not authorized by its charter. Its rights to act as
a corporation are only preserved to it so long as it obeys
the laws of its creation. There is a reserve right in the
legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange
anomaly to hold that a state, having chartered a
corporation to make use of certain franchises, could not,
in the exercise of sovereignty, inquire how these
franchises had been employed, and whether they had
been abused, and demand the production of the
corporate books and papers for that purpose. The
defense amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a refusal
to produce its books. To state this proposition is to answer
it. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity
statute, it does not follow that a corporation, vested with
special privileges and franchises may refuse to show its
hand when charged with an abuse of such privileges.”
At any rate, Executive Order No. 14-A, amending Section
4 of Executive Order No. 14 assures protection to
individuals required to produce evidence before the PCGG
against any possible violation of his right against self-
incrimination. It gives them immunity from prosecution on
the basis of testimony or information he is compelled to
present.
The constitutional safeguard against unreasonable
searches and seizures finds no application to the case at
bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no
seizure on the occasion thereof.
LUXURIA HOMES v. CA
Facts: Aida M. Posadas and her two (2) minor children co-
owned a 1.6 hectare property in Sucat, Muntinlupa, which
was occupied by squatters. Posadas entered into
negotiations with Jaime T. Bravo regarding the
development of the said property into a residential
subdivision. With a written authorization given by
Posadas, Bravo buckled down to work and started
negotiations with the squatters. Some 7 months later,
Posadas and her 2 children through a Deed of
Assignment, assigned the said property to Luxuria Homes,
Inc., purportedly for organizational and tax avoidance
purposes. Bravo signed as one of the witnesses to the
execution of the Deed of Assignment and the Articles of
Incorporation of Luxuria. Sometime thereafter, the
relationship of Posadas and Bravo turned sour when
OCRA Notes | 4
Posadas supposedly could not accept the management
contracts to develop the 1.6 hectare property into a
residential subdivision, Bravo was proposing. In
retaliation, Bravo demanded payment for services
rendered in connection with the development of the land.
In his statement of account Bravo demanded the payment
of P1,708,489.00 for various services rendered, i.e.,
relocation of squatters, preparation of the architectural
design and site development plan, survey and fencing.
Posadas refused to pay the amount demanded. Thus,
James Builder Construction and Bravo instituted a
complaint for specific performance before the trial court
against Posadas and Luxuria Homes, Inc. for the payment
of the balance f the contract price and for damages.
Issue: Whether or not Luxuria Homes can be held liable
for the transactions entered into between Posadas and
Bravo
Held: NO.
The Articles of Incorporation of Luxuria Homes, Inc.,
clearly show that Posadas owns approximately 33% only
of the capital stock. Hence Posadas cannot be considered
as an alter ego of Luxuria Homes, Inc.
To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. This is
elementary. The separate personality of the corporation
may be disregarded only when the corporation is used as
a cloak or cover for fraud or illegality, or to work injustice,
or where necessary for the protection of the creditors.
Bravo failed to show proof that Posadas acted in bad faith.
Consequently since James Builder and Bravo failed to
show that Luxuria Homes, Inc., was a party to any of the
supposed transactions, not even to the agreement to
negotiate with and relocate the squatters, it cannot be
held liable, nay jointly and in solidum, to pay James
Builder and Bravo. In this case since it was Posadas who
contracted Bravo to render the subject services, only she
is liable to pay the amounts adjudged herein.
CONCEPT BUILDERS v. NLRC
Facts: Concept Builders, Inc., is a domestic corporation,
in Maysan Road, Valenzuela, Metro Manila, engaged in
the construction business. Private respondents (Norberto
Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego,
Palcronio Giducos, Pedro Aboigar, Norberto Comendador,
Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina
Basea, Alfredo Albera, Paquito Salut, Domingo Guarino,
Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino
Sualibio, Moreno Escares, Ferdinand Torres, Felipe
Basilan, and Ruben Robalos--22) were employed by said
company as laborers, carpenters and riggers. Private
respondents were served individual written notices of
termination of employment by CBI, stating that their
contracts of employment had expired and the project in
which they were hired had been completed. Aggrieved,
private respondents filed a complaint for illegal dismissal,
unfair labor practice and non-payment of their legal
holiday pay, overtime pay and thirteenth-month pay
against CBI. The Labor Arbiter found that at the time of
the termination of the private respondents, the project in
which they were hired had not yet been finished and
completed. CBI had to engage the services of sub-
contractors whose workers performed the functions of
private respondents. Labor Arbiter ordered reinstatement
and backwages for private respondents. NLRC dismissed
CBI’s MR on the ground that the decision had already
become final and executory. Labor Arbiter issued a writ of
execution directing the sheriff to execute the Decision.
The writ was partially satisfied through garnishment of
sums from CBI’s debtor, the Metropolitan Waterworks and
Sewerage Authority, in the amount of P81,385.34. Said
amount was turned over to the cashier of the NLRC. An
Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from CBI the sum of
P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their
former positions. The sheriff issued a report stating that
he tried to serve the alias writ of execution on CBI through
the security guard on duty but the service was refused on
the ground that CBI no longer occupied the premises.
Upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution. The said writ had
not been enforced by the special sheriff because, as
stated in his progress report, all the employees inside
CBI’s premises claimed that they were employees of
Hydro Pipes Philippines, Inc. (HPPI) and not by CBI.
Nonetheless, levy was made upon the personal properties
found in the premises but security guards with high-
powered guns prevented him from removing the
properties he had levied upon. A certain Dennis
Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by
the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of
which he is the Vice-President. HPPI filed an Opposition
to private respondents’ motion for issuance of a break-
open order, contending that HPPI is a corporation which
is separate and distinct from CBI. HPPI also alleged that
the two corporations are engaged in two different kinds
of businesses, i.e., HPPI is a manufacturing firm while CBI
was then engaged in construction. LA denied private
OCRA Notes | 5
respondents’ motion for break open order but NLRC set
aside said order and directed private respondents to file a
bond. Thereafter, it directed the sheriff to proceed with
the auction sale of the properties already levied upon. It
dismissed the third-party claim for lack of merit. CBI in its
petition for certiorari, contends, that the doctrine of
piercing the corporate veil should not have been applied,
in this case, in the absence of any showing that it created
HPPI in order to evade its liability to private respondents.
It also contends that HPPI is engaged in the manufacture
and sale of steel, concrete and iron pipes, a business
which is distinct and separate from petitioner’s
construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same
President and the same set of officers and subscribers.
Issue: Whether or not the issuance of the break-open
order on the premises of HPPI is proper.
Held: YES.
It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may
be connected. But, this separate and distinct personality
of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion
of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime,
or is used as a device to defeat the labor laws, this
separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct,
a business conduit or an alter ego of another corporation.
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some
probative factors of identity that will justify the application
of the doctrine of piercing the corporate veil, to wit:
"1. Stock ownership by one or common ownership of both
corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."
The SEC en banc explained the "instrumentality rule"
which the courts have applied in disregarding the
separate juridical personality of corporations as follows:
"Where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be
disregarded. The control necessary to invoke the rule is
not majority or even complete stock control but such
domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control must
be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or
unjust loss for which the complaint is made."
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
"1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of:
The absence of any one of these elements prevents
‘piercing the corporate veil’. In applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are
concerned with reality and not form, with how the
corporation operated and the individual defendant’s
relationship to that operation."
Thus, the question of whether a corporation is a mere
alter ego, a mere sheet or paper corporation, a sham or
a subterfuge is purely one of fact.
In this case, the NLRC noted that, while CBI claimed that
it ceased its business operations on April 29, 1986, it filed
an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila.
On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.
OCRA Notes | 6
Furthermore, NLRC stated that:
"Both information sheets were filed by the same Virgilio
O. Casiño as the corporate secretary of both corporations.
It would also not be amiss to note that both corporations
had the same president, the same board of directors, the
same corporate officers, and substantially the same
subscribers.”
Clearly, CBI ceased its business operations in order to
evade the payment to private respondents of back wages
and to bar their reinstatement to their former positions.
HPPI is obviously a business conduit of CBI and its
emergence was skillfully orchestrated to avoid the
financial liability that already attached to CBI.
FRANCISCO MOTORS CORP v. CA
Facts: Spouses Gregorio and Librada Manuel purchased a
jeep body from Francisco Motors Corporation. For failure
to pay, FMC filed a complaint for a sum of money against
MAnuels to recover P3,412.06 as the balance of the jeep
body, an additional sum of P20,454.80 representing the
unpaid balance on the cost of repair of the vehicle and six
thousand pesos P6,000.00 for cost of suit and attorney’s
fees. Manuels interposed a counterclaim for unpaid legal
services by Gregorio Manuel in the amount of fifty
thousand pesos (P50,000) which was not paid by the
incorporators, directors and officers of FMC. Gregorio
alleged that while he was FMC’s Assistant Legal Officer,
he represented members of the Francisco family in the
intestate estate proceedings of the late Benita Trinidad.
However, even after the termination of the proceedings,
his services were not paid. The trial court decided in favor
of FMC but also allowed the counter-claim of the Manuels,
ordering FMC to pay him the amount of P50,000 as unpaid
attorney’s fees
Issue: Whether or not the doctrine of piercing the veil
applies in this case so as to hold FMC liable for the unpaid
attorney’s fees
Held: NO.
The rationale behind piercing a corporation’s identity in a
given case is to remove the barrier between the
corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain
proscribed activities. However, in the case at bar, instead
of holding certain individuals or persons responsible for
an alleged corporate act, the situation has been reversed.
It is Francisco Motors corporation which is being ordered
to answer for the personal liability of certain individual
directors, officers and incorporators concerned. Hence, it
appears to us that the doctrine has been turned upside
down because of its erroneous invocation. Note that
according to Gregorio Manuel his services were solicited
as counsel for members of the Francisco family to
represent them in the intestate proceedings over Benita
Trinidad’s estate. These estate proceedings did not
involve any business of Francisco Motors.
Manuel’s move to recover unpaid legal fees through a
counterclaim against Francisco Motors Corporation, to
offset the unpaid balance of the purchase and repair of a
jeep body could only result from an obvious
misapprehension that Francisco Motor’s corporate assets
could be used to answer for the liabilities of its individual
directors, officers, and incorporators. Such result if
permitted could easily prejudice the corporation, its own
creditors, and even other stockholders; hence, clearly
iniquitous to FMC.
Furthermore, considering the nature of the legal services
involved, whatever obligation said incorporators, directors
and officers of the corporation had incurred, it was
incurred in their personal capacity. When directors and
officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that
the corporation is perpetuating fraud or promoting
injustice, and be thereby held liable therefor by piercing
its corporate veil. While there are no hard and fast rules
on disregarding separate corporate identity, we must
always be mindful of its function and purpose. A court
should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied.
Otherwise an injustice, although unintended, may result
from its erroneous application.
The personality of the corporation and those of its
incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The
claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly
directed against the corporation without violating basic
principles governing corporations. Moreover, every action
— including a counterclaim — must be prosecuted or
defended in the name of the real party in interest. It is
plainly an error to lay the claim for legal fees of Gregorio
Manuel at the door of FMC rather than individual members
of the Francisco family.
TIMES TRANSPORATION COMPANY v. SOTELO
Facts: Times Transportation Company, Inc. is a
corporation engaged in the business of land
transportation. Prior to its closure, the Times Employees
OCRA Notes | 7
Union was formed and issued a certificate of union
registration. Times challenged the legitimacy of TEU by
filing a petition for the cancellation of its union
registration. TEU held a strike in response to Times’
alleged attempt to form a rival union and its dismissal of
the employees identified to be active union members.
In a certification election, TEU was certified as the sole
and exclusive collective bargaining agent in Times.
Consequently, TEU’s president wrote the management of
Times and requested for collective bargaining. Times
refused on the ground that the decision of the Med-
Arbiter upholding the validity of the certification election
was not yet final and executory. Another
conciliation/mediation proceeding was conducted for the
purpose of settling the brewing dispute. In the meantime,
Times’ management implemented a retrenchment
program and notices of retrenchment were sent to some
of its employees, informing them of their retrenchment
effective 30 days thereafter.
TEU held a strike vote on grounds of unfair labor practice
on the part of Times. For alleged participation in what it
deemed was an illegal strike, Times terminated all the 23
striking employees. DOLE Secretary Quisumbing issued
the second return-to-work order certifying the dispute to
the NLRC. While the strike was ended, the employees
were no longer admitted back to work.
In the meantime, Mencorp Transport Systems, Inc. had
acquired ownership over Times’ Certificates of Public
Convenience and a number of its bus units by virtue of
several deeds of sale. Mencorp is controlled and operated
by Mrs. Virginia Mendoza, daughter of Santiago Rondaris,
the majority stockholder of Times.
NLRC declared the first strike LEGAL while the second
strike is not. Consequently, 23 persons who participated
in the illegal strike … are deemed to have lost their
employment status and were therefore validly dismissed
from employment. NLRC also denied TEU’s "Motion to
Implead Mencorp Transport Systems, Inc. and/or Virginia
Mendoza and/or Santiago Rondaris" CA affirmed.
After the closure of Times, the retrenched employees,
filed cases for illegal dismissal, money claims and unfair
labor practices against Times before the Regional
Arbitration Branch in San Fernando City, La Union. The
arbitration branch ordered the archiving of the case
pending resolution of the ULP case.
The dismissed employees did not interpose an appeal
from said Order. Instead, they withdrew their complaints
with leave of court and filed a new set of cases before the
National Capital Region Arbitration Branch. This time,
they impleaded Mencorp and the Spouses Reynaldo and
Virginia Mendoza. Times sought the dismissal of these
cases on the ground of litis pendencia and forum
shopping.
The Labor Arbiter found ULP on the part of Times and
that the sale of said Times to Mencorp Transport Systems
Company, Inc. and/or Virginia Mendoza and Reynaldo
Mendoza was simulated and/or effected in bad faith. The
monetary award amounted to P43,347,341.69. NLRC
granted the Motion for Reduction of Bond and allowed
appeal despite the amount of bond posted being only P15
million, and ordered the case REMANDED to the
Arbitration Branch of origin for disposition and for the
conduct of appropriate proceedings for a decision to be
rendered with dispatch. CA reversed the decision of the
NLRC.
In its petition for certiorari, Times claims that "to drag
Mencorp, [Spouses] Mendoza and Rondaris into the
picture on the purported ground that a fictitious sale of
Times’ assets in their favor was consummated with the
end in view of frustrating the ends of justice and for
purposes of evading compliance with the judgment is …
the height of judicial arrogance."
Issue: Whether or not Mencorp and Spouses Mendoza can
be held liable under the decision in the ULP case.
Held: YES.
Piercing the corporate veil is warranted only in cases
when the separate legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend
crime, such that in the case of two corporations, the law
will regard the corporations as merged into one. It 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;
(2) such control must have been used to commit a fraud
or a wrong to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act
in contravention of a legal right; and (3) the said control
and breach of duty must have proximately caused the
injury or unjust loss complained of.
The following findings of the Labor Arbiter, which were
cited and affirmed by the Court of Appeals, have not been
refuted by Times, to wit:
1. The sale was transferred to a corporation controlled by
V. Mendoza, the daughter of respondent S. Rondaris of
OCRA Notes | 8
[Times] where she is/was also a director, as proven by
the articles of incorporation of [Mencorp];

2. All of the stockholders/incorporators of [Mencorp]:

Reynaldo M. Mendoza, Virginia R. Mendoza, Vernon
Gerard R. Mendoza, Vivian Charity R. Mendoza, Vevey
Rosario R. Mendoza are all relatives of respondent S.
Rondaris;

3. The timing of the sale evidently was to negate the

employees/complainants/members’ right to organization
as it was effected when their union (TEU) was just
organized/requesting [Times] to bargain;

5. [Mencorp] never obtained a franchise since its

supposed incorporation in 10 May 1994 but at present, all
the buses of [Times] are already being run/operated by
respondent [Mencorp], the franchise of [Times] having
been transferred to it.

The sale of Times’ franchise as well as most of its bus

units to a company owned by Rondaris’ daughter and
family members, right in the middle of a labor dispute, is
highly suspicious. It is evident that the transaction was
made in order to remove Times’ remaining assets from
the reach of any judgment that may be rendered in the
unfair labor practice cases filed against it.

YAO v. PEOPLE

OCRA Notes | 9
LYCEUM OF THE PHILIPPINES v. CA
Facts: Lyceum of the Philippines, Inc. commenced in the
SEC a proceeding against the Lyceum of Baguio, Inc. to
require it to change its corporate name and to adopt
another name not "similar [to] or identical" with that of
LPI. In an Order, Associate Commissioner Julio Sulit held
that the corporate name of LPI and that of the Lyceum of
Baguio, Inc. were substantially identical because of the
presence of a "dominant" word, i.e., "Lyceum," the name
of the geographical location of the campus being the only
word which distinguished one from the other corporate
name. The SEC also noted that LPI had registered as a
corporation on September 21, 195, ahead of the Lyceum
of Baguio, Inc. in point of time, and ordered the latter to
change its name to another name "not similar or identical
[with]" the names of previously registered entities. The
Lyceum of Baguio, Inc. assailed the Order of the SEC
before the Supreme Court but the same was denied
for lack of merit.
Armed with the Resolution of the SC, LPI then wrote all
the educational institutions it could find using the word
"Lyceum" as part of their corporate name, and advised
them to discontinue such use of "Lyceum." When, with
the passage of time, it became clear that this recourse
had failed, LPI instituted before the SEC a case to enforce
what it claims as its proprietary right to the word
"Lyceum."
Some of the private respondents actively participated in
the proceedings before the SEC. These are the following,
the dates of their original SEC registration being set out
below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The SEC hearing officer rendered a decision sustaining
LPI’s claim, upon relying on the Lyceum of Baguio, Inc.
case. SEC en banc reversed the decision as it did not
consider the word "Lyceum" to have become so identified
with LPI as to render use thereof by other institutions as
productive of confusion about the identity of the schools
concerned in the mind of the general public. SEC En Banc
held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools
from one another, especially in view of the fact that the
campuses of LPI and those of the private respondents
were physically quite remote from each other. CA
affirmed the order of the SEC en banc.
It is claimed, by LPI that the word "Lyceum" has acquired
a secondary meaning in relation to LPI with the result that
that word, although originally a generic, has become
appropriable by LPI to the exclusion of other institutions
like private respondents herein.
Furthermore, LPI argues that because the Western
Pangasinan Lyceum, Inc. failed to reconstruct its records
before the SEC in accordance with the provisions of R.A.
No. 62, which records had been destroyed during World
War II, Western Pangasinan Lyceum should be deemed
to have lost all rights it may have acquired by virtue of its
past registration in 1933.
Issue: Whether or not LPI has a right to the exclusive
appropriation of the word “Lyceum”
Held: NO.
The policy underlying the prohibition in against the
registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance
of fraud upon the public which would have occasion to
deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporations.
The Court does not consider that the corporate names of
private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of LPI. True
enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by
the general public for the Lyceum of the Philippines, or
that the "Lyceum of Camalaniugan" would be confused
with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for
the Greek lykeion which in turn referred to a locality on
the river Ilissius in ancient Athens "comprising an
enclosure dedicated to Apollo and adorned with fountains
and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching." In
OCRA Notes | 10
time, the word "Lyceum" became associated with schools
and other institutions providing public lectures and
concerts and public discussions. Thus today, the word
"Lyceum" generally refers to a school or an institution of
learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also
found in Spanish (liceo) and in French (lycee). As the
Court of Appeals noted in its Decision, Roman Catholic
schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de
Masbate," "Liceo de Albay." "Lyceum" is in fact as generic
in character as the word "university." In the name LPI,
"Lyceum" appears to be a substitute for "university;" in
other places, however, "Lyceum," or "Liceo" or "Lycee"
frequently denotes a secondary school or a college. It
may be (though this is a question of fact which we need
not resolve) that the use of the word "Lyceum" may not
yet be as widespread as the use of "university," but it is
clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of
their corporate names. Since "Lyceum" or "Liceo" denotes
a school or institution of learning, it is not unnatural to
use this word to designate an entity which is organized
and operating as an educational institution.
Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with
reference to an article in the market, because
geographical or otherwise descriptive might nevertheless
have been used so long and so exclusively by one
producer with reference to this article that, in that trade
and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce.
While LPI may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact alone
did not amount to mean that the said word had acquired
secondary meaning in its favor because LPI failed to prove
that it had been using the same word all by itself to the
exclusion of others. Western Pangasinan Lyceum, Inc.,
used the term "Lyceum" seventeen (17) years before the
LPI registered its own corporate name with the SEC and
began using the word "Lyceum." More so, there was no
evidence presented to prove that confusion will surely
arise if the same word were to be used by other
educational institutions.
Western Pangasinan Lyceum, Inc. registered with the SEC
soon after LPI had filed its own registration on 21
September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under
its original 1933 registration, appears to be quite
secondary in importance. LPI’s use of the word "Lyceum"
was neither the first use of that term in the Philippines
nor an exclusive use thereof. LPI use of the word
"Lyceum" was not exclusive but was in truth shared with
the Western Pangasinan Lyceum and a little later with
other private respondent institutions which registered
with the SEC using "Lyceum" as part of their corporation
names. There may well be other schools using Lyceum or
Liceo in their names, but not registered with the SEC
because they have not adopted the corporate form of
organization.
MGA KAANIB SA IGLESIA NG DIOS v. IGLESIA NG
DIOS KAY KRISTO
Facts: Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi
at Suhay ng Katotohanan is a non-stock religious society
or corporation registered in 1936. Sometime in 1976, one
Eliseo Soriano and several other members of respondent
corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-
stock religious society or corporation, named Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
In a SEC judgment rendered in favor of respondent,
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan was ordered to change its corporate name
to another name that is not similar or identical to any
name already used by a corporation, partnership or
association registered with the Commission. No appeal
was taken from said decision. It appears that during the
pendency of said case, Soriano, Et Al., caused the
registration on April 25, 1980 of petitioner corporation,
Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus,
H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands
for Haligi at Saligan ng Katotohanan.
Respondent corporation filed another petition before the
SEC praying that petitioner be compelled to change its
corporate name and be barred from using the same or
similar name on the ground that the same causes
confusion among their members as well as the public.
Petitioner claims that it complied with the SEC
guideline by adding not only two but eight words to
their registered name, to wit: "Ang Mga Kaanib" and
"Sa Bansang Pilipinas, Inc.," which, petitioner
argues, effectively distinguished it from respondent
corporation.
SEC rendered a decision ordering petitioner to change its
corporate name. SEC en banc and CA affirmed.
Issue: Whether or not Petitioner may be compelled to
change its corporate name
OCRA Notes | 11
Held: YES.
The additional words "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc." in petitioner’s name are, as correctly
observed by the SEC, merely descriptive of and also
referring to the members, or kaanib, of respondent who
are likewise residing in the Philippines. These words can
hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing
petitioner from Respondent. This is especially so, since
both petitioner and respondent corporations are using the
same acronym — H.S.K.; not to mention the fact that both
are espousing religious beliefs and operating in the same
place. Parenthetically, it is well to mention that the
acronym H.S.K. used by petitioner stands for "Haligi at
Saligan ng Katotohanan."
Then, too, the records reveal that in holding out their
corporate name to the public, petitioner highlights the
dominant words "IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN," which is
strikingly similar to respondent’s corporate name, thus
making it even more evident that the additional words
"Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are
merely descriptive of and pertaining to the members of
respondent corporation.
Significantly, the only difference between the corporate
names of petitioner and respondent are the words
SALIGAN and SUHAY. These words are synonymous —
both mean ground, foundation or support. Hence, this
case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc., where the Court ruled that
the corporate names Universal Mills Corporation and
Universal Textile Mills, Inc., are undisputably so similar
that even under the test of "reasonable care and
observation" confusion may arise.
The fact that there are other non-stock religious societies
or corporations using the names Church of the Living God,
Inc., Church of God Jesus Christ the Son of God the Head,
Church of God in Christ & By the Holy Spirit, and other
similar names, is of no consequence. It does not authorize
the use by petitioner of the essential and distinguishing
feature of respondent’s registered and protected
corporate name.
YOUNG AUTO SUPPLY v. CA
Facts: Young Auto Supply Co. Inc. (YASCO) represented
by Nemesio Garcia, its president, Nelson Garcia and
Vicente Sy, sold all of their shares of stock in Consolidated
Marketing & Development Corporation (CMDC) to George
C. Roxas for P8,000,000.00 payable in installments.
Immediately after the execution of the agreement, Roxas
took full control of the four markets of CMDC. However,
the vendors held on to the stock certificates of CMDC as
security pending full payment of the balance of the
purchase price. The first check of P4,000,000.00,
representing the down-payment, was honored by the
drawee bank but the four other checks representing the
balance of P4,000,000.00 were dishonored. In the
meantime, Roxas sold one of the markets to a third party.
Out of the proceeds of the sale, YASCO received
P600,000.00, leaving a balance of P3,400,000.00.
Subsequently, Nelson Garcia and Vicente Sy assigned all
their rights and title to the proceeds of the sale of the
CMDC shares to Nemesio Garcia.
YASCO and Nemesio Garcia filed a complaint against
Roxas in the RTC of Cebu City praying that Roxas be
ordered to pay petitioners the sum of P3,400,00.00 or
that full control of the three markets be turned over to
YASCO and Garcia.
Roxas was declared in default but the same was lifted
upon motion. Roxas then filed a motion to dismiss on the
grounds that:
1. The complaint did not state a cause of action due to
non-joinder of indispensable parties;
2. The claim or demand set forth in the complaint had
been waived, abandoned or otherwise extinguished; and
3. The venue was improperly laid
The trial court denied the motion to dismiss. The Court of
Appeals sustained the findings of the trial court with
regard to the first two grounds raised in the motion to
dismiss but ordered the dismissal of the complaint on the
ground of improper venue.
In holding that the venue was improperly laid in Cebu
City, the Court of Appeals relied on the address of YASCO,
as appearing in the Deed of Sale, which is "No. 1708
Dominga Street, Pasay City." This was the same address
written in YASCO's letters and several commercial
documents in the possession of Roxas.
Issue: Whether or not venue is improperly laid
Held: NO.
There are two plaintiffs in the case at bench: a natural
person and a domestic corporation. Both plaintiffs aver in
their complaint that they are residents of Cebu City. It is
provided in the Articles of Incorporation of YASCO that its
principal office is to be established in Cebu City.
OCRA Notes | 12
A corporation has no residence in the same sense in which
this term is applied to a natural person. But for practical
purposes, a corporation is in a metaphysical sense a
resident of the place where its principal office is located
as stated in the articles of incorporation. The Corporation
Code precisely requires each corporation to specify in its
articles of incorporation the "place where the principal
office of the corporation is to be located which must be
within the Philippines" The purpose of this requirement is
to fix the residence of a corporation in a definite place,
instead of allowing it to be ambulatory.
In Clavencilla Radio System v. Antillon, the Supreme
Court explained why actions cannot be filed against a
corporation in any place where the corporation maintains
its branch offices. The Court ruled that to allow an action
to be instituted in any place where the corporation has
branch offices, would create confusion and work untold
inconvenience to said entity. By the same token, a
corporation cannot be allowed to file personal actions in
a place other than its principal place of business unless
such a place is also the residence of a co-plaintiff or a
defendant.
If it was Roxas who sued YASCO in Pasay City and the
latter questioned the venue on the ground that its
principal place of business was in Cebu City, Roxas could
argue that YASCO was in estoppel because it misled
Roxas to believe that Pasay City was its principal place of
business. But this is not the case before us.
With the finding that the residence of YASCO for purposes
of venue is in Cebu City, where its principal place of
business is located, it becomes unnecessary to decide
whether Garcia is also a resident of Cebu City and whether
Roxas was in estoppel from questioning the choice of
Cebu City as the venue.
DE LA SALLE MONTESSORI INTERNATIONAL OF
MALOLOS v. DE LA SALLE BROTHERS
Facts: De La Salle Brothers, Inc., De La Salle University,
Inc., La Salle Academy, Inc., De La Salle-Santiago Zobel
School, Inc. (formerly De La Salle-South, Inc.), and De La
Salle Canlubang, Inc. (formerly De La Salle University-
Canlubang, Inc.) filed a petition with the SEC seeking to
compel De La Salle Montessori International Malolos, Inc.
to change its corporate name. Respondents claim that
petitioner's corporate name is misleading or confusingly
similar to that which respondents have acquired a prior
right to use, and that respondents' consent to use such
name was not obtained. According to respondents,
petitioner's use of the dominant phrases "La Salle" and
"De La Salle" gives an erroneous impression that De La
Salle Montessori International of Malolos, Inc. is part of
the "La Salle" group, which violates Section 18 of the
Corporation Code of the Philippines. Moreover, being the
prior registrant, respondents have acquired the use of
said phrases as part of their corporate names and have
freedom from infringement of the same.
Respondents' corporate names were registered on the
following dates: (1) De La Salle Brothers, Inc. on October
9, 1961 (2) De La Salle University, Inc. on December 19,
1975 (3) La Salle Academy, Inc. on January 26, 1960 (4)
De La Salle-Santiago Zobel School, Inc. on October 7,
1976 and (5) De La Salle Canlubang, Inc. on August 5,
1998.
On the other hand, petitioner was issued a Certificate of
Registration only on July 5, 2007.
Petitioner asserts that it has the right to use the phrase
"De La Salle" in its corporate name as respondents did not
obtain the right to its exclusive use, nor did the words
acquire secondary meaning. It endeavoured to
demonstrate that no confusion will arise from its use of
the said phrase by stating that its complete name, "De La
Salle Montessori International of Malolos, Inc.," contains
four other distinctive words that are not found in
respondents' corporate names. Moreover, it obtained the
words "De La Salle" from the French word meaning
"classroom," while respondents obtained it from the
French priest named Saint Jean Baptiste de La Salle.
Petitioner also compared its logo to that of respondent De
La Salle University and argued that they are different.
Further, petitioner argued that it does not charge as
much fees as respondents, that its clients knew that it
is not part of respondents' schools, and that it never
misrepresented nor claimed to be an affiliate of
respondents. Additionally, it has gained goodwill and a
name worthy of trust in its own right.
SEC Office of the General Counsel issued an order
directing petitioner to change or modify its corporate
name. SEC en banc and CA affirmed.
Issue: Whether or not there is confusing similarity
between the names of respondents and the petitioners
Held: YES.
To fall within the prohibition of Section 18, two requisites
must be proven, to wit: (1) that the complainant
corporation acquired a prior right over the use of such
corporate name; and (2) the proposed name is either: (a)
identical, or (b) deceptively or confusingly similar to that
of any existing corporation or to any other name already
OCRA Notes | 13
protected by law; or (c) patently deceptive, confusing or
contrary to existing law.
With respect to the first requisite, the Court has held that
the right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by
priority of adoption.
It being clear that respondents are the prior registrants,
they certainly have acquired the right to use the words
"De La Salle" or "La Salle" as part of their corporate
names. The second requisite is also satisfied since there
is a confusing similarity between petitioner's and
respondents' corporate names. While these corporate
names are not identical, it is evident that the phrase "De
La Salle" is the dominant phrase used.
The phrase "De La Salle" is not merely a generic term.
Respondents' use of the phrase being suggestive and may
properly be regarded as fanciful, arbitrary and whimsical,
it is entitled to legal protection. Contrary to [petitioner's]
claim, the word salle only means "room" in French. The
word la, on the other hand, is a definite article ("the")
used to modify salle. Thus, since salle is nothing more
than a room, [respondents'] use of the term is actually
suggestive.
A suggestive mark is therefore a word, picture, or other
symbol that suggests, but does not directly describe
something about the goods or services in connection with
which it is used as a mark and gives a hint as to the quality
or nature of the product. Suggestive trademarks therefore
can be distinctive and are registrable.
The appropriation of the term "la salle" to associate the
words with the lofty ideals of education and learning is in
fact suggestive because roughly translated, the words
only mean "the room." Thus, the room could be anything
- a room in a house, a room in a building, or a room in an
office.
In fact, the appropriation by [respondents] is fanciful,
whimsical and arbitrary because there is no inherent
connection between the words la salle and education, and
it is through [respondents'] painstaking efforts that the
term has become associated with one of the top
educational institutions in the country. Even assuming
arguendo that la salle means "classroom" in French,
imagination is required in order to associate the term with
an educational institution and its particular brand of
service.
The Court’s ruling in Lyceum of the Philippines does not
apply.
Here, the phrase "De La Salle" is not generic in relation to
respondents. It is not descriptive of respondent's business
as institutes of learning, unlike the meaning ascribed to
"Lyceum." Moreover, respondent De La Salle Brothers,
Inc. was registered in 1961 and the De La Salle group had
been using the name decades before petitioner's
corporate registration. In contrast, there was no evidence
of the Lyceum of the Philippines, Inc.'s exclusive use of
the word "Lyceum," as in fact another educational
institution had used the word 17 years before the former
registered its corporate name with the SEC. Also, at least
nine other educational institutions included the word in
their corporate names. There is thus no similarity between
the Lyceum of the Philippines case and this case that
would call for a similar ruling.
ROY III v. HERBOSA (April 18, 2017)
Facts: Jose M. Roy III, as a lawyer and taxpayer, and a
subscriber of PLDT, 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.
Section 2 of SEC-MC No. 8 provides:
Section 2. All covered corporations shall, at all times,
observe the constitutional or statutory ownership
requirement. For purposes of determining compliance
therewith, the required percentage of Filipino ownership
shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election
of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the
election of directors.
Petitioner Roy seeks to apply the 60-40 Filipino ownership
requirement separately to 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: Whether or not SEC-MC No. 8 should be declared
unconstitutional
Held: NO. There is need of an actual case or controversy
before the Court may exercise its power of judicial review.
OCRA Notes | 14
The movant's petition is not that actual case or
controversy.
The heart of the controversy is the interpretation of
Section 11, Article XII of the Constitution, which provides:
"No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to
corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital
is owned by such citizens x x x."
The Gamboa Decision and Gamboa Resolution made a
categorical ruling on the meaning of the word "capital"
under Section 11, Article XII of the Constitution only in
respect of, or only confined to, Philippine Long Distance
Telephone Company (PLDT).
The decretal portion of the Gamboa Decision follows the
definition of the term "capital" in the body of the decision,
to wit: "x x x we x x x rule that the term 'capital' in Section
11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares, and
not to the total outstanding capital stock (common and
non-voting preferred shares)."
The Gamboa Decision held, in no uncertain terms, that
what the Constitution requires is "[fJull [and legal]
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights
x x x must rest in the hands of Filipino nationals x x x."
And, precisely that is what SEC-MC No. 8 provides, viz.:
"x x x For purposes of determining compliance [with the
constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to BOTH
(a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or
not entitled to vote x x x."
Other than PLDT, the petitions failed to join or implead
other public utility corporations subject to the same
restriction imposed by Section 11, Article XII of the
Constitution. These corporations are in danger of losing
their franchise and property if they are found not
compliant with the restrictive interpretation of the
constitutional provision under review which is being
espoused by petitioners. They should be afforded due
notice and opportunity to be heard, lest they be deprived
of their property without due process.
Not only are public utility corporations other than PLDT
directly and materially affected by the outcome of the
petitions, their shareholders also stand to suffer in case
they will be forced to divest their shareholdings to ensure
compliance with the said restrictive interpretation of the
term "capital". As explained by SHAREPHIL, in five
corporations alone, more than Php158 Billion worth of
shares must be divested by foreign shareholders and
absorbed by Filipino investors if petitioners' position is
upheld.
Petitioners' disregard of the rights of these other
corporations and numerous shareholders constitutes
another fatal procedural flaw, justifying the dismissal of
their petitions. Without giving all of them their day in
court, they will definitely be deprived of their property
without due process of law.
If the Filipino has the voting power of the "specific stock",
i.e., he can vote the stock or direct another to vote for
him, or the Filipino has the investment power over the
"specific stock", i.e., he can dispose of the stock or direct
another to dispose of it for him, or both, i.e., he can vote
and dispose of that "specific stock" or direct another to
vote or dispose it for him, then such Filipino is the
"beneficial owner" of that "specific stock." Being
considered Filipino, that "specific stock" is then to be
counted as part of the 60% Filipino ownership
requirement under the Constitution. The right to the
dividends, jus fruendi - a right emanating from ownership
of that "specific stock" necessarily accrues to its Filipino
"beneficial owner."
The dividends accruing to any particular stock are
determinative of that stock's "beneficial
ownership." Dividend declaration is dictated by the
corporation's unrestricted retained earnings. On the other
hand, the corporation's need of capital for expansion
programs and special reserve for probable contingencies
may limit retained earnings available for dividend
declaration.
The Court in the Gamboa Decision adopted the foregoing
definition of the term "capital" in Section 11, Article XII of
the 1987 Constitution in express recognition of the
sensitive and vital position of public utilities both in the
national economy and for national security, so that the
evident purpose of the citizenship requirement is to
prevent aliens from assuming control of public utilities,
which may be inimical to the national interest. This
purpose prescinds from the "benefits"/dividends that are
derived from or accorded to the particular stocks held by
Filipinos vis-a-vis the stocks held by aliens. So long as
Filipinos have controlling interest of a public utility
corporation, their decision to declare more dividends for
OCRA Notes | 15
a particular stock over other kinds of stock is their sole
prerogative - an act of ownership that would presumably
be for the benefit of the public utility corporation itself.
In this regard, it would be apropos to state that since
Filipinos own at least 60% of the outstanding shares of
stock entitled to vote directors, which is what the
Constitution precisely requires, then the Filipino
stockholders control the corporation, i.e., they dictate
corporate actions and decisions, and they have all the
rights of ownership including, but not limited to, offering
certain preferred shares that may have greater economic
interest to foreign investors - as the need for capital for
corporate pursuits (such as expansion), may be good for
the corporation that they own. Surely, these "true
owners" will not allow any dilution of their ownership and
control if such move will not be beneficial to them.
Finally, as to how the SEC will classify or treat certain
stocks with voting rights held by a trust fund that is
created by the public entity whose compliance with the
limitation on foreign ownership under the Constitution is
under scrutiny, and how the SEC will determine if such
public utility does, in fact, control how the said stocks will
be voted, and whether, resultantly, the trust fund would
be considered as Philippine national or not - lengthily
discussed in the dissenting opinion of Justice Carpio - is
speculative at this juncture. The Court cannot engage in
guesswork. Thus, there is need of an actual case or
controversy before the Court may exercise its power of
judicial review. The movant's petition is not that actual
case or controversy.
To be sure, it would be more prudent and advisable for
the Court to await the SEC's prior determination of the
citizenship of specific shares of stock held in trust - based
on proven facts - before the Court proceeds to pass upon
the legality of such determination.
NARRA NICKEL MINING v. REDMONT
CONSOLIDATED MINES CORP
Facts: Redmont Consolidated Mines Corp. a domestic
corporation organized and existing under Philippine laws,
took interest in mining and exploring certain areas of the
province of Palawan. After inquiring with the Department
of Environment and Natural Resources (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
Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur).
Redmont filed before the Panel of Arbitrators (POA) of the
DENR three (3) separate petitions for the denial of
petitioners’ applications for MPSA alleging that at least
60% of the capital stock of McArthur, Tesoro and Narra
are owned and controlled by MBMI Resources, Inc.
(MBMI), a 100% Canadian corporation. Redmont
reasoned that since MBMI is a considerable stockholder
of petitioners, it was the driving force behind petitioners’
filing of the MPSAs over the areas covered by applications
since it knows that it can only participate in mining
activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’
capital stocks were mostly owned by MBMI, they were
likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino
citizens.
The following are the arguments of Petitioners:
1. Case is moot and academic: Petitioners reasoned
that they now cannot be considered as foreign-
owned; the transfer of their shares supposedly
cured the "defect" of their previous nationality.
They claimed that their current Financial or
Technical Assistance Agreements (FTAA) contract
with the State should stand since "even wholly-
owned foreign corporations can enter into an
FTAA with the State." Petitioners stress that there
should no longer be any issue left as regards their
qualification to enter into FTAA contracts since
they are qualified to engage in mining activities
in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used,
the nationalities of petitioners cannot be doubted
since it would pass both tests.
2. The grandfather rule, petitioners reasoned, has
no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3
of the FIA does not provide for it. They further
claim that the grandfather rule "has been
abandoned and is no longer the applicable rule."
They also opined that the last portion of Sec. 3 of
the FIA admits the application of a "corporate
layering" scheme of corporations. Petitioners
claim that the clear and unambiguous wordings
of the statute preclude the court from construing
it and prevent the court’s use of discretion in
applying the law. They said that the plain, literal
meaning of the statute meant the application of
the control test is obligatory.
3. Petitioners question the CA’s use of the exception
of the res inter alios acta or the "admission by co-
OCRA Notes | 16
 partner or agent" rule and "admission by privies"
under the Rules of Court in the instant case, by
pointing out that statements made by MBMI
should not be admitted in this case since it is not
a party to the case and that it is not a "partner"
of petitioners. Petitioners claim that before the
above-mentioned Rule can be applied to a case,
"the partnership relation must be shown, and that
proof of the fact must be made by evidence other
than the admission itself." Thus, petitioners
assert that the CA erred in finding that a
partnership relationship exists between them and
MBMI because, in fact, no such partnership
exists.
Issue: Whether or not petitioners are Filipino Corporations
Held: NO
First issue on Mootness:
The "mootness" principle, however, does accept certain
exceptions and the mere raising of an issue of "mootness"
will not deter the courts from trying a case when there is
a valid reason to do so. In David v. Macapagal-Arroyo
(David), the Court provided four instances where courts
can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and
paramount public interest is involved;
3.) When constitutional issue raised requires formulation
of controlling principles to guide the bench, the bar, and
the public; and
4.) The case is capable of repetition yet evading review.
All of the exceptions stated above are present in the
instant case. Furthermore, the sale of the MBMI
shareholdings to DMCI does not have any bearing in the
instant case and said fact should be disregarded. The
manifestation can no longer be considered by the Court
since it is being tackled in another case pending before
this Court. Thus, the question of whether petitioners,
allegedly a Philippine-owned corporation due to the sale
of MBMI's shareholdings to DMCI, are allowed to enter
into FTAAs with the State is a non-issue in this case.
SUBSTANTIVE ISSUES:
Basically, there are two acknowledged tests in
determining the nationality of a corporation: the control
test and the grandfather rule. Paragraph 7 of DOJ
Opinion No. 020, Series of 2005, adopting the 1967
SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are
registered in the name of a corporation or partnership at
least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or
say, 50% of the capital stock or capital of the corporation
or partnership, respectively, belongs to Filipino citizens,
only 50,000 shares shall be counted as owned by Filipinos
and the other 50,000 shall be recorded as belonging to
aliens.
The first part of paragraph 7, DOJ Opinion No. 020,
stating "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,"
pertains to the control test or the liberal rule. On the other
hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino ownership in
the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall
be counted as Philippine nationality," 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. Further, the pronouncement
of petitioners that the grandfather rule has already been
abandoned must be discredited for lack of basis.
To establish the actual ownership, interest or participation
of MBMI in each of petitioners’ corporate structure, they
have to be "grandfathered."
McArthur, Tesoro and Narra are not Filipino since MBMI,
a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, namely:
Madridejos Mining Corporation (MMC), Sara Marie Mining,
Inc. (SMMI) and Patricia Louise Mining & Development
Corporation (PLMDC). Going further and adding to the
picture, MBMI’s Summary of Significant Accounting
Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and
OCRA Notes | 17
"Alpha" groups––involves SMMI, Tesoro, PLMDC and
Narra. Noticeably, the ownership of the "layered"
corporations boils down to MBMI, Olympic or corporations
under the "Alpha" group wherein MBMI has joint venture
agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying
relationships between and among the corporations,
petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital
stocks or equity interests are owned by MBMI.
The "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is
doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the "grandfather rule."
As to the application of res inter alios acta
The relationships entered between and among petitioners
and MBMI are no simple "joint venture agreements." As a
rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations
enter into joint venture agreements with other
corporations or partnerships for certain transactions in
order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into
by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations
entering into partnerships, then the relationship created
should be deemed as "partnerships," and the laws on
partnership should be applied. Thus, a joint venture
agreement between and among corporations may be
seen as similar to partnerships since the elements of
partnership are present.
Considering that the relationships found between
petitioners and MBMI are considered to be partnerships,
then the CA is justified in applying Sec. 29, Rule 130 of
the Rules by stating that "by entering into a joint venture,
MBMI have a joint interest" with Narra, Tesoro and
McArthur.
GAMBOA v. TEVES
(June 28, 2011)
Facts: The Philippine Legislature enacted Act No. 3436
which granted PLDT a franchise and the right to engage
in telecommunications business. In 1969, General
Telephone and Electronics Corporation (GTE), an
American company and a major PLDT stockholder, sold
26 percent of the outstanding common shares of PLDT to
Philippine Telecommunications Investment Corporation
(PTIC). In 1977, Prime Holdings, Inc. (PHI) was
incorporated and became the owner of 111,415 shares of
stock of PTIC. 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 to be owned by
the Republic of the Philippines.
First Pacific, a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54 percent of the
outstanding capital stock of PTIC. In a public bidding,
Parallax Venture Fund XXVII acquired 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock
of PTIC 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. However, First Pacific failed to do so on the
deadline set by IPC. First Pacific, through its subsidiary,
Metro Pacific Assets Holdings, Inc. (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, which sale was later completed.
Wilson P. Gamboa filed a petition for prohibition,
injunction, declaratory relief, and declaration of nullity of
sale of the 111,415 PTIC shares. Gamboa claims, among
others, that the sale of the 111,415 PTIC shares would
result in an increase in First Pacific's common
shareholdings in PLDT from 30.7 percent to 37 percent,
and this, combined with Japanese NTT DoCoMo's
common shareholdings in PLDT, would result to a total
foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.
Issue: Whether or not there was violation of 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.
Held:
Procedural issues:
The Court treated the petition for declaratory relief as one
for mandamus since the issue involved has far-reaching
OCRA Notes | 18
implications to the national economy. Hence, falls within
the jurisdiction of the SC.
Gamboa is a stockholder of PLDT. As such, he has the
right to question the subject sale, which he claims to
violate the nationality requirement prescribed in Section
11, Article XII of the Constitution. If the sale indeed
violates the Constitution, then there is a possibility that
PLDT's franchise could be revoked, a dire consequence
directly affecting petitioner's interest as a stockholder.
More importantly, there is no question that the instant
petition raises matters of transcendental importance to
the public.
The term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote
in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding
capital stock comprising both common and non-voting
preferred shares.
Mere legal title is insufficient to meet the 60 percent
Filipino-owned "capital" required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights,
is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is
"considered as non-Philippine national[s]."
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." (Art II, Sec. 19) A
broad definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to
control of the public utility.
The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate.
Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of
the voting rights, is constitutionally required for the
State's grant of authority to operate a public utility.
Only holders of common shares can vote in the election
of directors, meaning only common shareholders exercise
control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of
directors, do not have any control over PLDT.
The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only
1/70 of the dividends that PLDT common shares earn,
grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership
of a public utility.
In short, Filipinos hold less than 60 percent of the voting
stock, and earn less than 60 percent of the dividends, of
PLDT.
Section 11, Article XII of the Constitution, like other
provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the
development of natural resources and ownership of land,
educational institutions and advertising business, is self-
executing. There is no need for legislation to implement
these self-executing provisions of the Constitution.
Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the
term "capital" in determining the extent of allowable
foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section
11, Article XII of the Constitution, to impose the
appropriate sanctions under the law.
(October 9, 2012)
(1) the Philippine Stock Exchange's (PSE) President, (2)
Manuel V. Pangilinan (Pangilinan), (3) Napoleon L.
Nazareno (Nazareno), and (4) the Securities and
Exchange Commission (SEC) (collectively, movants ) filed
a motion for reconsideration of the earlier decision.
THE COURT FOUND NO REASON TO OVERTURN ITS
PREVIOUS RESOLUTION.
Both the Voting Control Test and the Beneficial Ownership
Test must be applied to determine whether a corporation
is a "Philippine national." Furthermore, It was the intent
of the framers of the 1987 Constitution to adopt the
Grandfather Rule.
BENEFICIAL OWNERSHIP TEST
Mere legal title is insufficient to meet the 60 percent
Filipino owned "capital" required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights,
is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the
OCRA Notes | 19
constitutional mandate. Otherwise, the corporation is
"considered as non-Philippine national[s]."
VOTING CONTROL TEST
Using only the voting stock to determine whether a
corporation is a Philippine national.
GRANDFATHER RULE
Compliance with the constitutional limitation(s) on
engaging in nationalized activities must be determined by
ascertaining if 60% of the investing corporation’s
outstanding capital stock is owned by "Filipino citizens",
or as interpreted, by natural or individual Filipino citizens.
shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino
control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of
shares insures that the "controlling interest" in public
utilities always lies in the hands of Filipino citizens. This
addresses and extinguishes Pangilinan’s worry that
foreigners, owning most of the non-voting shares, will
exercise greater control over fundamental corporate
matters requiring two-thirds or majority vote of all
shareholders.
Motion for reconsideration was denied with finality.

If such investing corporation is in turn owned to some

extent by another investing corporation, the same
process must be observed. One must not stop until the
citizenships of the individual or natural stockholders of
layer after layer of investing corporations have been
established, the very essence of the Grandfather Rule.

Republic Act No. 7042 or the Foreign Investments Act of

1991 clearly and unequivocally defines a "Philippine
national" as a Philippine citizen, or a domestic corporation
at least "60% of the capital stock outstanding and entitled
to vote" is owned by Philippine citizens. Occasional
opinions of SEC legal officers that obviously contradict the
FIA should immediately raise a red flag. There are already
numerous opinions of SEC legal officers that cite the
definition of a "Philippine national" in Section 3(a) of the
FIA in determining whether a particular corporation is
qualified to own and operate a nationalized or partially
nationalized business in the Philippines.

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

OCRA Notes | 20
MODULE 2
GRACE CHRISTIAN SCHOOL v. CA
Facts: Grace Christian High School is an educational
institution offering preparatory, kindergarten and
secondary courses at the Grace Village in Quezon City.
Grace Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees and
residents at Grace Village. On December 20, 1975, a
committee of the board of directors prepared a draft of
an amendment to the by-laws, designating GCHS
representative as a permanent director of the Association.
This draft was never presented to the general
membership for approval. Nevertheless, from 1975 up to
1990, GCHS was given a permanent seat in the board of
directors of the association.
However, on February 13, 1990, the association's
committee on election in a letter informed James Tan,
principal of the school, that "it was the sentiment that all
directors should be elected by members of the
association" because "to make a person or entity a
permanent Director would deprive the right of voters to
vote for fifteen (15) members of the Board," and "it is
undemocratic for a person or entity to hold office in
perpetuity."
Following this advice, notices were sent to the members
of the association that the provision on election of
directors of the 1968 by-laws of the association would be
observed. GCHS requested the chairman of the election
committee to change the notice of election by following
the procedure in previous elections, claiming that the
notice issued for the 1990 elections ran "counter to the
practice in previous years" and was "in violation of the by-
laws (of 1975)" and "unlawfully deprive[d] Grace
Christian High School of its vested right [to] a permanent
seat in the board."
As the association denied the request, GCHS brought suit
for mandamus in the Home Insurance and Guaranty
Corporation to compel the board of directors of the
association to recognize its right to a permanent seat in
the board.
Issue: Whether or not GCHS is entitled to a permanent
position in the Board
Held: NO.
The provisions of the former and present corporation law
leave no room for doubt as to their meaning: the board
of directors of corporations must be elected from among
the stockholders or members. There may be corporations
in which there are unelected members in the board but it
is clear that unelected members sit as ex officio members,
i.e., by virtue of and for as long as they hold a particular
office. But in the case of GCHS, there is no reason at all
for its representative to be given a seat in the board. Nor
does GCHS claim a right to such seat by virtue of an office
held. In fact it was not given such seat in the beginning.
It was only in 1975 that a proposed amendment to the
by-laws sought to give it one.
Since the provision in question is contrary to law, the fact
that for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been
implemented by the members of the association cannot
forestall a later challenge to its validity. Neither can it
attain validity through acquiescence because, if it is
contrary to law, it is beyond the power of the members of
the association to waive its invalidity. For that matter the
members of the association may have formally adopted
the provision in question, but their action would be of no
avail because no provision of the by-laws can be adopted
if it is contrary to law.
It is probable that, in allowing GCHS’s representative to
sit on the board, the members of the association were not
aware that this was contrary to law. It should be noted
that they did not actually implement the provision in
question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not the
allowance of GCHS’s representative as an unelected
member of the board of directors. It is more accurate to
say that the members merely tolerated GCHS’s
representative and tolerance cannot be considered
ratification.
Nor can GCHS claim a vested right to sit in the board on
the basis of "practice." Practice, no matter how long
continued, cannot give rise to any vested right if it is
contrary to law. Even less tenable is petitioner's claim that
its right is "coterminus with the existence of the
association."
GOKONGWEI v. SEC
John Gokongwei, Jr. as stockholder of San Miguel
Corporation, filed with the Securities and Exchange
Commission a petition for "declaration of nullity of
amended by-laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with prayer
for a preliminary injunction" against the majority of the
members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner.
OCRA Notes | 21
As a first cause of action, Gokongwei contended that
according to section 22 of the Corporation Law and Article
VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by the affirmative
vote of stockholders representing not less than 2/3 of the
subscribed and paid up capital stock of the corporation,
which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, when
the outstanding capital stock of SMC was only
P70,139.740.00, the outstanding and paid up shares
totalled 30,127,047, Gokongwei contended that the Board
acted without authority and in usurpation of the power of
the stockholders.
As a second cause of action, it was alleged that the
authority granted in 1961 had already been exercised in
1962 and 1963, after which the authority of the Board
ceased to exist.
As a third cause of action, petitioner averred that the
membership of the Board of Directors had changed since
the authority was given in 1961, there being six (6) new
directors.
As a fourth cause of action, it was claimed that prior to
the questioned amendment, Gokongwei had all the
qualifications to be a director of SMC, being a Substantial
stockholder thereof; that as a stockholder, Gokongwei
had acquired rights inherent in stock ownership, such as
the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and
deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void.
As additional causes of action, it was alleged that
corporations have no inherent power to disqualify a
stockholder from being elected as a director and,
therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts
(specifically a management contract) with SMC, which
was allowed because the questioned amendment gave
the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or
antagonistic business. Furthermore, the portion of the
amended bylaws which states that in determining
whether or not a person is engaged in competitive
business, the Board may consider such factors as
business and family relationship, is unreasonable and
oppressive and, therefore, void.
It was, therefore, prayed that the amended by-laws be
declared null and void and the certificate of filing thereof
be cancelled, and that individual respondents be made to
pay damages, in specified amounts to Gokongwei.
Andres M. Soriano, Jr and Jose M. Soriano alleged that
the interest Gokongwei represents are engaged in
business competitive and antagonistic to that of San
Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the
Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business
directly and substantially competing with the allied
businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when
CFC and Robina had accumulated investments. Further,
when CFC and Robina had accumulated shares in SMC,
the Board of Directors of SMC realized the clear and
present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and
direct access to SMC's business and trade secrets and
plans
Issue:
1. Whether or not Gokongwei has a vested right to
be elected director
2. Whether or not the provisions of the amended by-
laws of SMC, disqualifying a competitor from
nomination or election to the Board of Directors
are valid and reasonable
Held:
1. NO.
The validity or reasonableness of a by-law of a
corporation in purely a question of law. Whether the by-
law is in conflict with the law of the land, or with the
charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law.
This rule is subject, however, to the limitation that where
the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have
exercised their authority.
Under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws "the qualifications, duties and
compensation of directors, officers and employees ... "
This must necessarily refer to a qualification in addition to
that specified by section 30 of the Corporation Law, which
OCRA Notes | 22
provides that "every director must own in his right at least
one share of the capital stock of the stock corporation of
which he is a director ... "
Any person "who buys stock in a corporation does so with
the knowledge that its affairs are dominated by a majority
of the stockholders and that he impliedly contracts that
the will of the majority shall govern in all matters within
the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." To this extent,
therefore, the stockholder may be considered to have
"parted with his personal right or privilege to regulate the
disposition of his property which he has invested in the
capital stock of the corporation, and surrendered it to the
will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is
infringed ... by any act of the former which is authorized
by a majority ... ."
Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at
least two-thirds of the subscribed capital stock of the
corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the
dissenting minority has only one right, viz.: "to object
thereto in writing and demand payment for his share."
Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or
repeal any by-law or adopt new by-laws. It cannot be
said, therefore, that Gokongwei has a vested right to be
elected director, in the face of the fact that the law at the
time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and
modification.
2. YES.
If the by-law is to be held reasonable in disqualifying a
stockholder in a competing company from being a
director, the same reasoning would apply to disqualify the
wife and immediate member of the family of such
stockholder, on account of the supposed interest of the
wife in her husband's affairs, and his suppose influence
over her. It is perhaps true that such stockholders ought
not to be condemned as selfish and dangerous to the best
interest of the corporation until tried and tested. So it is
also true that we cannot condemn as selfish and
dangerous and unreasonable the action of the board in
passing the by-law. The strife over the matter of control
in this corporation as in many others is perhaps carried
on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether
or not the action of the Board is authorized and
sanctioned by law. ... .
The doctrine of "corporate opportunity" is precisely a
recognition by the courts that the fiduciary standards
could not be upheld where the fiduciary was acting for
two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage
of an opportunity for his own personal profit when the
interest of the corporation justly calls for protection.
It is not denied that a member of the Board of Directors
of the San Miguel Corporation has access to sensitive and
highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and
(d) sources of funding, availability of personnel, proposals
of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity
for an officer or director of San Miguel Corporation, who
is also the officer or owner of a competing corporation,
from taking advantage of the information which he
acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and
its stockholders, that the questioned amendment of the
by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were
to discharge effectively his duty, to satisfy his loyalty to
both corporations and place the performance of his
corporation duties above his personal concerns.
In McKee & Co. v. First National Bank of San Diego the
Court further listed qualificational by-laws upheld by the
courts, as follows:
(1) A director shall not be directly or indirectly interested
as a stockholder in any other firm, company, or
association which competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
OCRA Notes | 23
(5) No person who is an attorney against the corporation
in a law suit is eligible for service on the board.
These are not based on theorical abstractions but on
human experience — that a person cannot serve two
hostile masters without detriment to one of them.
The offer and assurance of Gokongwei that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters
would be discussed, would not detract from the validity
and reasonableness of the by-laws here involved. Apart
from the impractical results that would ensue from such
arrangement, it would be inconsistent with Gokongwei
primary motive in running for board membership — which
is to protect his investments in San Miguel Corporation.
More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's
duty of fidelity to the corporation, for the policy of the law
is to encourage and enforce responsible corporate
management.
Sound principles of corporate management counsel
against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These
dangers are enhanced considerably where the common
director such as the petitioner is a controlling stockholder
of two of the competing corporations. It would seem
manifest that in such situations, the director has an
economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the
corporation where he sits as director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of
the strategies for the development of existing or new
markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage.
There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint
of trade or unfair competition. Thus, section 2 of Article
XIV of the Constitution provides: "The State shall regulate
or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair
competition shall be snowed."
A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public.
In short, it is the concentration of business in the hands
of a few. The material consideration in determining its
existence is not that prices are raised and competition
actually excluded, but that power exists to raise prices or
exclude competition when desired. Further, it must be
considered that the Idea of monopoly is now understood
to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition
by the qualification of interest or management, or it may
be thru agreement and concert of action. It is, in brief,
unified tactics with regard to prices.
From the foregoing definitions, it is apparent that the
contentions of Gokongwei are not in accord with reality.
The election of Gokongwei to the Board of SMC can bring
about an illegal situation. This is because an express
agreement is not necessary for the existence of a
combination or conspiracy in restraint of trade. It is
enough that a concert of action is contemplated and that
the defendants conformed to the arrangements, and what
is to be considered is what the parties actually did and not
the words they used. There is here a statutory recognition
of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more
competing corporations. A common director of two or
more competing corporations would have access to
confidential sales, pricing and marketing information and
would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling
competition.
Obviously, if a competitor has access to the pricing policy
and cost conditions of the products of San Miguel
Corporation, the essence of competition in a free market
for the purpose of serving the lowest priced goods to the
consuming public would be frustrated, The competitor
could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get
the most out of the consumers. Where the two competing
firms control a substantial segment of the market this
could lead to collusion and combination in restraint of
trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking
directorates between companies that are related to each
other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate
competition. As SMC aptly observes, knowledge by CFC-
OCRA Notes | 24
Robina of SMC's costs in various industries and regions in
the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire
consuming population by geographical areas or income
groups and change varying prices in order to maximize
profits from every market segment. CFC-Robina could
determine the most profitable volume at which it could
produce for every product line in which it competes with
SMC. Access to SMC pricing policy by CFC-Robina would
in effect destroy free competition and deprive the
consuming public of opportunity to buy goods of the
highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a
certain extent, engaged in agriculture, then the election
of petitioner to the Board of SMC may constitute a
violation of the prohibition contained in section 13(5) of
the Corporation Law. Said section provides in part that
"any stockholder of more than one corporation organized
for the purpose of engaging in agriculture may hold his
stock in such corporations solely for investment and not
for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations
... ."
Neither are We persuaded by the claim that the by-law
was Intended to prevent the candidacy of Gokongwei for
election to the Board. If the by-law were to be applied in
the case of one stockholder but waived in the case of
another, then it could be reasonably claimed that the by-
law was being applied in a discriminatory manner.
However, the by law, by its terms, applies to all
stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally
upon all persons of a class. Besides, before Gokongwei
can be declared ineligible to run for director, there must
be hearing and evidence must be submitted to bring his
case within the ambit of the disqualification. Sound
principles of public policy and management, therefore,
support the view that a by-law which disqualifies a
competition from election to the Board of Directors of
another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation
in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is
a mere matter of judgment, and upon which reasonable
minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws
and who have expressed their authority.
Although it is asserted that the amended by-laws confer
on the present Board powers to perpetuate themselves in
power such fears appear to be misplaced. This power, but
is very nature, is subject to certain well established
limitations. One of these is inherent in the very convert
and definition of the terms "competition" and
"competitor". "Competition" implies a struggle for
advantage between two or more forces, each possessing,
in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means
an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade.
The test must be whether the business does in fact
compete, not whether it is capable of an indirect and
highly unsubstantial duplication of an isolated or non-
characteristics activity. It is, therefore, obvious that not
every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place
of business, Identity of products and area of competition
should be taken into consideration. It is, therefore,
necessary to show that petitioner's business covers a
substantial portion of the same markets for similar
products to the extent of not less than 10% of respondent
corporation's market for competing products.
While the Court sustained the validity of the amended by-
laws, it does not follow as a necessary consequence that
Gokongwei is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing
at which the Gokongwei must be given the fullest
opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the
stockholders, it is the responsibility of directors to act with
fairness to the stockholders. Pursuant to this obligation
and to remove any suspicion that this power may be
utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the
Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless
reversed by this Court on certiorari.
PEOPLE’S AIR CARGO v. CA
Facts: To obtain a license for the corporation from the
Bureau of Customs, Antonio Punsalan Jr., the President of
People’s AirCargo and Warehousing Co. Inc. solicited a
proposal (First Contract) from Stefani Sao for the
preparation of a feasibility study. Sao priced his services
at P350,000.00. Initially, Cheng Yong, the majority
stockholder of People’s Aircargo, objected to Sao’s offer
as another company priced a similar proposal at only
OCRA Notes | 25
P15,000. However, Punsalan preferred Sao’s services
because of the latters membership in the task force,
which was supervising the transition of the Bureau of
Customs from the Marcos government to the Aquino
administration. People’s Aircargo, through Punsalan, sent
Sao a letter, confirming their agreement (Second
Contract).
People’s Aircargo submitted the operations manual
prepared by Sao to the Bureau of Customs in connection
with the formers application to operate a bonded
warehouse. Thereafter the Bureau issued to it a license
to operate, enabling it to become one of the three public
customs bonded warehouses at the international airport.
Sao also conducted, in the warehouse of People’s
Aircargo, a three-day training seminar for the latters
employees.
After Punsalan sold his shares in People’s Aircargo and
resigned as its president, Sao filed a collection suit against
against People’s Aircargo for having refused to pay him
for his services. People’s Aircargo, in its answer, alleged
that the letter-agreement was signed by Punsalan without
authority, in collusion with Sao in order to unlawfully get
some money from People’s Aircargo, and despite his
knowledge that a group of employees of the company had
been commissioned by the board of directors to prepare
an operations manual.
People’s Aircargo further argues that a single isolated
agreement prior to the subject contract does not
constitute corporate practice of clothing the president
with authority to enter into the second contract.
Issue: Whether or not People’s Aircargo is liable under the
contract
Held: YES.
The general rule is that, in the absence of authority from
the board of directors, no person, not even its officers,
can validly bind a corporation. A corporation is a juridical
person, separate and distinct from its stockholders and
members, having xxx powers, attributes and properties
expressly authorized by law or incident to its existence.
Being a juridical entity, a corporation may act through its
board of directors, which exercises almost all corporate
powers, lays down all corporate business policies and is
responsible for the efficiency of management.
The power and the responsibility to decide whether the
corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles
of incorporation, bylaws, or relevant provisions of law.
However, just as a natural person may authorize another
to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority
of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom
or acquiescence in the general course of business.
A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the
extent that [the] authority to do so has been conferred
upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the
usual course of the particular business, are incidental to,
or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has
conferred.
The authority to act for and to bind a corporation may be
presumed from acts of recognition in other instances,
wherein the power was in fact exercised without any
objection from its board or shareholders. People’s
Aircargo had previously allowed its president to enter into
the First Contract with Sao without a board resolution
expressly authorizing him; thus, it had clothed its
president with apparent authority to execute the subject
contract.
Apparent authority is derived not merely from practice.
Its existence may be ascertained through (1) the general
manner in which the corporation holds out an officer or
agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation.
In the case at bar, People’s Aircargo, through its president
Antonio Punsalan Jr., entered into the First Contract
without first securing board approval. Despite such lack
of board approval, People’s Aircargo did not object to or
repudiate said contract, thus clothing its president with
the power to bind the corporation. The First Contract was
consummated, implemented and paid without a hitch.
OCRA Notes | 26
Hence, Sao should not be faulted for believing that
Punsalans conformity to the contract in dispute was also
binding on People’s Aircargo. It is familiar doctrine that if
a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the
power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agents
authority.
Furthermore, People’s Aircargo prepared an operations
manual and conducted a seminar for the employees of
petitioner in accordance with their contract. People’s
Aircargo accepted the operations manual, submitted it to
the Bureau of Customs and allowed the seminar for its
employees. As a result of its aforementioned actions,
petitioner was given by the Bureau of Customs a license
to operate a bonded warehouse. Granting arguendo then
that the Second Contract was outside the usual powers of
the president, People’s Aircargo’s ratification of said
contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article
1403(2) is ratified by the acceptance of benefits under
them under Article 1405.
Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the
strict rule that said officer has no inherent power to act
for the corporation is slowly giving way to the realization
that such officer has certain limited powers in the
transaction of the usual and ordinary business of the
corporation. In the absence of a charter or bylaw
provision to the contrary, the president is presumed to
have the authority to act within the domain of the general
objectives of its business and within the scope of his or
her usual duties.
Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter
into a contract for the corporation, when the conduct on
the part of both the president and the corporation
[shows] that he had been in the habit of acting in similar
matters on behalf of the company and that the company
had authorized him so to act and had recognized,
approved and ratified his former and similar actions.
Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the authority
to enter, on behalf of the corporation, into contracts that
are within the scope of the powers of said corporation and
that do not violate any statute or rule on public policy.
MARC II MARKETING INC. AND LUCILA V. JOSON
v. ALFREDO M. JOSON
Facts: Before Marc II Marketing, Inc. was officially
incorporated, Alfredo Joson has already been engaged by
Lucila Joson, in her capacity as President of Marc
Marketing, Inc., to work as the General Manager of Marc
II. It was formalized through the execution of a
Management Contractdated 16 January 1994 under the
letterhead of Marc Marketing, Inc. It was explicitly
provided therein that Alfredo shall be entitled to 30% of
its net income for his work as General Manager. Alfredo
will also be granted 30% of its net profit to compensate
for the possible loss of opportunity to work overseas.
Pending incorporation of Marc II, Alfredo was designated
as the General Manager of Marc Marketing, Inc., which
was then in the process of winding up its business. For
occupying the said position, Alfredo was among its
corporate officers by the express provision of its by-laws.
On 15 August 1994, Marc II was officially incorporated
and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational. Alfredo
continued to discharge his duties as General Manager but
this time under petitioner corporation. Pursuant to the by-
laws of Marc II, its corporate officers are as follows:
Chairman, President, one or more Vice-President(s),
Treasurer and Secretary. Its Board of Directors, however,
may, from time to time, appoint such other officers as it
may determine to be necessary or proper.
On 30 June 1997, Marc II decided to stop and cease its
operations due to poor sales collection aggravated by the
inefficient management of its affairs. Concomitantly,
Alfredo was apprised of the termination of his services as
General Manager since his services as such would no
longer be necessary for the winding up of its affairs.
Alfredo filed a Complaint for Reinstatement and Money
Claim before the Labor Arbiter. LA ruled in favor of
Alfredo. NLRC reversed. CA upheld the finding of the
Labor Arbiter that Alfredo was a mere employee of Marc
II, who has been illegally dismissed from employment
without valid cause and without due process.
Marc II insists that the resolution issued by its Board of
Directors appointing Alfredo as General Manager, coupled
with his assumption of the said position, positively made
him its corporate officer. Thus, Alfredo’s removal as
General Manager involved a purely intra-corporate
controversy over which the RTC has jurisdiction.
OCRA Notes | 27
Issue: Whether or not the case involves an intracorporate
dispute under jurisdiction of the RTC
Held: NO.
Alfredo was not a corporate officer of Marc II because his
position as General Manager was not specifically
mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in Marc II’s by-
laws empowering its Board of Directors to create
additional officers, i.e., General Manager, and the alleged
subsequent passage of a board resolution to that effect
cannot make such position a corporate office. Unless and
until Marc II’s by-laws is amended for the inclusion of
General Manager in the list of its corporate officers, such
position cannot be considered as a corporate office within
the realm of Section 25 of the Corporation Code.
To allow the creation of a corporate officer position by a
simple inclusion in the corporate by-laws of an enabling
clause empowering the board of directors to do so can
result in the circumvention of the constitutionally well-
protected right of every employee to security of tenure.
The submission of the undated Secretary's Certificate
making Alfredo’s position of General Manager a corporate
office will not change the fact that Alfredo was an
employee. The certification does not amount to an
amendment of the by-laws which is needed to make the
position of General Manager a corporate office. That
Alfredo was also a director and a stockholder of Marc II
will not automatically make the case fall within the ambit
of intra-corporate controversy and be subjected to RTC's
jurisdiction. To reiterate, not all conflicts between the
stockholders and the corporation are classified as intra-
corporate. As previously discussed, Alfredo was but a
mere employee of Marc II so there was no intra-corporate
relationship between them.
Article 283 of the Labor Code, as amended, there are
three requisites for a valid cessation of business
operations: (a) service of a written notice to the
employees and to the Department of Labor and
Employment (DOLE) at least one month before the
intended date thereof; (b) the cessation of business must
be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month
pay or at least one-half month pay for every year of
service, whichever is higher.
In this case, it is obvious that Marc II’s cessation of
business operations was not due to serious business
losses. Mere poor sales collection, coupled with
mismanagement of its affairs does not amount to serious
business losses. Nonetheless, Marc II can still validly
cease or close its business operations because such right
is legally allowed, so long as it was not done for the
purpose of circumventing the provisions on termination of
employment embodied in the Labor Code. However, in
doing so, Marc II failed to comply with the one-month
prior written notice rule.
As a rule, corporation has a personality separate and
distinct from its officers, stockholders and members such
that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded
their authority. However, this corporate veil can be
pierced when the notion of the legal entity is used as a
means to perpetrate fraud, an illegal act, as a vehicle for
the evasion of an existing obligation, and to confuse
legitimate issues. Under the Labor Code, for instance,
when a corporation violates a provision declared to be
penal in nature, the penalty shall be imposed upon the
guilty officer or officers of the corporation.
In this case, Lucila, being the President of Marc II, acted
in bad faith and with malice in effecting Alfredo’s dismissal
from employment. Although Marc II has a valid cause for
dismissing Alfredo due to cessation of business
operations, however, the latter's dismissal therefrom was
done abruptly by its President, Lucila. Alfredo was not
given the required one-month prior written notice that
Marc II will already cease its business operations. As can
be gleaned from the records, Alfredo was dismissed
outright by Lucila on the same day that Marc II decided
to stop and cease its business operations. Worse, Alfredo
was not given separation pay considering that Marc II’s
cessation of business was not due to business losses or
financial reverses.
SPS. DAVID v. CIAC
Facts: NARCISO and AIDA QUIAMBAO engaged the
services of COORDINATED GROUP, INC. (CGI) to design
and construct a five-storey concrete office/residential
building on their land in Tondo, Manila. The Design/Build
Contract of the parties provided that: (a) CGI shall
prepare the working drawings for the construction
project; (b) Quiambao shall pay petitioner CGI the sum of
P7,309,821.51 for the construction of the building,
including the costs of labor, materials and equipment, and
Two Hundred Thousand Pesos P200,000.00 for the cost
of the design; and (c) the construction of the building
shall be completed within nine (9) months after securing
the building permit.
OCRA Notes | 28
It appears that CGI failed to follow the specifications and
plans as previously agreed upon. As CGI failed to act on
the demand for the correction of the errors, Quiambao
rescinded the contract after paying 74.84% of the cost of
construction.
Quiambao then engaged the services of another
contractor, RRA and Associates, to inspect the project and
assess the actual accomplishment of CGI in the
construction of the building. It was found that CGI revised
and deviated from the structural plan of the building
without notice to or approval by the Quiambaos.
Quiambaos filed a case for breach of contract before the
RTC. At the pre-trial conference, the parties agreed to
submit the case for arbitration to the CONSTRUCTION
INDUSTRY ARBITRATION COMMISSION. CIAC ruled
against CGI and Spouses Roberto and Evelyn David. CA
affirmed. It was contended that Spouses David cannot be
held jointly and severally liable with CGI in the payment
of the arbitral award as they are merely its corporate
officers.
Issue: Whether or not Spouses David can be held liable
with CGI
Held: YES. The contention raises a question of fact.
As a general rule, the officers of a corporation are not
personally liable for their official acts unless it is shown
that they have exceeded their authority. However, the
personal liability of a corporate director, trustee or officer,
along with corporation, may so validly attach when he
assents to a patently unlawful act of the corporation or
for bad faith or gross negligence in directing its affairs.
Engr. Villasenor admitted that the revision of the plans
which resulted in the construction of additional columns
was in pursuance of the request of Engr. David to revise
the structural plans to provide for a significant reduction
of the cost of construction. When Engr. David was asked
for the justification for the revision for the plans, he
confirmed that he wanted to reduce the cost of
construction. Such design change was made and
implemented by CGI without the conformity of
Quiambaos.
Findings of construction arbitrators are final and
conclusive and not reviewable by this Court on appeal,
except when the petitioner proves affirmatively that: (1)
the award was procured by corruption, fraud or other
undue means; (2) there was evident partiality or
corruption of the arbitrators or of any of them; (3) the
arbitrators were guilty of misconduct in refusing to
postpone the hearing upon sufficient cause shown, or in
refusing to hear evidence pertinent and material to the
controversy; (4) one or more of the arbitrators were
disqualified to act as such under section nine of Republic
Act No. 876 and willfully refrained from disclosing such
disqualifications or of any other misbehavior by which the
rights of any party have been materially prejudiced; or (5)
the arbitrators exceeded their powers, or so imperfectly
executed them, that a mutual, final and definite award
upon the subject matter submitted to them was not
made. Sps. David failed to show that any of these
exceptions applies to the case at bar.
The Court will not, therefore, permit the parties to
relitigate before it the issues of facts previously presented
and argued before the Arbitral Tribunal, save only where
a clear showing is made that, in reaching its factual
conclusions, the Arbitral Tribunal committed an error so
egregious and hurtful to one party as to constitute a grave
abuse of discretion resulting in lack or loss of jurisdiction.
Prototypical examples would be factual conclusions of the
Tribunal which resulted in deprivation of one or the other
party of a fair opportunity to present its position before
the Arbitral Tribunal, and an award obtained through
fraud or the corruption of arbitrators. Any other more
relaxed rule would result in setting at naught the basic
objective of a voluntary arbitration and would reduce
arbitration to a largely inutile institution.
INTERASIA INVESTMENT INDUSTRIES v. CA
Facts: Inter-Asia Industries, Inc. sold to Asia Industries,
Inc. for and in consideration of the sum of
P19,500,000.00 all its right, title and interest in and to all
the outstanding shares of stock of FARMACOR, INC. The
Agreement was signed by Leonides P. Gonzales and Jesus
J. Vergara, presidents of Inter-Asia and Asia Industries,
respectively.
It appears that FARMACOR has a deficit of
P11,244,225.00. Since the stockholder’s equity amounted
to P10,000,000.00, FARMACOR had a net worth
deficiency of P1,244,225.00. The guaranteed net worth
shortfall thus amounted to P13,244,225.00 after adding
the net worth deficiency of P1,244,225.00 to the Minimum
Guaranteed Net Worth of P12,000,000.00.
Interasia thereafter proposed, by letter signed by its
president, that Asia Industries claim for refund be reduced
to P4,093,993.00, it promising to pay the cost of the
Northern Cotabato Industries, Inc. (NOCOSII)
superstructures in the amount of P759,570.00. To the
proposal Asia Industries agreed. Interasia, however,
failed on its promise.
OCRA Notes | 29
Asia Industries having already paid Interasia
P12,000,000.00, it was entitled to a refund. Asia
Industries then, filed a complaint for the recovery of
P4,853,503.00
Interasia argues that letter-proposal for the reduction of
Asia Industries’ claim for refund which was signed by its
president has no legal force and effect against it as it was
not authorized by its board of directors, it citing the
Corporation Law which provides that unless the act of the
president is authorized by the board of directors, the
same is not binding on it.
Issue: Whether or not the letter proposal was binding on
the Corporation
Held: YES.
The general rule is that, in the absence of authority from
the board of directors, no person, not even its officers,
can validly bind a corporation. A corporation is a juridical
person, separate and distinct from its stockholders and
members, "having x x x powers, attributes and properties
expressly authorized by law or incident to its existence."
Being a juridical entity, a corporation may act through its
board of directors, which exercises almost all corporate
powers, lays down all corporate business policies and is
responsible for the efficiency of management.
The power and responsibility to decide whether the
corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles
of incorporation, bylaws, or relevant provisions of law.
However, just as a natural person may authorize another
to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority
of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom
or acquiescence in the general course of business.
[A]pparent authority is derived not merely from practice.
Its existence may be ascertained through (1) the general
manner in which the corporation holds out an officer or
agent as having the power to act or, in other words the
apparent authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It
is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer
with power to bind the corporation.
As correctly argued by Asia Industries, an officer of a
corporation who is authorized to purchase the stock of
another corporation has the implied power to perform all
other obligations arising therefrom, such as payment of
the shares of stock. By allowing its president to sign the
Agreement on its behalf, Interasia clothed him with
apparent capacity to perform all acts which are expressly,
impliedly and inherently stated therein.
NEW FRONTIER SUGAR CORP v. RTC
Facts: New Frontier Sugar Corporation (NFSC) obtained a
loan from Equitable PCI Bank (EPCIB). Said loan was
secured by a real estate mortgage over NFSC’s land
consisting of ninety-two (92) hectares located in Passi
City, Iloilo, and a chattel mortgage over NFSC’s sugar mill.
Because of liquidity problems and continued indebtedness
to EPCIB, NFSC entered into a Memorandum of
Agreement with Central Iloilo Milling Corporation
(CIMICO), whereby the latter agreed to take-over the
operation and management of the NFSC raw sugar
factory and facilities for the period covering crop years
2000 to 2003.
NFSC filed a complaint for specific performance and
collection against CIMICO for the latter’s failure to pay its
obligations under the MOA. In response, CIMICO filed a
case against NFSC for sum of money and/or breach of
contract. Because of NFSC’s failure to pay its debt, EPCIB
instituted extra-judicial foreclosure proceedings over
NFSC’s land and sugar mill. During public auction, EPCIB
was the sole bidder and was thus able to buy the entire
property and consolidate the titles in its name. EPCIB then
employed the services of Philippine Industrial Security
Agency (PISA) to help it in its effort to secure the land
and the sugar mill.
CIMICO impleaded PISA and EPCIB. CIMICO and Megan
Sugar Corporation (MEGAN) entered into a MOA whereby
MEGAN assumed CIMICO’s rights, interests and
obligations over the property. As a result of the foregoing
undertaking, MEGAN started operating the sugar mill.
Passi Iloilo Sugar Central, Inc. filed with the RTC a Motion
for Intervention claiming to be the vendee of EPCIB. Passi
Sugar claimed that it had entered into a Contract to Sell
with EPCIB after the latter foreclosed NFSC’s land and
sugar mill.
During the hearing on the motion for intervention, Atty.
Reuben Mikhail Sabig appeared before the RTC and
entered his appearance as counsel for MEGAN. Several
OCRA Notes | 30
counsels objected to Atty. Sabig’s appearance since
MEGAN was not a party to the proceedings; however,
Atty. Sabig explained to the court that MEGAN had
purchased the interest of CIMICO and manifested that his
statements would bind MEGAN.
Megan Sugar Corporation or its director-officer, Mr. Joey
Concha, who is General Manager of Megan, is ordered to
deposit in escrow the sugar quedans representing the
miller’s share pursuant to the Memorandum of Agreement
executed by plaintiff CIMICO and defendant NFSC. CA
denied Megan’s petition for certiorari stating that since
Atty. Sabig had actively participated before the RTC,
MEGAN was already estopped from assailing the RTC’s
jurisdiction.
MEGAN points out that its board of directors did not issue
a resolution authorizing Atty. Sabig to represent the
corporation before the RTC. It contends that Atty. Sabig
was an unauthorized agent and as such his actions should
not bind the corporation. In addition, MEGAN argues that
the counsels of the different parties were aware of Atty.
Sabig’s lack of authority because he declared in court that
he was still in the process of taking over the case and that
his voluntary appearance was just for the hearing of the
motion for intervention of Passi Sugar.
Issue: Whether or not Atty. Sabig’s appearance binds
MEGAN
Held: YES.
The doctrine of estoppel is based upon the grounds of
public policy, fair dealing, good faith and justice, and its
purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to
whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable
principles and the equities in the case. It is designed to
aid the law in the administration of justice where without
its aid injustice might result. It has been applied by this
Court wherever and whenever special circumstances of a
case so demand.
Based on the events and circumstances surrounding the
issuance of the assailed orders, this Court rules that
MEGAN is estopped from assailing both the authority of
Atty. Sabig and the jurisdiction of the RTC. While it is true,
as claimed by MEGAN, that Atty. Sabig said in court that
he was only appearing for the hearing of Passi Sugar’s
motion for intervention and not for the case itself, his
subsequent acts, coupled with MEGAN’s inaction and
negligence to repudiate his authority, effectively bars
MEGAN from assailing the validity of the RTC proceedings
under the principle of estoppel.
In the first place, Atty. Sabig is not a complete stranger
to MEGAN. As a matter of fact, as manifested by EPCIB,
Atty. Sabig and his law firm SABIG SABIG & VINGCO Law
Office has represented MEGAN in other cases where the
opposing parties involved were also CIMICO and EPCIB.
As such, contrary to MEGAN’s claim, such manifestation
is neither immaterial nor irrelevant, because at the very
least, such fact shows that MEGAN knew Atty. Sabig.
MEGAN can no longer deny the authority of Atty. Sabig as
they have already clothed him with apparent authority to
act in their behalf. It must be remembered that when
Atty. Sabig entered his appearance, he was accompanied
by Concha, MEGAN’s director and general manager.
Concha himself attended several court hearings, and even
sent a letter to the RTC asking for the status of the case.
A corporation may be held in estoppel from denying as
against innocent third persons the authority of its officers
or agents who have been clothed by it with ostensible or
apparent authority. Atty. Sabig may not have been armed
with a board resolution, but the appearance of Concha
made the parties assume that MEGAN had knowledge of
Atty. Sabig’s actions and, thus, clothed Atty. Sabig with
apparent authority such that the parties were made to
believe that the proper person and entity to address was
Atty. Sabig. Apparent authority, or what is sometimes
referred to as the "holding out" theory, or doctrine of
ostensible agency, imposes liability, not as the result of
the reality of a contractual relationship, but rather
because of the actions of a principal or an employer in
somehow misleading the public into believing that the
relationship or the authority exists.
One of the instances of estoppel is when the principal has
clothed the agent with indicia of authority as to lead a
reasonably prudent person to believe that the agent
actually has such authority. With the case of MEGAN, it
had all the opportunity to repudiate the authority of Atty.
Sabig since all motions, pleadings and court orders were
sent to MEGAN’s office. However, MEGAN never
questioned the acts of Atty. Sabig and even took time and
effort to forward all the court documents to him.
BERNAS v. CINCO
Facts: Jose A. Bernas, Cecile H. Cheng, Victor Africa,
Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon
and Paulino T. Lim (Bernas Group) were among the
Members of the Board of Directors and Officers of Makati
Sports Club whose terms were to expire either in 1998 or
1999.
OCRA Notes | 31
Alarmed with the rumored anomalies in handling the
corporate funds, the MSC Oversight Committee (MSCOC),
composed of the past presidents of the club, demanded
from the Bernas Group, who were then incumbent officers
of the corporation, to resign from their respective
positions to pave the way for the election of new set of
officers. Resonating this clamor were the stockholders of
the corporation representing at least 100 shares who
sought the assistance of the MSCOC to call for a special
stockholders meeting for the purpose of removing the
sitting officers and electing new ones. Pursuant to such
request, the MSCOC called a Special Stockholders'
Meeting and sent out notices to all stockholders and
members stating therein the time, place and purpose of
the meeting. For failure of the Bernas Group to secure an
injunction before the Securities Commission (SEC), the
meeting proceeded wherein Jose A. Bernas, Cecile H.
Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso,
Ignacio T. Macrohon, Jr. and Paulino T. Lim were
removed from office and, in their place and stead,
Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger
T. Aguiling, Rogelio G. · Villarosa, Armando David,
Norberto Maronilla, Regina de Leon-Herlihy and Claudio
B. Altura, (Cinco Group) were elected.
Aggrieved by the turn of events, the Bernas Group
initiated an action before the Securities Investigation and
Clearing Department (SICD) of the SEC seeking for the
nullification of the 17 December 1997 Special
Stockholders Meeting on the ground that it was
improperly called. Citing Section 28 of the Corporation
Code, the Bernas Group argued that the authority to call
a meeting lies with the Corporate Secretary and not with
the MSCOC which functions merely as an oversight body
and is not vested with the power to call corporate
meetings. For being called by the persons not authorized
to do so, the Bernas Group urged the SEC. to declare the
17 December 1997 Special Stockholders' Meeting,
including the removal of the sitting officers and the
election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17
December 1997 Special Stockholders' Meeting is
sanctioned by the Corporation Code and the MSC by-laws.
In justifying the call effected by the MSCOC, they
reasoned that Section 258 of the MSC by-laws merely
authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority
solely belongs to him. It was further asseverated by the
Cinco Group that it would be useless to course the request
to call a meeting thru the Corporate Secretary because he
repeatedly refused to call a special stockholders' meeting
despite demands and even "filed a suit to restrain the
holding of a special meeting.
Meanwhile, the newly elected directors initiated an
investigation on the alleged anomalies in administering
the corporate affairs and after finding Bernas guilty of
irregularities, the Board resolved to expel him from the
club by selling his shares at public auction. After the
notice requirement was complied with, Bernas' shares
was accordingly sold for ₱902,000.00 to the highest
bidder.
An Annual Stockholders' Meeting was held on 20 April
1998 pursuant to Section 8 of the MSC bylaws. During
the said meeting, which was attended by 1,017
stockholders representing 2/3 of the outstanding shares,
the majority resolved to approve, confirm and ratify,
among others, the calling and · holding of 17 December
1997 Special Stockholders' Meeting, the acts and
resolutions adopted therein including the removal of
Bernas Group from the Board and the election of their
replacements.
The conduct of the 17 December 1997 Special
Stockholders' Meeting was likewise ratified by the
stockholders during the 2000 Annual Stockholders'
Meeting which was held on 17 April 2000.
Issue: Whether or not the Special Stockholders’ meeting
is valid
Held: NO.
Textually, only the President and the Board of Directors
are authorized by the by-laws to call a special meeting. In
cases where the person authorized to call a meeting
refuses, fails or neglects to call a meeting, then the
stockholders representing at least 100 shares, upon
written request, may file a petition to call a special
stockholder's meeting.
In the instant case, there is no dispute that the 17
December 1997 Special Stockholders' Meeting was called
neither by the President nor by the Board of Directors but
by the MSCOC. While the MSCOC, as its name suggests,
is created for the purpose of overseeing the affairs of the
corporation, nowhere in the by-laws does it state that it
is authorized to exercise corporate powers, such as the
power to call a special meeting, solely vested by law and
the MSC by-laws on the President or the Board of
Directors.
The board of directors is the directing and controlling
body of the corporation. It is a creation of the
stockholders and derives its power to control and direct
OCRA Notes | 32
the affairs of the corporation from them. The board of
directors, in drawing to itself the power of the
corporation, occupies a position of trusteeship in relation
to the stockholders, in the sense that the board should
exercise not only care and diligence, but utmost good
faith in the management of the corporate affairs.
The underlying policy of the Corporation Code is that the
business and affairs of a corporation must be governed
by a board of directors whose members have stood for
election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the
continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical
to the theory that legitimizes the exercise of power by the
directors or officers over the properties that they do not
own.
A corporation's board of directors is understood to be that
body which (1) exercises all powers provided for under
the Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all the property of
the corporation. Its members have been characterized as
trustees or directors clothed with fiduciary character.
It is ineluctably clear that the fiduciary relation is between
the stockholders and the board of directors and who are
vested with the power to manage the affairs of the
corporation. The ordinary trust relationship of · directors
of a corporation and stockholders is not a matter of
statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate
affairs and property and hence of the property interests
of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof. Should the board
fail to perform its fiduciary duty to safeguard the interest
of the stockholders or commit acts prejudicial to their
interest, the law and the by-laws provide mechanisms to
remove and replace the erring director.
A distinction should be made between corporate acts or
contracts which are illegal and those which are merely
ultra vires. The former contemplates the doing of an act
which are contrary to law, morals or public policy or public
duty, and are, like similar transactions between
individuals, void: They cannot serve as basis of a court
action nor acquire validity by performance, ratification or
estoppel. Mere ultra vires acts, on the other hand, or
those which are not illegal or void ab initio, but are not
merely within the scope of the articles of incorporation,
are merely voidable and may become binding and
enforceable when ratified by the stockholders.
The Special Stockholders' Meeting called by the Oversight
Committee cannot have any legal effect. The removal of
the Bernas Group, as well as the election of the Cinco
Group, effected by the assembly in that improperly called
meeting is void, and since the Cinco Group has no legal
right to sit in the board, their subsequent acts of expelling
Bernas from the club and the selling of his shares. at the
public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto
officership doctrine to justify the actions taken after the
invalid election since the operation of the principle is
limited to third persons who were originally not part of
the corporation but became such by reason of voting of
government-sequestered shares.
In fine, the 17 December 1997 Special Stockholders'
Meeting is null and void and produces no effect; the
resolution expelling the Bernas Group from the
corporation and authorizing the sale of Bernas' shares at
the public auction is likewise null and void. The
subsequent Annual Stockholders' Meeting held on 20 April
1998, 19 April 1999 and 17 April 2000 are valid and
binding except the ratification of the removal of the
Bernas Group and the sale of Bernas' shares at the public
auction effected by the body during the said meetings.
The expulsion of the Bernas Group and the subsequent
auction of Bernas' shares are void from the very beginning
and therefore the ratifications effected during the
subsequent meetings cannot be sustained. A void act
cannot be the subject of ratification.
FEDERATED LPG DEALERS ASSOCIATION v. DEL
ROSARIO
Facts: Atty. Genesis M. Adarlo of Joaquin Adarlo and
Caoile, sought assistance from the Criminal Investigation
and Detection Group, Anti-Fraud and Commercial Crimes
Division (CIDG-AFCCD) of the Philippine National Police in
the surveillance, investigation, apprehension, and
prosecution of certain persons and establishments within
Metro Manila reportedly committing acts violative of Batas
Pambansa Blg. 33 (BP 33), as amended by Presidential
Decree No. 1865 (PD 1865), to wit: (1) refilling of
Liquefied Petroleum Gas (LPG) cylinders branded as
Shellane, Petron Gasul, Caltex, Totalgaz and Superkalan
Gaz without any written authorization from the companies
which own the said brands (2) underfilling of LPG
products or possession of underfilled LPG cylinders for the
purpose of sale, distribution, transportation, exchange or
barter and (3) refilling LPG cylinders without giving any
OCRA Notes | 33
receipt therefor, or giving out receipts without indicating
the brand name, tare weight, gross weight and/or price
thereof, among others.
Atty. Adarlo again wrote the CIDG-AFCCD informing the
latter of its confirmation that ACCS Ideal Gas Corporation
(ACCS), which allegedly has been refilling branded LPG
cylinders in its refilling plant at 882 G. Araneta Avenue,
Quezon City, has no authority to refill per certifications
from gas companies owning the branded LPG cylinders.
Having reasonable grounds to believe that ACCS was in
violation of BP 33, P/Supt. Esguerra filed with the
Regional Trial Court (RTC) of Manila applications for
search warrant against the officers of ACCS, to wit:
Antonio G. Del Rosario and, Ma. Cristina L. Del Rosario,
Celso E. Escobido II, and Shiela M. Escobido. Upon
confirmation of the allegations, P/Supt Esguerra filed with
the Department of Justice (DOJ) Complaints-Affidavits
against Antonio and respondents for illegal trading of
petroleum products and for underfilling of LPG cylinders.
In their Joint Rejoinder-Affidavit, Antonio and
respondents reiterated that ACCS was only a dealer and
distributor of petroleum products and not engaged in
refilling activities. They also stressed, among others, that
Del Rosario, et. al. cannot be held liable under BP 33 as
amended since the AOI of ACCS did not state that they
were the President, General Manager, Managing Partner,
or such other officer charged with the management of
business affairs, What the AOI plainly indicated was that
they were the incorporating stockholders of the
corporation and nothing more.
Issue: Whether or not Del Rosario, et. al. as members of
the Board of Directors of ACCS, be criminally prosecuted
for the latter's alleged violation/s of BP 33 as amended
Held: NO.
It may be noted that Sec. 4 of BP 33 the persons who
may be held liable for violations of the law, viz[.]: (1) the
president, (2) general manager, (3) managing partner,
(4) such other officer charged with the management of
the business affairs of the corporation or juridical entity,
or (5) the employee responsible for such violation. A
common thread of the first four enumerated officers is the
fact that they manage the business affairs of the
corporation or juridical entity. In short, they are operating
officers of a business concern, while the last in the list is
self-explanatory.
A member of the Board of Directors of a corporation,
cannot, by mere reason of such membership, be held
liable for corporation's probable violation of BP 33. If one
is not the President, General Manager or Managing
Partner, it is imperative that it first be shown that he/she
falls under the catch-all "such other officer charged with
the management of the business affairs," before he/she
can be prosecuted. However, it must be stressed, that the
matter of being an officer charged with the management
of the business affairs is a factual issue which must be
alleged and supported by evidence. Here, there is no
dispute that neither of the respondents was the President,
General Manager, or Managing Partner of ACCS. Hence,
it becomes incumbent upon petitioner to show that
respondents were officers charged with the management
of the business affairs. However, the Complaint-Affidavit
attached to the records merely states that respondents
were members of the Board of Directors based on the AOI
of ACCS. There is no allegation whatsoever that they were
in-charge of the management of the corporation's
business affairs.
It is actually the President under Section 2, Article IV of
the said by-laws who is vested with wide latitude in
controlling the business operations of the corporation.
Among others, the President is specifically empowered to
supervise and manage the business affairs of the
corporation, to implement the administrative and
operational policies of the corporation under his
supervision and control, to appoint, remove, suspend or
discipline employees of the corporation, prescribe their
duties, and determine their salaries. With these functions,
the President appears to be the officer charged with the
management of the business affairs of ACCS. But since
there is no allegation or showing that any of the
respondents was the President of ACCS, none of them,
therefore, can be considered as an officer charged with
the management of the business affairs even in so far as
the By-Laws of the subject corporation is concerned.
Clearly, therefore, it is only Antonio, who undisputedly
was the General Manager – a position among those
expressly mentioned as criminally liable under paragraph
4, Section 3 of BP 33, as amended – can be prosecuted
for ACCS' perceived violations of the said law.
Respondents who were mere members of the Board of
Directors and not shown to be charged with the
management of the business affairs were thus correctly
dropped as respondents in the complaints.
WESLEYAN UNIVERSITY v. MAGLAYA
Facts: Atty. Guillermo T. Maglaya, Sr. is a trustee of
Wesleyan University-Philippines, is a non-stock, non-
pro6t, non-sectarian educational corporation duly
OCRA Notes | 34
organized and existing under the Philippine laws. The
incumbent Bishops of the United Methodist Church
apprised all the corporate members of the expiration of
their terms, unless renewed by the former. The said
members, including Maglaya, sought the renewal of their
membership in the WUP's Board, and signified their
willingness to serve the corporation. Dr. Dominador
Cabasal, Chairman of the Board, informed the Bishops of
the cessation of corporate terms of some of the members
and/or trustees since the by-laws provided that the
vacancy shall only be filled by the Bishops upon the
recommendation of the Board. The Bishops, through a
formal notice to all the officers, deans, staff, and
employees of WUP, introduced the new corporate
members, trustees, and officers. Manuel Palomo, the new
Chairman of the Board, informed Maglaya of the
termination of his services and authority as the President
of the University. Thereafter, Maglaya and other former
members of the Board filed a Complaint for Injunction and
Damages before the Regional Trial Court of Cabanatuan
City. The RTC observed that it is clear from the by-laws
of WUP that insofar as membership in the corporation is
concerned, which can only be given by the College of
Bishops of the United Methodist Church, it is a
precondition to a seat in the WUP Board. CA affirmed.
Thereafter, Maglaya filed a case for illegal dismissal
before the LA. LA dismissed stating that the case involves
intra-corporate dispute which was definitely beyond the
jurisdiction of the labor tribunal. NLRC reversed, stating
that although the position of the President of the
University is a corporate office, the manner of Maglaya's
appointment, and his duties, salaries, and allowances
point to his being an employee and subordinate. The
control test is the most important indicator of the
presence of employer-employee relationship. Such was
present in the instant case as Maglaya had the duty to
report to the Board, and it was the Board which
terminated or dismissed him even before his term ends.
CA denied Wesleyan’s petition for certiorari for having
been filed after the lapse of 10 calendar days from receipt
of the decision of NLRC.
Issue: Whether or not the NLRC has jurisdiction over the
illegal dismissal case of Maglaya
Held: No. The application of the doctrine of immutability
of judgment in the case at bar is misplaced. To reiterate,
although the 10-day period for finality of the decision of
the NLRC may already have lapsed as contemplated in the
Labor Code, this Court may still take cognizance of the
petition for certiorari on jurisdictional and due process
considerations if filed within the reglementary period
under Rule 65. WUP received the decision of the NLRC on
March 12, 2012. Thereafter, it led fi petition for certiorari
before the CA on March 26, 2013.
As to the merits:
The president, vice-president, secretary and treasurer are
commonly regarded as the principal or executive officers
of a corporation, and they are usually designated as the
officers of the corporation. However, other officers are
sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered
under the by-laws of a corporation to create additional
offices as may be necessary. This Court expounded that
an "office" is created by the charter of the corporation and
the officer is elected by the directors or stockholders,
while an "employee" usually occupies no office and
generally is employed not by action of the directors or
stockholders but by the managing officer of the
corporation who also determines the compensation to be
paid to such employee.
From the foregoing, that the creation of the position is
under the corporation's charter or by-laws, and that the
election of the officer is by the directors or stockholders
must concur in order for an individual to be considered a
corporate officer, as against an ordinary employee or
officer. It is only when the officer claiming to have been
illegally dismissed is classi6ed as such corporate officer
that the issue is deemed an intra-corporate dispute which
falls within the jurisdiction of the trial courts.
It is apparent from the By-laws of WUP that the president
was one of the officers of the corporation, and was an
honorary member of the Board. He was appointed by the
Board and not by a managing officer of the corporation.
We held that one who is included in the by-laws of a
corporation in its roster of corporate officers is an officer
of said corporation and not a mere employee.
The alleged "appointment" of Maglaya instead of
"election" as provided by the by-laws neither convert the
president of university as a mere employee, nor amend
its nature as a corporate officer. With the office
specifically mentioned in the by-laws, the NLRC erred in
taking cognizance of the case, and in concluding that
Maglaya was a mere employee and subordinate official
because of the manner of his appointment, his duties and
responsibilities, salaries and allowances, and considering
the Identification Card, the Administration and Personnel
Policy Manual which speci6ed the retirement of the
university president, and the check disbursement as
pieces of evidence supporting such finding.
OCRA Notes | 35
A corporate officer's dismissal is always a corporate act,
or an intra-corporate controversy which arises between a
stockholder and a corporation, and the nature is not
altered by the reason or wisdom with which the Board of
Directors may have in taking such action. An intra-
corporate dispute subject to the jurisdiction of the regular
courts.
CALUBAD v. RICARCEN DEVELOPMENT
CORPORATION
Facts: Ricarcen Development Corporation was a family
corporation with Marilyn Soliman as its president from
2001 to August 2003. Marilyn, acting on Ricarcen's behalf
as its president, took out a P4,000,000.00 loan from
Arturo Calubad. This loan was secured by a real estate
mortgage over Ricarcen's Quezon City property.
On December 6, 2001, Ricarcen, through Marilyn, and
Calubad amended and increased the loan to
P5,000,000.00 in the Amendment of Deed of Mortgage
(Additional Loan of P1,000,000.00).
On May 8, 2002, Ricarcen, again acting through Marilyn,
took out an additional loan of 2,000,000.00 from Calubad,
as evidenced by the executed Second Amendment of
Deed of Mortgage (Additional Loan of P2,000,000.00).
To prove her authority to execute the three (3) mortgage
contracts in Ricarcen's behalf, Marilyn presented Calubad
with a Board Resolution and Secretary’s Certificate dated
October 15, 2001 and 2 Secretary's Certificates dated
December 6, 2001 and May 8, 2002, executed by
Marilyn's sister and Ricarcen's corporate secretary,
Elizabeth Chamorro.
Sometime in 2003, after Ricarcen failed to pay its loan,
Calubad initiated extrajudicial foreclosure proceedings on
the real estate mortgage. Calubad was the highest
bidder and was issued a Certificate of sale. Ricarcen
claimed that it only learned of Marilyn's transactions with
Calubad sometime in July 2003.
Ricarcen filed its Complaint for Annulment of Real Estate
Mortgage and Extrajudicial Foreclosure of Mortgage and
Sale with Damages against Marilyn, Calubad, and
employees of the Registry of Deeds of Quezon City and of
the Regional Trial Court of Quezon City. Elizabeth later on
denied signing any of the four (4) documents cited by
Calubad, saying that she regularly signed blank
documents and left them with her sister Marilyn. She
opined that the Board Resolution and Secretary's
Certificates, which purportedly gave Marilyn the authority
to transact with Calubad in Ricarcen's behalf, might have
been some of the blank documents she had earlier signed.
Issue: Whether or not the mortgage should be annulled
Held: NO.
Law and jurisprudence recognize actual authority and
apparent authority as the two (2) types of authorities
conferred upon a corporate officer or agent in dealing
with third persons.
Actual authority can either be express or implied. Express
actual authority refers to the power delegated to the
agent by the corporation, while an agent's implied
authority can be measured by his or her prior acts which
have been ratified by the corporation or whose benefits
have been accepted by the corporation.
On the other hand, apparent authority is based on the
principle of estoppel. The doctrine of apparent authority
provides that even if no actual authority has been
conferred on an agent, his or her acts, as long as they are
within his or her apparent scope of authority, bind the
principal. However, the principal's liability is limited to
third persons who are reasonably led to believe that the
agent was authorized to act for the principal due to the
principal's conduct.
Apparent authority is determined by the acts of the
principal and not by the acts of the agent. Thus, it is
incumbent upon Calubad to prove how Ricarcen's acts led
him to believe that Marilyn was duly authorized to
represent it.
As the former president of Ricarcen, it was within
Marilyn's scope of authority to act for and enter into
contracts in Ricarcen's behalf. Her broad authority from
Ricarcen can be seen with how the corporate secretary
entrusted her with blank yet signed sheets of paper to be
used at her discretion. She also had possession of the
owner's duplicate copy of the land title covering the
property mortgaged to Calubad, further proving her
authority from Ricarcen.
Calubad could not be faulted for continuing to transact
with Marilyn, even agreeing to give out additional loans,
because Ricarcen clearly clothed her with apparent
authority. Likewise, it reasonably appeared that
Ricarcen's officers knew of the mortgage contracts
entered into by Marilyn in Ricarcen's behalf as proven by
the issued Banco De Oro checks as payments for the
monthly interest and the principal loan. It appears as if
Ricarcen and its officers gravely erred in putting too much
trust in Marilyn. However, Calubad, as an innocent third
OCRA Notes | 36
party dealing in good faith with Marilyn, should not be
made to suffer because of Ricarcen's negligence in
conducting its own business affairs.
MACTAN ROCK INDUSTRIES v. GERMO
Facts: Mactan Rock Industries, Inc., a domestic
corporation engaged in supplying water, selling industrial
maintenance chemicals, and water treatment and
chemical cleaning services, through its President/Chief
Executive Officer (CEO), Antonio Tompar, entered into a
Technical Consultancy Agreement with Benfrei S. Germo
whereby the parties agreed, inter alia, that: (a) Germo
shall stand as MRII's marketing consultant who shall take
charge of negotiating, perfecting sales, orders, contracts,
or services of MRII, but there shall be no employer-
employee relationship between them; and (b) Germo
shall be paid on a purely commission basis, including a
monthly allowance of P5,000.00.
During the effectivity of the TCA, Germo successfully
negotiated and closed with International Container
Terminal Services, Inc. (ICTSI) a supply contract of 700
cubic meters of purified water per day. Accordingly, MRII
commenced supplying water to ICTSI and in tum, the
latter religiously paid MRII the corresponding monthly
fees. Despite the foregoing, MRII allegedly never paid
Germo his rightful commissions amounting to
P2,225,969.56. Complaint before the NLRC was dismissed
for lack of jurisdiction there being no employer-employee
relationship. RTC ruled in Germo's favor, and accordingly,
ordered MRII and Tompar to solidarily pay him the
amount of his commissions with interest, and damages.
CA Affirmed.
Issue: Whether or not Tompar, in his capacity as then-
President/CEO of MRII, should be held solidarily liable
with MRII for the latter's obligations to Germo.
Held: NO
It is a basic rule that a corporation is a juridical entity
which is vested with legal and personality separate and
distinct from those acting for and in behalf of, and from
the people comprising it. As a general rule, directors,
officers, or employees of a corporation cannot be held
personally liable for the obligations incurred by the
corporation, unless it can be shown that such
director/officer/employee is guilty of negligence or bad
faith, and that the same was clearly and convincingly
proven.
Thus, before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
(1) the 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; and
(2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.
In this case, Tompar's assent to patently unlawful acts of
the MRII or that his acts were tainted by gross negligence
or bad faith was not alleged in Germo's complaint, much
less proven in the course of trial. Therefore, the deletion
of Tompar's solidary liability with MRII is in order.
IENT v. TULLETT PREBON
James lent is a British national and the Chief Financial
Officer of Tradition Asia Pacific Pte. Ltd. (Tradition Asia)
in Singapore. Maharlika Schulze is a Filipino/German who
does Application Support for Tradition Financial Services
Ltd. in London (Tradition London). Tradition Asia and
Tradition London are subsidiaries of Compagnie
Financiere Tradition and are part of the "Tradition Group."
The Tradition Group is allegedly the third largest group of
Inter-dealer Brokers (IDB) in the world while the
corporate organization, of which Tullett Prebonn
(Philippines Inc.) is a part, is supposedly the second
largest. In other words, the Tradition Group and Tullett
are competitors in the inter-dealer broking business.
Tullett was the first to establish a business presence in
the Philippines and had been engaged in the inter-dealer
broking business or voice brokerage here since 1995.
Sometime in August 2008, in line with Tradition Group's
motive of expansion and diversification in Asia, lent and
Schulze were tasked with the establishment of a
Philippine subsidiary of Tradition Asia to be known as
Tradition Financial Services Philippines, Inc. (Tradition
Philippines). Tradition Philippines was registered with the
Securities and Exchange Commission (SEC) on with lent
and Schulze, among others, named as incorporators and
directors in its Articles of Incorporation.
Tullett, through one of its directors, Gordon Buchan, filed
a Complaint-Affidavit with the City Prosecution Office of
Makati City against the officers/employees of the
Tradition Group for violation of the Corporation Code.
Impleaded as respondents in the Complaint-Affidavit were
lent and Schulze, Jaime Villalon, who was formerly
President and Managing Director of Tullett, Mercedes
OCRA Notes | 37
Chuidian, who was formerly a member of Tullett's Board
of Directors, and other John and Jane Does. Villalon and
Chuidian were charged with using their former positions
in Tullett to sabotage said company by orchestrating the
mass resignation of its entire brokering staff in order for
them to join Tradition Philippines. With respect to Villalon,
Tullett claimed that the former held several meetings with
members of Tullett's Spot Desk and brokering staff in
order to convince them to leave the company. Villalon
likewise supposedly intentionally failed to renew the
contracts of some of the brokers. A meeting was also
allegedly held in Howzat Bar in Makati City Ient,Schulze
and a lawyer of Tradition Philippines were present. At said
meeting, the brokers of Tullett were purportedly induced,
en masse, to sign employment contracts with Tradition
Philippines and were allegedly instructed by Tradition
Philippines' lawyer as to how they should file their
resignation letters.
Petitioners posit that Section 144 (which provides for a
punishment of a fine of not less than one thousand
(₱1,000.00) pesos but not more than ten thousand
(₱10,000.00) pesos or imprisonment for not less than
thirty (30) days but not more than five (5) years, or both,
in the discretion of the court) only applies to the
provisions of the Corporation Code or its amendments
"not otherwise specifically penalized" by said statute and
should not cover Sections 31 and 34 *now sec 30 and 33
of the RCC (embodying the “corporate opportunity
doctrine”) which both prescribe the "penalties" for their
violation; namely, damages, accounting and restitution of
profits. On the other hand, respondent and the appellate
court have taken the position that the term "penalized"
under Section 144 should be interpreted as referring to
criminal penalty, such as fine or imprisonment, and that
it could not possibly contemplate "civil" penalties such as
damages, accounting or restitution.
Issue: Whether or not criminal penalties may be imposed
on Ient and Schulze
Held: NO.
The Court is guided by the elementary rules of statutory
construction of penal provisions. First, in all criminal
prosecutions, the existence of criminal liability for which
the accused is made answerable must be clear and
certain. "Penal statutes are construed strictly against the
1
– x x x – “Any officer or agent of the corporation who shall
refuse to allow any director, trustee, stockholder or member
of the corporation to examine and copy excerpts from its
records or minutes, in accordance with the provisions of this
State and liberally in favor of the accused. When there is
doubt on the interpretation of criminal laws, all must be
resolved in favor of the accused. Since penal laws should
not be applied mechanically, the Court must determine
whether their application is consistent with the purpose
and reason of the law."
Second, intimately related to the in dubio pro reo principle
is the rule of lenity. The rule applies when the court is
faced with two possible interpretations of a penal statute,
one that is prejudicial to the accused and another that is
favorable to him. The rule calls for the adoption of an
interpretation which is more lenient to the accused.
After a meticulous consideration of the arguments
presented by both sides, the Court comes to the
conclusion that there is textual ambiguity in Section 144;
moreover, such ambiguity remains even after an
examination of its legislative history and the use of other
aids to statutory construction, necessitating the
application of the rule of lenity in the case at bar.
Perusal of Section 144 shows that it is not a purely penal
provision. When it is a corporation that commits a
violation of the Corporation Code, it may be dissolved in
appropriate proceedings before the Securities and
Exchange Commission. The involuntary dissolution of an
erring corporation is not imposed as a criminal sanction,
but rather it is an administrative penalty.
There is no compelling reason for the Court to construe
Section 144 as similarly employing the term "penalized"
or "penalty" solely in terms of criminal liability. Lack of
specific language imposing criminal liability in Sections 31
and 34 shows legislative intent to limit the consequences
of their violation to the civil liabilities mentioned therein.
Had it been the intention of the drafters of the law to
define Sections 31 and 34 as offenses, they could have
easily included similar language as that found in Section
741. Contrasted with the interpellations on Section 74
(regarding the right to inspect the corporate records), the
discussions on said provision leave no doubt that
legislators intended both civil and penal liabilities to attach
to corporate officers who violate the same, as was
repeatedly stressed from the legislative records.
If a director or officer is found to have breached his duty
of loyalty, an injunction may be issued or damages may
be awarded. A corporate officer guilty of fraud or
Code, shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this
Code:” – x x x –
OCRA Notes | 38
mismanagement may be held liable for lost profits. A
disloyal agent may also suffer forfeiture of his
compensation. There is nothing in the deliberations to
indicate that drafters of the Corporation Code intended to
deviate from common law practice and enforce the
fiduciary obligations of directors and corporate officers
through penal sanction aside from civil liability. On the
contrary, there appears to be a concern among the
drafters of the Corporation Code that even the imposition
of the civil sanctions under Section 31 and 34 might
discourage competent persons from serving as directors
in corporations.
The Corporation Code was intended as a regulatory
measure, not primarily as a penal statute. Sections 31 to
34 in particular were intended to impose exacting
standards of fidelity on corporate officers and directors
but without unduly impeding them in the discharge of
their work with concerns of litigation. Considering the
object and policy of the Corporation Code to encourage
the use of the corporate entity as a vehicle for economic
growth, we cannot espouse a strict construction of
Sections 31 and 34 as penal offenses in relation to Section
144 in the absence of unambiguous statutory language
and legislative intent to that effect.
When Congress intends to criminalize certain acts it does
so in plain, categorical language, otherwise such a statute
would be susceptible to constitutional attack. Had the
Legislature intended to attach penal sanctions to Sections
31 and 34 of the Corporation Code it could have expressly
stated such intent in the same manner that it did for
Section 74 of the same Code.
NAPOCOR BOARD v. COA
Facts: On September 10, 2009, National Power
Corporation (NPC) Board of Directors (petitioners),
through a Board Resolution No. 2009-52 authorized the
payment of Employee Health and Wellness Program and
Related Financial Assistance (EHWPRFA) to qualified
officials and employees of the NPC. The EHWPRFA is a
monthly benefit equivalent to P5,000.00 to be released on
a quarterly basis.
On September 26, 2011, petitioners received a copy of
ND No. NPC-11-004-10,4 which disallowed the payment
of EHWPRFA for the first quarter of 2010 amounting to
P29,715,000.00. The EHWPRFA was disallowed in audit
because it was a new benefit and did not have prior
approval from the Office of the President as required
under Memorandum Order No. 20 dated June 25, 2001.
Petitioners argue that the EHWPRFA is not a new benefit
as it is a similar benefit with the previous CHBP under
Circular No. 2000-55 dated September 11, 2000. It
explains that the EHWPRFA was granted because the
amount granted under the CHBP was no longer
reasonable owing to the exorbitant increase in the prices
of medicines and considering that the preventive
approach to wellness would benefit the work force more.
Petitioners further contend that even if it were to concede
that the EHWPRFA required presidential approval, the
said requirement had been complied with, following the
doctrine of political agency. The President's approval was
secured as a consequence of the approval of the
EHWPRFA by the National Power Board. It highlights that
the DBM Secretary is one of the members of the National
Power Board. Petitioners aver that having a member of
the board review an act already validly enacted by the
board itself is a useless proposition as this would result in
an absurd scenario that one member of the board can
overrule an action taken and approved by the whole
board.
Issue: Whether or not EHWPRFA received should be
reimbursed
Held: YES.
Even assuming that the petitioners are correct in arguing
that the EHWPRFA merely increased existing benefits of
NPC employees, it still erred in concluding that the same
did not require the imprimatur of the President. Both M.O.
No. 20 and A.O. No. 103 did not limit their application to
new benefits, but likewise included the increase of
existing benefits. Section 3 of M.O. No. 20 required that
any increase in salary or compensation shall be subject to
the approval of the President. On the other hand, Section
3(b) of A.O. No. 103 directed the GOCCs to suspend the
grant of new or additional benefits to officials and
employees. Clearly, the augmenting of the benefits the
NPC employees already enjoyed still required the approval
from the President.
The doctrine of qualified political agency essentially
postulates that the heads of the various executive
departments are the alter egos of the President, and,
thus, the actions taken by such heads in the performance
of their official duties are deemed the acts of the President
unless the President himself should disapprove such acts.
This doctrine is in recognition of the fact that in our
presidential form of government, all executive
organizations are adjuncts of a single Chief Executive;
that the heads of the Executive Departments are
assistants and agents of the Chief Executive; and that the
OCRA Notes | 39
multiple executive functions of the President as the Chief
Executive are performed through the Executive
Departments. The doctrine has been adopted here out of
practical necessity, considering that the President cannot
be expected to personally perform the multifarious
functions of the executive office.
of disallowance. They must reimburse the amount they
received through salary deduction, or through whatever
mode of payment the Commission on Audit may deem
just and proper under the circumstances.

Petitioners concede that the DBM Secretary sits as

member of the National Power Board in an ex officio
capacity pursuant to R.A. No. 9136 or the Electric Power
Industry Reforms Act of 2001. As such, the Budget
Secretary's authority to sit in the National Power Board
emanated from the law, and not from the appointment of
the President. Thus, the doctrine of qualified political
agency does not attach to the acts performed by cabinet
secretaries in connection with their position as ex officio
members of the National Power Board.

Contrary to petitioners' assumption, no absurd situation

arises in still requiring presidential approval in the grant
of the EHWPRFA. In assenting to the grant of EHWPRFA
as part of the National Power Board, the Budget Secretary
was not acting as the alter ego of the President as it was
in connection with his ex officio position as member of the
board. Thus, the approval or disapproval of the DBM
Secretary as required under the law would not have the
effect of one member of the board overturning the votes
of the majority of the board since it is, by legal fiat,
actually the act of the President exercised through his
alter ego.

In sum, the COA did not act with grave abuse of discretion
in upholding ND No. NPC-11-004-10 and in finding that
the NPC officers who had approved or authorized the
disbursement in question are liable to refund the same.
To reiterate, the grant of EHWPRFA for the first quarter
of 2010 was contrary to existing laws, rules and
regulations as it was made sans presidential approval.

Good faith is not a valid defense for passive recipients

because they are deemed trustees of a constructive trust
for having received benefits they were never entitled to
in the first place. In addition, the doctrine of unjust
enrichment only concerns the question of whether an
individual was benefited without legal basis at the
expense of another — the belief or intent of the party
placed at an advantage is immaterial. Such scenario exists
in the disallowance of benefits as the concerned
employees receive benefits or emoluments sans legal
basis to the prejudice of the government.

The certifying and approving officers, as well as all the

employees of the National Power Corporation who
received the disallowed benefit, are liable for the amount
OCRA Notes | 40
MODULE 3
NIELSON & CO. v. LEPANTO CONSOLIDATED
MINING CO.
Facts: Before World War II or on January 30, 1937,
Nielson & Co. and Lepanto Consolidated Mining Co.
executed an operating agreement whereby Nielson
operated and managed the mining properties owned by
Lepanto for a management fee of P2,500.00 a month and
a 10% participation in the net profits resulting from the
operation of the mining properties, for a period of five (5)
years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years,
but in the meantime, the Pacific War broke out in
December, 1941.
In January, 1942 operation of the mining properties was
disrupted on account of the war. In February of 1942, the
mill, power plant, supplies on hand, equipment,
concentrates on hand and mines, were destroyed upon
orders of the United States Army, to prevent their
utilization by the invading Japanese Army. The Japanese
forces thereafter occupied the mining properties,
operated the mines during the continuance of the war,
and who were ousted from the mining properties only in
August of 1945. After the mining properties were
liberated from the Japanese forces, LEPANTO took
possession thereof and embarked in rebuilding and
reconstructing the mines and mill. The rehabilitation and
reconstruction of the mine and mill was not completed
until 1948. On June 26, 1948 the mines resumed
operation under the exclusive management of LEPANTO.
Shortly after the mines were liberated from the Japanese
invaders in 1945, a disagreement arose between
NIELSON and LEPANTO over the status of the operating
contract in question which as renewed expired in 1947.
Under the terms thereof, the management contract shall
remain in suspense in case fortuitous event or force
majeure, such as war or civil commotion, adversely
affects the work of mining and milling.
On Motion for Reconsideration, Lepanto asserts for the
first time that the management contract in question is a
contract of agency such that it has the right to revoke and
terminate the said contract, as it did terminate the same,
under the law of agency, and particularly pursuant to
Article 1733 of the Old Civil Code (Article 1920 of the New
Civil Code).
Issue:
(1) Whether or not the management contract is a
contract of agency that can be terminated by
Lepanto at any time
(2) Whether or not such suspension had the effect of
extending the period of the management contract
for the period of said suspension
(3) Whether or not stock dividends can be issued as
payment for the services rendered under the
management contract
Held:
(1) NO.
From the annual report for 1936, and from the provision
of paragraph XI of the Management contract, the
employment by Lepanto of Nielson to operate and
manage its mines was principally in consideration of the
know-how and technical services that Nielson offered
Lepanto. The contract thus entered into pursuant to the
offer made by Nielson and accepted by Lepanto was a
"detailed operating contract." It was not a contract of
agency. Nowhere in the record is it shown that Lepanto
considered Nielson as its agent and that Lepanto
terminated the management contract because it had lost
its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the
management contract in 1945, following the liberation of
the mines from Japanese control, because the relation
between it and Nielson was one of agency and as such it
could terminate the agency at will, is, therefore,
untenable. On the other hand, it can be said that, in
asserting that it had terminated or cancelled the
management contract in 1945, Lepanto had thereby
violated the express terms of the management contract.
The management contract was renewed to last until
January 31, 1947, so that the contract had yet almost two
years to go — upon the liberation of the mines in 1945.
There is no showing that Nielson had ceased to prosecute
the operation and development of the mines in good faith
and in accordance with approved mining practice which
would warrant the termination of the contract upon ninety
days written notice. In fact there was no such written
notice of termination. It is an admitted fact that Nielson
ceased to operate and develop the mines because of the
war — a cause beyond the control of Nielson.
Indeed, if the management contract in question was
intended to create a relationship of principal and agent
between Lepanto and Nielson, paragraph XI of the
contract should not have been inserted because, as
provided in Article 1733 of the old Civil Code, agency is
essentially revocable at the will of the principal - that
OCRA Notes | 41
means, with or without cause. But precisely said
paragraph XI was inserted in the management contract
to provide for the cause for its revocation. The provision
of paragraph XI must be given effect.
In the construction of an instrument where there are
several provisions or particulars, such a construction is, if
possible, to be adopted as will give effect to all, 3 and if
some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import
which is most adequate to render it effectual.
By express stipulation of the parties, the management
contract in question is not revocable at the will of Lepanto.
We rule that this management contract is not a contract
of agency as defined in Article 1709 of the old Civil Code,
but a contract of lease of services as defined in Article
1544 of the same Code. This contract can not be
unilaterally revoked by Lepanto.
(2) YES.
A careful scrutiny of Clause II of the management
contract will at once reveal that in order that the
management contract may be deemed suspended two
events must take place which must be brought in a
satisfactory manner to the attention of defendant within
a reasonable time, to wit: (1) the event constituting the
force majeure must be reasonably beyond the control of
Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to
undertake. As long as these two condition exist the
agreement is deem suspended.
Lepanto mines were liberated on August 1, 1945, but
because of the period of rehabilitation and reconstruction
that had to be made as a result of the destruction of the
mill, power plant and other necessary equipment for its
operation it cannot be said that the suspension of the
contract ended on that date. Hence, the contract must
still be deemed suspended during the succeeding years of
reconstruction and rehabilitation, and this period can only
be said to have ended on June 26, 1948 when, as
reported by the defendant, the company officially
resumed the mining operations of the Lepanto. It should
here be stated that this period of suspension from
February, 1942 to June 26, 1948 is the one urged by
Nielson & Co.
The nature of the contract for the management and
operation of mines justifies the interpretation of the force
majeure clause, that a period equal to the period of
suspension due to force majeure should be added to the
original term of the contract by way of an extension. The
SC, therefore, reiterate the ruling in its decision that the
management contract in the instant case was suspended
from February, 1942 to June 26, 1948, and that from the
latter date the contract had yet five years to go.
(3) NO.
Under Section 16 of the Corporation Law stock dividends
can not be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar
Nielson can not be paid in shares of stock which form part
of the stock dividends of Lepanto for services it rendered
under the management contract. We sustain the
contention of Lepanto that the understanding between
Lepanto and Nielson was simply to make the cash value
of the stock dividends declared as the basis for
determining the amount of compensation that should be
paid to Nielson, in the proportion of 10% of the cash value
of the stock dividends declared. And this conclusion of
Ours finds support in the record.
Nielson is entitled to payment by Lepanto of P300,000.00
in cash, which is equivalent to 10% of the money value
of the stock dividends worth P3,000,000.00 which were
declared on November 28, 1949 and on August 20, 1950,
with interest thereon at the rate of 6% from February 6,
1958.
ISLAMIC DIRECTORATE v. CA
Facts: Islamic leaders of all Muslim major tribal groups in
the Philippines headed by Dean Cesar Adib Majul
organized and incorporated the ISLAMIC DIRECTORATE
OF THE PHILIPPINES (IDP), the primary purpose of which
is to establish an Islamic Center in Quezon City for the
construction of a "Mosque (prayer place), Madrasah
(Arabic School), and other religious infrastructures" so as
to facilitate the effective practice of Islamic faith in the
area.
Toward this end, the Libyan government donated money
to the IDP to purchase land at Culiat, Tandang Sora,
Quezon City, to be used as a Center for the Islamic
populace. The land, with an area of 49,652 square
meters, was covered by two titles.
In 1972, after the purchase of the land by the Libyan
government in the name of IDP, Martial Law was declared
by the late President Ferdinand Marcos. Most of the
members of the 1971 Board of Trustees like Senators
Mamintal Tamano, Salipada Pendatun, Ahmad Alonto,
and Congressman Al-Rashid Lucman flew to the Middle
East to escape political persecution.
OCRA Notes | 42
Thereafter, two Muslim groups sprung, the Carpizo
Group, headed by Engineer Farouk Carpizo, and the
Abbas Group, led by Mrs. Zorayda Tamano and Atty.
Firdaussi Abbas. Both groups claimed to be the legitimate
IDP. In a suit between these two contending groups, SEC
came up with a decision declaring the election of both the
Carpizo Group and the Abbas Group as IDP board
members to be null and void. The SEC held that before
any election of the members of the Board of Trustees
could be conducted, there must be an approved by-laws
to govern the internal government of the association
including the conduct of election.
Neither group however, took the necessary steps
prescribed by the SEC and thus, no valid election of the
members of the Board of Trustees of IDP was ever called.
Without having been properly elected as new members of
the Board of Trustee of IDP, the Carpizo Group caused to
be signed an alleged Board Resolution of the IDP,
authorizing the sale of the two parcels of land to Iglesia
ni Cristo which sale was evidenced by a Deed of Absolute
Sale.
IDP Board of Trustees headed by former Senator
Mamintal Tamano, or the Tamano Group, filed a petition
before the SEC, seeking to declare null and void the Deed
of Absolute Sale signed by the Carpizo Group.
Issue: Whether or not the Deed of Sale is void
Held: YES.
For the sale to be valid, the majority vote of the legitimate
Board of Trustees, concurred in by the vote of at least 2/3
of the bona fide members of the corporation should have
been obtained. These twin requirements were not met as
the Carpizo Group which voted to sell the Tandang Sora
property was a fake Board of Trustees, and those whose
names and signatures were affixed by the Carpizo Group
together with the sham Board Resolution authorizing the
negotiation for the sale were, from all indications, not
bona fide members of the IDP as they were made to
appear to be. Apparently, there are only fifteen (15)
official members of Islamic Directorate including the eight
(8) members of the Board of Trustees.
The resolution of the question as to whether or not the
SEC had jurisdiction to declare the subject sale null and
void is rendered moot and academic by the inherent
nullity of the highly dubious sale due to lack of consent of
the IDP, owner of the subject property. No end of
substantial justice will be served if we reverse the SEC's
conclusion on the matter, and remand the case to the
regular courts for further litigation over an issue which is
already determinable based on what we have in the
records.
DEE v. SEC
Facts: Naga Telephone Company, Inc. entered into a
contract with Communication Services, Inc. (CSI for
short) for the "manufacture, supply, delivery and
installation" of telephone equipment. In accordance with
this contract, Natelco issued 24,000 shares of common
stocks to CSI on the same date as part of the down
payment. Later, another 12,000 shares of common stocks
were issued to CSI. In both instances, no prior
authorization from the Board of Communications, now the
National Telecommunications Commission, was secured
in violation of the conditions imposed by the decision in
BOC Case NO. 74-84.
The stockholders of the Natelco held their annual
stockholders' meeting to elect their seven directors to
their Board of Directors, for the year 1979-1980. In this
election Pedro Lopez Dee (Dee for short) was unseated
as Chairman of the Board and President of the
Corporation, but was elected as one of the directors,
together with his wife, Amelia Lopez Dee. In the election
CSI was able to gain control of Natelco when the latter's
legal counsel, Atty. Luciano Maggay (Maggay for short)
won a seat in the Board with the help of CSI. In the
reorganization Atty. Maggay became president
Dee having been unseated in the election, filed a petition
in the SEC questioning the validity of the elections of May
19, 1979 upon the main ground that there was no valid
list of stockholders through which the right to vote could
be determined. As prayed for in the petition, a restraining
order was issued by the SEC placing Dee and the other
officers of the 1978-1979 Natelco Board in hold-over
capacity.
During the tenure of the Maggay Board, it did not reform
the contract with CSI, and entered into another contract
with CSI for the supply and installation of additional
equipment but also issued to CSI 113,800 shares of
common stock.
SEC en banc dismissed the petition of Dee. Pending MR,
the hearing officer without waiting for the decision of the
commission en banc to become final and executory
rendered an order stating that the election for directors
would be held on May 22, 1982.
A restraining order dated May 21, 1982 was issued by the
lower court commanding desistance from the scheduled
election until further orders. Nevertheless, on May 22,
OCRA Notes | 43
1982, as scheduled, the controlling majority of the
stockholders of the Natelco defied the restraining order,
and proceeded with the elections, under the supervision
of the SEC representatives. Lopez Dee group headed by
Messrs. Justino De Jesus and Julio Lopez Dee kept
insisting no elections were held and refused to vacate
their positions.
Per order of SEC with the assistance of the Sheriff of Naga
City, assisted by law enforcement agencies, installed the
newly elected directors and officers of the Natelco.
Antonio Villasenor filed a charge of contempt against the
newly elected directors and officers, claiming in press
conferences and over the radio airlanes that they actually
held and conducted elections on May 22, 1982 in the City
of Naga and that they have a new set of officers, in
violation if the restraining order.
The trial judge held the respondents in contempt and
ordered the reinstatement of the hold-over directors and
officers of NATELCO. IAC reversed the decision and the
Maggay Group was restored as the officers of NATELCO.
Issue: Whether or not the shares of stock issued by
NATELCO to CSI is void
Held: NO.
The power to issue shares of stocks in a corporation is
lodged in the board of directors and no stockholders
meeting is required to consider it because additional
issuance of shares of stocks does not need approval of
the stockholders. Consequently, no pre-emptive right of
Natelco stockholders was violated by the issuance of the
113,800 shares to CSI.
In order that the SEC can take cognizance of a case, the
controversy must pertain to any of the following
relationships: (a) between corporation, partnership or
association and the public; (b) between the corporation,
partnership, or association and its stockholders, partners,
members or officers; (c) between the corporation,
partnership or association and the state insofar as its
franchise, permit or license to operate is concerned; and
(d) among the stockholders, partners, or associates
themselves.
The SEC en banc directed the holding of a new election
which, through a conference attended by the hold-over
directors of Natelco accompanied by their lawyers and
presided by a SEC hearing officer, was scheduled on May
22, 1982. Contrary to the claim of Lee, that the case is
within the jurisdiction of the lower court as it does not
involve an intra-corporate matter but merely a claim of a
private party of the right to repurchase common shares
of stock of Natelco and that the restraining order was not
meant to stop the election duly called for by the SEC, it is
undisputed that the main objective of the lower court's
order of May 21, 1982 was precisely to restrain or stop
the holding of said election of officers and directors of
Natelco, a matter purely within the exclusive jurisdiction
of the SEC.
The trial judge in the lower court (CFI of Camarines Sur)
did not have jurisdiction to issue the restraining order,
disobedience thereto did not constitute contempt, as it is
necessary that the order be a valid and legal one. It is an
established rule that the court has no authority to punish
for disobedience of an order issued without authority.
JIAO v. NLRC
Facts: The petitioners were regular employees of the
Philippine Banking Corporation (Philbank), each with at
least ten years of service in the company. In February,
2000, Philbank absorbed Global Business Bank, Inc. As
their positions were included in the redundancy
declaration, the petitioners availed of the Special
Separation Pay, signed acceptance letters and executed
quitclaims in Globalbank’s favor in consideration of their
receipt of separation pay equivalent to 150% of their
monthly salaries for every year of service. In August 2002,
Metropolitan Bank and Trust Company (Metrobank)
acquired the assets and liabilities of Globalbank through
a Deed of Assignment of Assets and Assumption of
Liabilities. Subsequently, the petitioners filed separate
complaints for non-payment of separation pay with prayer
for damages and attorney’s fees before the National Labor
Relations Commission.
The petitioners asserted that, under the Old Gratuity Pay
Plan, they were entitled to an additional 50% of their
gratuity pay on top of 150% of one month’s salary for
every year of service they had already received. They
insisted that 100% of the 150% rightfully belongs to them
as their separation pay. Thus, the remaining 50% was
only half of the gratuity pay that they are entitled to under
the Old Plan. They argued that even if the New Gratuity
Plan were to be followed, the computation would be the
same, since Section 10.1 of the New Gratuity Plan
provides that employees who have attained a regular
status at the time of its implementation (March 8, 1991),
shall be entitled to which is the higher benefit between
the two Plans.
Globalbank asserted that the SSP should prevail and the
petitioners were no longer entitled to the additional 50%
gratuity pay which was already paid, the same having
OCRA Notes | 44
been included in the computation of their separation pay.
It maintained further that the waivers executed by the
petitioners should be held binding, since these were
executed in good faith and with the latter’s full knowledge
and understanding.
Metrobank denied any liability, citing the absence of an
employment relationship with the petitioners. It argued
that its acquisition of the assets and liabilities of
Globalbank did not include the latter’s obligation to its
employees. Moreover, Metrobank pointed out that the
petitioners’ employment with Globalbank had already
been severed before it took over the latter’s banking
operations.
Issue: Whether or not Metrobank can be held liable for
petitioners claims
Held: NO.
As a rule, a corporation that purchases the assets of
another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and
paid adequate consideration for such assets, except when
any of the following circumstances is present: (1) where
the purchaser expressly or impliedly agrees to assume the
debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where
the purchasing corporation is merely a continuation of the
selling corporation; and (4) where the selling corporation
fraudulently enters into the transaction to escape liability
for those debts.
Under the Deed of Assignments of Assets and Assumption
of Liabilities between Globalbank and Metrobank, the
latter accepted the former’s assets in exchange for
assuming its liabilities. The liabilities that Metrobank
assumed, which were clearly set out in Annex "A" of the
instrument, are: deposit liabilities; interbank loans
payable; bills payable; manager’s checks and demand
drafts outstanding; accrued taxes, interest and other
expenses; and deferred credits and other liabilities.
Based on this enumeration, the liabilities that Metrobank
assumed can be characterized as those pertaining to
Globalbank’s banking operations. They do not include
Globalbank’s liabilities to pay separation pay to its former
employees. This must be so because it is understood that
the same liabilities ended when the petitioners were paid
the amounts embodied in their respective acceptance
letters and quitclaims. Hence, this obligation could not
have been passed on to Metrobank.
While the petitioners’ allegations are true that Metrobank
is the "parent" company of Globalbank and that majority
of the latter’s board of directors are also members of the
former’s board of directors, one fact cannot be ignored –
that Globalbank has a separate and distinct juridical
personality. The petitioners’ own evidence – Global
Business Holdings, Inc.’s General Information Sheet filed
with the Securities and Exchange Commission – bears this
out.
Neither can there be piercing of the corporate veil. This
fiction of corporate entity can only be disregarded in cases
when it is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Moreover, to
justify the disregard of the separate juridical personality
of a corporation, the wrongdoing must be clearly and
convincingly established. In the instant case, none of
these circumstances is present such as to warrant piercing
the veil of corporate fiction and treating Globalbank and
Metrobank as one.
LOYOLA GRANDVILLAS HOMEOWNERS
ASSOCIATION v. CA
Facts: Loyola Grand Villas Homeowners Association was
registered with the Home Financing Corporation, as the
predecessor of Home Insurance and Guaranty
Corporation. It was organized by the developer of the
subdivision and its first president was Victorio V. Soliven,
himself the owner of the developer. For unknown
reasons, however, LGVHAI did not file its corporate by-
laws.
When Soliven inquired about the status of LGVHAI, Atty.
Joaquin A. Bautista, the head of the legal department of
the HIGC, informed him that LGVHAI had been
automatically dissolved for two reasons. First, it did not
submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of
corporate charter because HIGC had not received any
report on the association's activities. Apparently, this
information resulted in the registration of the South
Association with the HIGC covering Phases West I, East I
and East II.
These developments prompted the officers of the LGVHAI
to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration without
due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North
and South Associations by reason of the earlier issuance
of a certificate of registration in favor of LGVHAI.
OCRA Notes | 45
South Association contends that, since Section 46 uses
the word "must" with respect to the filing of by-laws,
noncompliance therewith would result in "self-extinction"
either due to non-occurrence of a suspensive condition or
the occurrence of a resolutory condition "under the
hypothesis that (by) the issuance of the certificate of
registration alone the corporate personality is deemed
already formed." It insists that no sanction need be
provided "because the mandatory nature of the provision
is so clear that there can be no doubt about its being an
essential attribute of corporate birth."
Issue: Whether or not the LGVHAI's failure to file its by-
laws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically
dissolving the said corporation
Held: NO.
A private corporation commences to have corporate
existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a
certificate of incorporation under its official seal. The
requirement for the filing of by-laws under Section 46 of
the Corporation Code within one month from official
notice of the issuance of the certificate of incorporation
presupposes that it is already incorporated, although it
may file its by-laws with its articles of incorporation.
Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum), Section 46 reveals the
legislative intent to attach a directory, and not mandatory,
meaning for the word "must" in the first sentence thereof.
Note should be taken of the second paragraph of the law
which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the
Code rules out mandatory compliance with the
requirement of filing the by-laws "within one (1) month
after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange
Commission." It necessarily follows that failure to file the
by-laws within that period does not imply the "demise" of
the corporation. By-laws may be necessary for the
"government" of the corporation but these are
subordinate to the articles of incorporation as well as to
the Corporation Code and related statutes.
Although the Corporation Code requires the filing of by-
laws, it does not expressly provide for the consequences
of the non-filing of the same within the period provided
for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, which provided
that failure to file by laws within the required period will
give the Commission the power to suspend, or revoke,
after proper notice and hearing, the franchise or
certificate of registration of the Corporation.
There can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic
institution, agency or society. In other words, the
incorporators must be given the chance to explain their
neglect or omission and remedy the same.
CHINA BANKING CORPORATION v. CA
Facts: Galicano Calapatia, Jr. a stockholder of Valley
Golf & Country Club, Inc. pledged his Stock
Certificate No. 1219 to China Banking Corporation.
The deed of pledge executed by Calapatia in CBC’s
favor was duly noted in its corporate books.
Calapatia obtained a loan of P20,000.00 from CBC,
payment of which was secured by the aforestated
pledge agreement still existing between Calapatia
and CBC. Due to Calapatia's failure to pay his
obligation, CBC filed a petition for extrajudicial
foreclosure and informed VCCI of the foreclosure
proceedings, requesting that the pledged stock be
transferred to CBC’s name and the same be recorded
in the corporate books. VGCCI expressed its inability
to accede to CBC’s request in view of Calapatia's
unsettled accounts with the club. Despite the
foregoing, Notary Public Antonio de Vera held a
public auction and CBC emerged as the highest
bidder at P20,000.00 for the pledged stock.
Consequently, CBC was issued the corresponding
certificate of sale.
Meanwhile, VGCCI caused to be published in the
newspaper Daily Express a notice of auction sale of
a number of its stock certificates, including
Calapatia’s share of stock. VGCCI insists that due to
Calapatia's failure to settle his delinquent accounts,
it had the right to sell the share in question in
accordance with the express provision found in its
by-laws. “For reason of delinquency" Calapatia's
stock was sold at the public auction.
CBC protested the sale and filed a case before the
RTC for the nullification of VGCCI’s auction sale. The
OCRA Notes | 46
same however was dismissed and CBC filed a similar
complaint before the SEC.
SEC Hearing Officer Manuel P. Perea rendered a decision
in favor of VGCCI, stating in the main that "(c)onsidering
that the said share is delinquent, (VGCCI) had valid
reason not to transfer the share in the name of the
petitioner in the books of (VGCCI) until liquidation of
delinquency." SEC reversed said decision.
CA nullified the orders of the SEC and its hearing officer
on ground of lack of jurisdiction over the subject matter
as the controversy between CBC and VGCCI is not intra-
corporate.
Issue:
(1) Whether or not the controversy between CBC and
VGCCI is intra-corporate as to vest jurisdiction in
the SEC
(2) Whether or not the CBC is bound by the by laws
of VGCCI
Held:
(1) YES.
Under the "sense-making and expeditious doctrine of
primary jurisdiction . . . the courts cannot or will not
determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where
the question demands the exercise of sound
administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to
determine technical and intricate matters of fact, and a
uniformity of ruling is essential to comply with the
purposes of the regulatory statute administered.
In this case, the need for the SEC's technical expertise
cannot be over-emphasized involving as it does the
meticulous analysis and correct interpretation of a
corporation's by-laws as well as the applicable provisions
of the Corporation Code in order to determine the validity
of VGCCI's claims. The SEC, therefore, took proper
cognizance of the instant case.
(2) NO.
In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the
transaction or agreement between said third party and
the shareholder was entered into, in this case, at the time
the pledge agreement was executed. VGCCI could have
easily informed CBC of its by-laws when it sent notice
formally recognizing CBC as pledgee of one of its shares
registered in Calapatia's name. CBC’s belated notice of
said by-laws at the time of foreclosure will not suffice.
A bona fide pledgee takes free from any latent or secret
equities or liens in favor either of the corporation or of
third persons, if he has no notice thereof, but not
otherwise. He also takes it free of liens or claims that may
subsequently arise in favor of the corporation if it has
notice of the pledge, although no demand for a transfer
of the stock to the pledgee on the corporate books has
been made.
Sec. 63 of the Corporation Code which provides that "no
shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term
"unpaid claim" refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising
from any other transaction." In the case at bar, the
subscription for the share in question has been fully paid
as evidenced by the issuance of Membership Certificate
No. 1219. What Calapatia owed the corporation were
merely the monthly dues. Hence, the aforequoted
provision does not apply.
ASSOCIATED BANK v. CA
Facts: On or about September 16, 1975, Associated
Banking Corporation and Citizens Bank and Trust
Company merged to form just one banking corporation
known as Associated Citizens Bank, later changed to
Associated Bank, the surviving bank.
On September 7, 1977, Lorenzo Sarmiento executed in
favor of CBTC a promissory note whereby Sarmiento
undertook to pay CBTC the sum of P2,500,000.00.
Despite repeated demands Sarmiento failed to pay the
amount due.
Associated Bank brought an action for collection.
Samiento contends that, since he issued the promissory
note to CBTC on September 7, 1977 — two years after
the merger agreement had been executed — CBTC could
not have conveyed or transferred to Associated Bank its
interest in the said note, which was not yet in existence
at the time of the merger. Therefore, Associated Bank,
the surviving bank, has no right to enforce the promissory
note on Sarmiento; such right properly pertains only to
CBTC.
Issue: Whether or not the surviving corporation have a
right to enforce a contract entered into by the absorbed
company subsequent to the date of the merger
OCRA Notes | 47
agreement, but prior to the issuance of a certificate of
merger by the Securities and Exchange Commission
Held: YES.
Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives
and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires
all their rights, privileges and powers, as well as their
liabilities.
The merger, however, does not become effective upon
the mere agreement of the constituent corporations. The
procedure to be followed is prescribed under the
Corporation Code. Section 79 of said Code requires the
approval by the Securities and Exchange Commission
(SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective
stockholders of the constituent corporations. The same
provision further states that the merger shall be effective
only upon the issuance by the SEC of a certificate of
merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation
ceases to exist; and when its rights, privileges, properties
as well as liabilities pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the
September 16, 1975 Agreement of Merger, provided that
its effectivity "shall, for all intents and purposes, be the
date when the necessary papers to carry out this [m]erger
shall have been approved by the Securities and Exchange
Commission."
The records do not show when the SEC approved the
merger. Sarmiento’s theory is that it took effect on the
date of the execution of the agreement itself, which was
September 16, 1975.
The fact that the promissory note was executed after the
effectivity date of the merger does not militate against
Associated Bank. The agreement itself clearly provides
that all contracts — irrespective of the date of execution
— entered into in the name of CBTC shall be understood
as pertaining to the surviving bank, Associated Bank.
Since said clause no longer specifically refers only to
contracts existing at the time of the merger, no distinction
should be made. The clause must have been deliberately
included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the
merger agreement a farcical interpretation aimed at
evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC
as the payee, the reference to CBTC in the note shall be
construed, under the very provisions of the merger
agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all
intents and purposes."
No other construction can be given to the unequivocal
stipulation. Being clear, plain and free of ambiguity, the
provision must be given its literal meaning and applied
without a convoluted interpretation. Verba lelegis non est
recedendum.
BABST v. CA
Facts: Elizalde Steel Consolidated, Inc. obtained from
Commercial Bank and Trust Company a loan in the
amount of P 8,015,900.84 evidenced by a promissory
note. ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of
P2,795,240.67.
CBTC opened letters of credit for ELISCON using the
credit facilities of Pacific Multi-Commercial Corporation
(MULTI) with the said bank, pursuant to the Resolution of
the Board of Directors of MULTI.
Subsequently, Antonio Roxas Chua and Chester G. Babst
executed a Continuing Suretyship, hereby they bound
themselves jointly and severally liable to pay any existing
indebtedness of MULTI to CBTC to the extent of
P8,000,000.00 each.
CBTC opened for ELISCON in favor of National Steel
Corporation three (3) domestic letters of credit which
ELISCON used to purchase tin black plates from National
Steel Corporation. ELISCON defaulted in its obligation to
pay the amounts of the letters of credit, leaving an
outstanding account, in the total amount of
P3,963,372.08.
Bank of the Philippine Islands (BPI) and CBTC entered
into a merger, wherein BPI, as the surviving corporation,
acquired all the assets and assumed all the liabilities of
CBTC.
Meanwhile, ELISCON encountered financial difficulties
and became heavily indebted to the Development Bank of
the Philippines (DBP). In order to settle its obligations,
ELISCON proposed to convey to DBP by way of dacion en
pago all its fixed assets mortgaged with DBP, as payment
for its total indebtedness in the amount of
OCRA Notes | 48
P201,181,833.16. ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt.
BPI, as successor-in-interest of CBTC, instituted with the
RTC for sum of money against ELISCON, MULTI and
Babst. BPI alleged that by virtue of its merger with CBTC,
it acquired all the latter's rights and interest including all
receivables; that in order to effect a valid novation by
substitution of debtors, the consent of the creditor must
be express; that in addition, the consent of BPI must
appear in its books, it being a private corporation; that
BPI intentionally did not consent to the assumption by
DBP of the obligations of ELISCON because it wanted to
preserve intact its causes of action and legal recourse
against Pacific Multi-Commercial Corporation and Babst as
sureties of ELISCON and not of DBP; that MULTI expressly
bound itself solidarily for ELISCON's obligations to CBTC
in its Resolution wherein it allowed the latter to use its
credit facilities; and that the suretyship agreement
executed by Babst does not exclude liabilities incurred by
MULTI on behalf of third parties, such as ELISCON.
Issue: Whether or not BPI consented to the assumption
by DBP of the obligations of ELISCON
Held: YES.
BPI's conduct evinced a clear and unmistakable consent
to the substitution of DBP for ELISCON as debtor. Hence,
there was a valid novation which resulted in the release
of ELISCON from its obligation to BPI, whose cause of
action should be directed against DBP as the new debtor.
Indeed, there exist clear indications that BPI was aware
of the assumption by DBP of the obligations of ELISCON.
In fact, BPI admits that ---
"the Development Bank of the Philippines (DBP), for a
time, had proposed a formula for the settlement of
Eliscon's past obligations to its creditors, including the
plaintiff [BPI], but the formula was expressly rejected by
the plaintiff as not acceptable (long before the filing of
the complaint at bar).”
The authority granted by BPI to its account officer to
attend the creditors' meeting was an authority to
represent the bank, such that when he failed to object to
the substitution of debtors, he did so on behalf of and for
the bank. Even granting arguendo that the said account
officer was not so empowered, BPI could have
subsequently registered its objection to the substitution,
especially after it had already learned that DBP had taken
over the assets and assumed the liabilities of ELISCON.
Its failure to do so can only mean an acquiescence in the
assumption by DBP of ELISCON's obligations. As
repeatedly pointed out by ELISCON and MULTI, BPI's
objection was to the proposed payment formula, not to
the substitution itself.
BPI gives no cogent reason in withholding its consent to
the substitution, other than its desire to preserve its
causes of action and legal recourse against the sureties
of ELISCON. It must be remembered, however, that while
a surety is solidarily liable with the principal debtor, his
obligation to pay only arises upon the principal debtor's
failure or refusal to pay. In the case at bar, there was no
indication that the principal debtor will default in
payment. In fact, DBP, which had stepped into the shoes
of ELISCON, was capable of payment. Its authorized
capital stock was increased by the government.
Notwithstanding the fact that a reliable institution backed
by government funds was offering to pay ELISCON's
debts, not as mere surety but as substitute principal
debtor, BPI, for reasons known only to itself, insisted in
going after the sureties.
The original obligation having been extinguished, the
contracts of suretyship executed separately by Babst and
MULTI, being accessory obligations, are likewise
extinguished. Hence, BPI should enforce its cause of
action against DBP.
MINDANAO SAVINGS v. WILLKOM
Facts: The First Iligan Savings and Loan Association, Inc.
(FISLAI) and the Davao Savings and Loan Association,
Inc. (DSLAI) entered into a merger, with DSLAI as the
surviving corporation. The articles of merger were not
registered with the SEC due to incomplete
documentation. DSLAI changed its corporate name to
Mindanao Savings and Loan Association, Inc. by way of
an amendment to Article 1 of its Articles of Incorporation.
Meanwhile, the Board of Directors of FISLAI passed and
approved Board Resolution No. 86-002, assigning its
assets in favor of DSLAI which in turn assumed the
former’s liabilities. The business of MSLAI, however,
failed. Hence, the Monetary Board of the Central Bank of
the Philippines ordered its closure and placed it under
receivership. The Monetary Board ordered the liquidation
of MSLAI, with Philippine Deposit Insurance Corporation
as its liquidator. Prior to the closure of MSLAI, Remedios
Uy was able to secure a judgment in her favor in an action
for collection of sum of money against FSLAI. Sheriff
Malayo Bantuas levied on six (6) parcels of land owned
by FISLAI located in Cagayan de Oro City, and the notice
of sale was subsequently published. During the public
auction Edward Willkom was the highest bidder. Upon
OCRA Notes | 49
expiration of the redemption period, new certificates of
title covering the subject properties were issued in favor
of Willkom. Thereafter, Willkom sold one of the subject
parcels of land to Gilda Go.
MSLAI, represented by PDIC, filed before the RTC a
complaint for Annulment of Sheriff’s Sale, Cancellation of
Title and Reconveyance of Properties against respondents
Willkom, Go, Uy and deputy Sheriff Bantuas. MSLAI
alleged that the execution of the RTC decision in favor of
Uy was illegal and contrary to law and jurisprudence, not
only because PDIC was not notified of the execution sale,
but also because the assets of an institution placed under
receivership or liquidation such as MSLAI should be
deemed in custodia legis and should be exempt from any
order of garnishment, levy, attachment, or execution.
In their Answer, respondents averred that MSLAI had no
cause of action against them or the right to recover the
subject properties because MSLAI is a separate and
distinct entity from FISLAI. They further contended that
the "unofficial merger" between FISLAI and DSLAI (now
MSLAI) did not take effect considering that the merging
companies did not comply with the formalities and
procedure for merger or consolidation as prescribed by
the Corporation Code of the Philippines. Finally, they
claimed that FISLAI is still a SEC registered corporation
and could not have been absorbed by MSLAI.
Issue: Whether or not the merger between FISLAI and
DSLAI (now MSLAI) valid and effective
Held: NO.
The steps necessary to accomplish a merger or
consolidation, as provided for in Sections 76, 77, 78, and
79 of the Corporation Code, are:
(1) The board of each corporation draws up a plan of
merger or consolidation. Such plan must include any
amendment, if necessary, to the articles of incorporation
of the surviving corporation, or in case of consolidation,
all the statements required in the articles of incorporation
of a corporation.
(2) Submission of plan to stockholders or members of
each corporation for approval. A meeting must be called
and at least two (2) weeks’ notice must be sent to all
stockholders or members, personally or by registered
mail. A summary of the plan must be attached to the
notice. Vote of two-thirds of the members or of
stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when
proper, must be respected.
(3) Execution of the formal agreement, referred to as the
articles of merger o[r] consolidation, by the corporate
officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation
to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the
issuance of a certificate of merger by the SEC, subject to
its prior determination that the merger is not inconsistent
with the Corporation Code or existing laws. Where a party
to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency
should first be obtained.
In this case, it is undisputed that the articles of merger
between FISLAI and DSLAI were not registered with the
SEC due to incomplete documentation. Consequently, the
SEC did not issue the required certificate of merger. Even
if it is true that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact remains
that no certificate was issued by the SEC. Such merger is
still incomplete without the certification.
The issuance of the certificate of merger is crucial
because not only does it bear out SEC’s approval but it
also marks the moment when the consequences of a
merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation ceases
to exist but its rights and properties, as well as liabilities,
shall be taken and deemed transferred to and vested in
the surviving corporation.
The same rule applies to consolidation which becomes
effective not upon mere agreement of the members but
only upon issuance of the certificate of consolidation by
the SEC. When the SEC, upon processing and examining
the articles of consolidation, is satisfied that the
consolidation of the corporations is not inconsistent with
the provisions of the Corporation Code and existing laws,
it issues a certificate of consolidation which makes the
reorganization official. The new consolidated corporation
comes into existence and the constituent corporations are
dissolved and cease to exist.
OCRA Notes | 50
There being no merger between FISLAI and DSLAI (now
MSLAI), for third parties such as respondents, the two
corporations shall not be considered as one but two
separate corporations. A corporation is an artificial being
created by operation of law. It possesses the right of
succession and such powers, attributes, and properties
expressly authorized by law or incident to its existence. It
has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to
which it may be related. Being separate entities, the
property of one cannot be considered the property of the
other.
Thus, in the instant case, as far as third parties are
concerned, the assets of FISLAI remain as its assets and
cannot be considered as belonging to DSLAI and MSLAI,
notwithstanding the Deed of Assignment wherein FISLAI
assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in
Article 1625 of the Civil Code, "an assignment of credit,
right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case
the assignment involves real property." The certificates of
title of the subject properties were clean and contained
no annotation of the fact of assignment. Respondents
cannot, therefore, be faulted for enforcing their claim
against FISLAI on the properties registered under its
name. Accordingly, MSLAI, as the successor-in-interest of
DSLAI, has no legal standing to annul the execution sale
over the properties of FISLAI. With more reason can it not
cause the cancellation of the title to the subject properties
of Willkom and Go.
It is a rule that novation by substitution of debtor must
always be made with the consent of the creditor. Since
novation implies a waiver of the right which the creditor
had before the novation, such waiver must be express.
In this case, there was no showing that Uy, the creditor,
gave her consent to the agreement that DSLAI (now
MSLAI) would assume the liabilities of FISLAI. Such
agreement cannot prejudice Uy. Thus, the assets that
FISLAI transferred to DSLAI remained subject to
execution to satisfy the judgment claim of Uy against
FISLAI. The subsequent sale of the properties by Uy to
Willkom, and of one of the properties by Willkom to Go,
cannot, therefore, be questioned by MSLAI.
Y-I LEISURE PHILIPPINES INC. v. YU
Facts: Mt. Arayat Development Co. Inc. (MADCI) offered
for sale shares of a golf and country club located in the
vicinity of Mt. Arayat in Arayat, Pampanga, for the price
of P550.00 per share. Relying on the representation of
MADCI's brokers and sales agents, James Yu bought 500
golf and 150 country club shares for a total price of
P650,000.00 which he paid by installment with fourteen
(14) Far East Bank and Trust Company (FEBTC) checks.
Upon full payment of the shares to MADCI, Yu visited the
supposed site of the golf and country club and discovered
that it was non-existent. In a letter, Yu demanded from
MADCI that his payment be returned to him. MADCI
recognized that Yu had an investment of P650,000.00,
but the latter had not yet received any refund.
Yu filed with the RTC a complaint for collection of sum of
money and damages with prayer for preliminary
attachment against MADCI and its president Rogelio
Sangil (Sangil) to recover his payment for the purchase of
golf and country club shares. In his transactions with
MADCI, Yu alleged that he dealt with Sangil, who used
MADCI's corporate personality to defraud him.
After the pre-trial, Yu filed an Amended Complaint,
wherein he also impleaded [petitioners] Yats
International Ltd. (YIL), Y-I Leisure Phils., Inc. (YILPI)
and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he
discovered in the Registry of Deeds of Pampanga that,
substantially, all the assets of MADCI, consisting of one
hundred twenty (120) hectares of land located in
Magalang, Pampanga, were sold to YIL, YILPI and YICRI.
The transfer was done in fraud of MADCI's creditors, and
without the required approval of its stockholders and
board of directors under Section 40 of the Corporation
Code. Yu also alleged that Sangil even filed a case in
Pampanga which assailed the said irregular transfers of
lands.
Issue: Whether or not fraud must exist in the transfer of
all the corporate assets in order for the transferee to
assume the liabilities of the transferor—NO
Whether or not petitioners can be held liable to Yu.—YES.
Held:
The Nell Doctrine states the general rule that the transfer
of all the assets of a corporation to another shall not
render the latter liable to the liabilities of the transferor.
The following are the exceptions:
1. Where the purchaser expressly or impliedly
agrees to assume such debts;
2. Where the transaction amounts to a consolidation
or merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and
OCRA Notes | 51
 4. Where the transaction is entered into fraudulently capacity. Fittingly, the proper provision of law that is
in order to escape liability for such debts. contemplated by this exception would be Section 40 of
the Corporation Code. Section 40 refers to the sale, lease,
The general rule expressed by the doctrine reflects the
exchange or disposition of all or substantially all of the
principle of relativity under Article 1311 of the Civil Code.
corporation's assets, including its goodwill. The sale under
Contracts, including the rights and obligations arising
this provision does not contemplate an ordinary sale of all
therefrom, are valid and binding only between the
corporate assets; the transfer must be of such degree that
contracting parties and their successors-in-interest. Thus,
the transferor corporation is rendered incapable of
despite the sale of all corporate assets, the transferee
continuing its business or its corporate purpose.
corporation cannot be prejudiced as it is not in privity with
the contracts between the transferor corporation and its Section 40 suitably reflects the business-enterprise
creditors. transfer under the exception of the Nell Doctrine because
the purchasing or transferee corporation necessarily
The first exception under the Nell Doctrine, where the
continued the business of the selling or transferor
transferee corporation expressly or impliedly agrees to
corporation. Given that the transferee corporation
assume the transferor's debts, is provided under Article
acquired not only the assets but also the business of the
2047 of the Civil Code. When a person binds himself
transferor corporation, then the liabilities of the latter are
solidarity with the principal debtor, then a contract of
inevitably assigned to the former.
suretyship is produced. Necessarily, the corporation which
expressly or impliedly agrees to assume the transferor's It must be clarified, however, that not every transfer of
debts shall be liable to the same. the entire corporate assets would qualify under Section
40. It does not apply (1) if the sale of the entire property
The second exception under the doctrine, as to the
and assets is necessary in the usual and regular course of
merger and consolidation of corporations, is well-
business of corporation, or (2) if the proceeds of the sale
established under Sections 76 to 80, Title X of the
or other disposition of such property and assets will be
Corporation Code. If the transfer of assets of one
appropriated for the conduct of its remaining business.
corporation to another amounts to a merger or
Thus, the litmus test to determine the applicability of
consolidation, then the transferee corporation must take
Section 40 would be the capacity of the corporation to
over the liabilities of the transferor.
continue its business after the sale of all or substantially
Another exception of the doctrine, where the sale of all all its assets.
corporate assets is entered into fraudulently to escape
The exception of the Nell doctrine, which finds its legal
liability for transferor's debts, can be found under Article
basis under Section 40, provides that the transferee
1388 of the Civil Code. It provides that whoever acquires
corporation assumes the debts and liabilities of the
in bad faith the things alienated in fraud of creditors, shall
transferor corporation because it is merely a continuation
indemnify the latter for damages suffered. Thus, if there
of the latter's business. A cursory reading of the exception
is fraud in the transfer of all the assets of the transferor
shows that it does not require the existence of fraud
corporation, its creditors can hold the transferee liable.
against the creditors before it takes full force and effect.
The legal basis of the last in the four (4) exceptions to the Indeed, under the Nell Doctrine, the transferee
Nell Doctrine, where the purchasing corporation is merely corporation may inherit the liabilities of the transferor
a continuation of the selling corporation, is challenging to despite the lack of fraud due to the continuity of the
determine. In his book, Philippine Corporate Law, Dean latter's business.
Cesar Villanueva explained that this exception
The purpose of the business-enterprise transfer is to
contemplates the "business-enterprise transfer." In such
protect the creditors of the business by allowing them a
transfer, the transferee corporation's interest goes
remedy against the new owner of the assets and business
beyond the assets of the transferor's assets and its
enterprise. Otherwise, creditors would be left "holding the
desires to acquire the latter's business enterprise,
bag," because they may not be able to recover from the
including its goodwill.
transferor who has "disappeared with the loot," or against
In this last exception, the transferee purchases not only the transferee who can claim that he is a purchaser in
the assets of the transferor, but also its business. As a good faith and for value. Based on the foregoing, as the
result of the sale, the transferor is merely left with its exception of the Nell doctrine relates to the protection of
juridical existence, devoid of its industry and earning the creditors of the transferor corporation, and does not

OCRA Notes | 52
depend on any deceit committed by the transferee -
corporation, then fraud is certainly not an element of the
business enterprise doctrine.
Synthesizing Section 40 and the previous rulings of this
Court, it is apparent that the business-enterprise transfer
rule applies when two requisites concur: (a) the transferor
corporation sells all or substantially all of its assets to
another entity; and (b) the transferee corporation
continues the business of the transferor corporation. Both
requisites are present in this case.
Based on these factual findings, the Court is convinced
that MADCI indeed had assets consisting of 120 hectares
of landholdings in Magalang, Pampanga, to be developed
into a golf course, pursuant to its primary purpose.
Because of its alleged violation of the MOA, however,
MADCI was made to transfer all its assets to the
petitioners. No evidence existed that MADCI subsequently
acquired other lands for its development projects. Thus,
MADCI, as a real estate development corporation, was left
without any property to develop eventually rendering it
incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
Section 40 must apply.
Consequently, the transfer of the assets of MADCI to the
petitioners should have complied with the requirements
under Section 40. Nonetheless, the present petition is not
concerned with the validity of the transfer; but Uy’s claim
of refund of his P650,000.00 payment for golf and country
club shares. Both the CA and the RTC ruled that MADCI
and Sangil were liable.
While the Corporation Code allows the transfer of all or
substantially all of the assets of a corporation, the transfer
should not prejudice the creditors of the assignor
corporation. Under the business-enterprise transfer, the
petitioners have consequently inherited the liabilities of
MADCI because they acquired all the assets of MADCI.
The continuity of MADCI's land developments is now in
the hands of the petitioners, with all its assets and
liabilities. There is absolutely no certainty that Yu can still
claim its refund from MADCI with the latter losing all its
assets. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors
will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money
would be to assert his claim against the petitioners as
transferees of the assets.
The petitioners, however, are not left without recourse as
they can invoke the free and harmless clause under the
MOA. In business-enterprise transfer, it is possible that
the transferor and the transferee may enter into a
contractual stipulation stating that the transferee shall not
be liable for any or all debts arising from the business
which were contracted prior to the time of transfer. Such
stipulations are valid, but only as to the transferor and the
transferee. These stipulations, though, are not binding on
the creditors of the business enterprise who can still go
after the transferee for the enforcement of the liabilities.
PHILIPPINE GEOTHERMAL, INC. EMPLOYEES
UNION v. UNOCAL PHILIPPINES, INC.
Facts: Unocal Corporation executed an Agreement and
Plan of Merger (Merger Agreement) with Chevron Texaco
Corporation (Chevron) and Blue Merger Sub, Inc. (Blue
Merger). After the merger, Blue Merger, as the surviving
corporation, changed its name to Unocal Corporation.
Unocal Corporation executed a Collective Bargaining
Agreement with Philippine Geothermal, Inc. Employees
Union. However, the Union wrote Unocal Corporation
asking for the separation benefits provided for under the
Collective Bargaining Agreement. According to the Union,
the Merger Agreement of Unocal Corporation, Blue
Merger, and Chevron resulted in the closure and cessation
of operations of Unocal Philippines Inc., formerly known
as Philippine Geothermal, Inc., and the implied dismissal
of its employees. The Union insists that the "cessation of
operations" contemplated in the Collective Bargaining
Agreement and the Memorandum of Agreement must
be liberally interpreted to include mergers, and that
doubts must be resolved in favor of labor. Unocal
Philippines refused the Union's request and asserted that
the employee-members were not terminated and that the
merger did not result in its closure or the cessation of its
operations. Furthermore, Unocal Philippines asserted that
it was not a party to the merger as it was a subsidiary of
Unocal California and, thus, had a separate and distinct
personality from Unocal Corporation.
Issue: Whether or not there is implied dismissal of the
employees as a consequence of the merger
Held: NO.
The claim that Unocal Philippines is not a party to the
merger is a new allegation raised for the first time on
appeal before the Court of Appeals. Unocal Philippines
did state that Unocal Corporation was the party to the
Merger Agreement with Blue Merger and Chevron.
Nonetheless, it did not use this allegation to argue that it
had a separate and distinct personality from Unocal
Corporation and is, thus, not a party to the Merger
OCRA Notes | 53
Agreement. Respondent only raised this argument in its
appeal before the Court of Appeals. The Union was denied
the opportunity to present evidence to disprove this new
claim. Therefore, the Court of Appeals erred in taking into
consideration this argument.
A merger is a consolidation of two or more corporations,
which results in one or more corporations being absorbed
into one surviving corporation. The separate existence of
the absorbed corporation ceases, and the surviving
corporation "retains its identity and takes over the rights,
privileges, franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s)."
Section 80 of the Corporation Code provides that the
surviving corporation shall possess all the rights,
privileges, properties, and receivables due of the
absorbed corporation. Moreover, all interests of,
belonging to, or due to the absorbed corporation "shall be
taken and deemed to be transferred to and vested in such
surviving or consolidated corporation without further act
or deed." The surviving corporation likewise acquires all
the liabilities and obligations of the absorbed corporation
as if it had itself incurred these liabilities or obligations.
This acquisition of all assets, interests, and liabilities of
the absorbed corporation necessarily includes the rights
and obligations of the absorbed corporation under its
employment contracts. Consequently, the surviving
corporation becomes bound by the employment contracts
entered into by the absorbed corporation. These
employment contracts are not terminated. They subsist
unless their termination is allowed by law.
This interpretation is consistent with the constitutional
provisions and policies on work and labor which ensure
that workers' rights are protected as they are imbued with
public interest. They likewise prevent an interpretation of
any law, rule, or agreement, which may violate worker's
rights acquired during their employment.
Associate Justice Brion likewise discussed the nature of a
merger agreement vis-a-vis the employment contracts:
“This recognition is not to objectify the workers as assets
and liabilities, but to recognize — using the spirit of the
law and constitutional standards — their necessary
involvement and need to be provided for in a merger
situation. Neither does this step, directly impacting on the
employees' individual employment contracts, detract from
the in personam character of these contracts. For in a
merger situation, no change of employer is involved; the
change is in the internal personality of the employer
rather than through the introduction of a new employer
which would have novated the contract. This conclusion
proceeds from the nature of a merger as a corporate
development regulated by law and the merger's
implementation through the parties' merger agreement.”
The merger of Unocal Philippines with Blue Merger and
Chevron does not result in an implied termination of the
employment of the Union’s members. Assuming Unocal
Philippines is a party to the merger, its employment
contracts are deemed to subsist and continue by "the
combined operation of the Corporation Code and the
Labor Code under the backdrop of the labor and social
justice provisions of the Constitution."
Separation Pay is granted only under the following
exceptional cases: (1) the dismissal of the employee was
not for serious misconduct; and (2) it did not reflect on
the moral character of the employee.
In this case, there is no dismissal of the employees on
account of the merger. The Union does not deny that
Unocal Philippines actually continued its normal course of
operations after the merger, and that its members, as
employees, resumed their work with their tenure,
salaries, wages, and other benefits intact. The Union was
even able to execute with Unocal Corporation, after the
merger, the Collective Bargaining Agreement from which
it anchors its claims.
SUMIFRU v. BAYA
Facts: Bernabe Baya had been employed by AMS Farming
Corporation (AMSFC) and from then on, worked his way
to a supervisory rank. As a supervisor, Baya joined the
union of supervisors, and eventually, formed AMS
Kapalong Agrarian Reform Beneficiaries Multipurpose
Cooperative (AMSKARBEMCO), the basic agrarian reform
organization of the regular employees of AMSFC. Baya
was reassigned to a series of supervisory positions in
AMSFC's sister company, Davao Fruits Corporation (DFC)
where he also became a member of the latter's
supervisory union while at the same time, remaining
active at AMSKARBEMCO. Later on and upon
AMSKARBEMCO's petition before the Department of
Agrarian Reform (DAR), some 220 hectares of AMSFC's
513-hectare banana plantation were covered by the
Comprehensive Agrarian Reform Law. Eventually, said
portion was transferred to AMSFC's regular employees as
Agrarian Reform Beneficiaries (ARBs), including Baya.
Thereafter, the ARBs explored a possible agribusiness
venture agreement with AMSFC, but the talks broke
down, prompting the Provincial Agrarian Reform Officer
to terminate negotiations and, consequently, give
AMSKARBEMCO freedom to enter into similar agreement
OCRA Notes | 54
with other parties. The ARBs held a referendum in order
to choose as to which group between AMSKARBEMCO or
SAFFPAI, an association of pro-company beneficiaries,
they wanted to belong 280 went to AMSKARBEMCO while
85 joined SAFFPAI. When AMSFC learned that
AMSKARBEMCO entered into an export agreement with
another company, it summoned AMSKARBEMCO officers,
including Baya, to lash out at them and even threatened
them that the ARBs' takeover of the lands would not push
through. Thereafter, Baya was again summoned, this
time by a DFC manager, who told the former that he
would be putting himself in a "difficult situation" if he will
not shift his loyalty to SAFFPAI; this notwithstanding,
Baya politely refused to betray his cooperative. A few days
later, Baya received a letter stating that his secondment
with DFC has ended, thus, ordering his return to AMSFC.
However, upon Baya's return to AMSFC, he was informed
that there were no supervisory positions available; thus,
he was assigned to different rank-and-file positions
instead. Baya's written request to be restored to a
supervisory position was denied, prompting him to file a
complaint for illegal dismissal against AMSFC and DFC.
CA set aside the NLRC ruling and reinstated that of the LA
with modification and ordering AMSFC and DFC to
solidarily pay Baya separation pay, 13th month pay, moral
damages as attorney's fees.
During the pendency of the CA proceedings, Sumifru
(Philippines) Corporation acquired DFC via merger.
Sumifru contends that it should only be held liable for the
period when Baya stayed with DFC as it only merged with
the latter and not with AMSFC.
Issue: Whether or not or not Sumifru should be held
solidarily liable with AMSFC's for Baya's monetary awards.
Held: YES.
Section 80 of the Corporation Code of the Philippines
clearly states that one of the effects of a merger is that
the surviving company shall inherit not only the assets,
but also the liabilities of the corporation it merged with.
In this case, it is worthy to stress that both AMSFC and
DFC are guilty of acts constitutive of constructive
dismissal performed against Baya. As such, they should
be deemed as solidarily liable for the monetary awards in
favor of Baya. Meanwhile, Sumifru, as the surviving entity
in its merger with DFC, must be held answerable for the
latter's liabilities, including its solidary liability with AMSFC
arising herein. Verily, jurisprudence states that "in the
merger of two existing corporations, one of the
corporations survives and continues the business, while
the other is dissolved and all its rights, properties and
liabilities are acquired by the surviving corporation, as in
this case.
Accordingly, Sumifru (Philippines) Corporation, as the
surviving entity in its merger with Davao Fruits
Corporation, shall be held answerable for the latter's
obligations as indicated in the CA decision as affirmed by
the SC.
BANK OF COMMERCE v. HEIRS OF DELA CRUZ
Facts: Rodolfo Dela Cruz is the sole owner and proprietor
of the Mamertha General Merchandising, an entity
engaged in sugar trading since 1970. He maintained a
bank account with Panasia Banking, Inc.
Sometime in October 1998, Dela Cruz discovered that
Panasia allowed his son, Allan Dela Cruz to withdraw
money from the said bank account/deposit without his
consent and/or authority. Upon discovery, he immediately
instructed Panasia not to allow his son to make any
withdrawals from his bank account and even sent a letter
to that effect. Despite said instruction and receipt of the
letter, Panasia still allowed and continued to allow Dela
Cruz's son, Allan Dela Cruz to withdraw from the said bank
account/deposit without his knowledge and consent. The
unauthorized withdrawals amounted to P56,223,066.07
as evidenced by Panasia's banking counter checks.
In the meantime, sometime in September, 2000, the Bank
of Commerce demanded payment from Dela Cruz the
amount of P27,150,000.00. Not having any knowledge of
obtaining or having obtained a loan from the Bank of
Commerce, Dela Cruz upon verification from the said bank
discovered that the loan payment demanded by the bank
refers to the loan he obtained from Panasia and that
pursuant to a Purchase and Sale Agreement entered into
between Panasia and Bank of Commerce on July 27,
2000, Panasia has been acquired by Bank of Commerce
transferring to the latter the former's assets and liabilities
on bank deposits.
As a consequence thereof, Dela Cruz demanded from the
Bank of Commerce to pay the liability of Panasia to him
and offered to compensate/set off his secured loan
obligation with Panasia in the amount of P27,150,000.00
by deducting the same from his outstanding claim of
P56,223,066.07. Dela Cruz claimed that he is entitled to
legal compensation or set-off and therefore, the Bank of
Commerce had no right to foreclose the mortgaged
properties since the principal obligation has already been
extinguished.
OCRA Notes | 55
The Bank of Commerce claimed that it purchased from
Panasia only selected accounts and liabilities. Dela Cruz's
loan account who does business under the name and style
of Mamertha General Merchandising was among those
acquired by it from Panasia by virtue of the Purchase and
Sale Agreement and Deed of Assignment both entered
into by and between Panasia and Bank of Commerce.
RTC declared the BOC and Panasia jointly and severally
liable to the late Rodolfo dela Cruz. RTC observed that:
“Common sense dictates that when Bank of Commerce
took over Panasia, it likewise took over its assets but also
its liabilities. It cannot say that only selected assets and
liabilities were the subject matter of the purchase
agreement. It cannot just pick its choice and forget the
other obligations which are not favorable to its business.”
CA concurred, pointing out that the failure of BOC to
formally offer the documents denominated as Purchase
and Sale Agreement and the Deed of Assignment was
fatal to BOC’s defense of not having assumed Panasia's
liabilities.
Issue: Whether or not BOC can be held solidarily liable
with Panasia to Dela Cruz
Held: NO. CA should have undone the RTC 's unfounded
assumption that BOC had merged with Panasia and had
thereby taken over all of the assets and liabilities of the
latter, including that for the negligent handling of dela
Cruz's account. Such assumption had neither factual nor
legal support in the records. Without the Sale and
Purchase Agreement being admitted in evidence, the
implication of BOC in the negligence of Panasia had no
factual basis for the simple reason that there was no
showing at all of BOC having specifically merged with
Panasia and thereby assumed the latter's liabilities.
Matters of judicial notice have three material requisites:
(1) the matter must be one of common and general
knowledge; (2) it must be well and authoritatively settled
and not doubtful or uncertain; and (3) it must be known
to be within the limits of the jurisdiction of the court. The
principal guide in determining what facts may be assumed
to be judicially known is that of notoriety. Hence, it can
be said that judicial notice is limited to facts evidenced by
public records and facts of general notoriety.
Contrary to the findings and conclusions of the RTC, the
merger of the BOC and Panasia was not of common
knowledge. It was overly presumptuous for the RTC to
thereby assume the merger because the element of
notoriety as basis for taking judicial notice of the merger
was loudly lacking. A merger is the union of two or more
existing corporations in which the surviving corporation
absorbs the others and continues the combined business.
The merger dissolves the non-surviving corporations, and
the surviving corporation acquires all the rights,
properties and liabilities of the dissolved corporations.
Considering that the merger involves fundamental
changes in the corporation, as well as in the rights of the
stockholders and the creditors, there must be an express
provision of law authorizing the merger. The merger does
not become effective upon the mere agreement of the
constituent corporations, but upon the approval of the
articles of merger by the Securities and Exchange
Commission issuing the certificate of merger as required
by Section 79 of the Corporation Code. Should any party
in the merger be a special corporation governed by its
own charter, the Corporation Code particularly mandates
that a favorable recommendation of the appropriate
government agency should first be obtained.
It is plain enough, therefore, that there were several
specific facts whose existence must be shown (not
assumed) before the merger of two or more corporations
can be declared as established. Among such facts are:
(1) the plan of merger that includes the terms and
mode of carrying out the merger and the
statement of the changes, if any, of the present
articles of the surviving corporation;
(2) the approval of the plan of merger by majority
vote of each of the boards of directors of the
concerned corporations at separate meetings;
(3) the submission of the plan of merger for the
approval of the stockholders or members of each
of the corporations at separate corporate
meetings duly called for the purpose;
(4) the affirmative vote of 2/3 of the outstanding
capital in case of stock corporations, or 2/3 of the
members in case of non-stock corporations;
(5) the submission of the approved articles of merger
executed by each of the constituent corporations
to the SEC; and
(6) the issuance of the certificate by the SEC on the
approval of the merger.
In this case, because dela Cruz's allegation of the merger
was specifically denied by the BOC, the RTC had
absolutely no factual and legal bases to take constructive
notice of any of the foregoing circumstances. It should
have required proof of the acquisition of the liability of
Panasia on the part of the BOC. Accordingly, if the RTC
and the CA could not reasonably declare the BOC
solidarily liable with Panasia for the latter's negligence,
OCRA Notes | 56
the dismissal of the amended complaint of dela Cruz
against BOC was in order.
ONG v. BPI FAMILY SAVINGS BANK
Facts: Spouses Francisco Ong and Betty Lim Ong and
Spouses Joseph Ong Chuan and Esperanza Ong Chuan
(collectively referred to as the petitioners) are engaged in
the business of printing under the name and style
"MELBROS PRINTING CENTER.” They executed a real
estate mortgage (REM) over their property situated in
Paco, Manila in favor of Bank of Southeast Asia as security
for a P15,000,000.00 term loan and P5,000,000.00 credit
line or a total of P20,000,000.00.
With regard to the P5,000,000.00 credit line, only
P3,000,000.00 was released. BSA promised to release the
remaining P2,000,000.00 conditioned upon the payment
of the P3,000,000.00 initially released to petitioners.
Petitioners acceded to the condition and paid the
P3,000,000.00 in full. However, BSA still refused to
release the P2,000,000.00. Petitioners then refused to
pay the amortizations due on their term loan.
Later on, BPI Family Savings Bank (BPI) merged with BSA,
thus, acquired all the latter's rights and assumed its
obligations. BPI filed a petition for extrajudicial
foreclosure of the REM for petitioners' default in the
payment of their term loan. In order to enjoin the
foreclosure, petitioners instituted an action for damages
with Temporary Restraining Order and Preliminary
Injunction against BPI.
BPI insists that it acted in good faith when it sought
extrajudicial foreclosure of the mortgage and that it was
not responsible for acts committed by its predecessor,
BSA.
Issue: Whether or not BPI can foreclose the mortgage
Held: NO.
BSA did not only incur delay in releasing the pre-agreed
credit line of P5,000,000.00 but likewise violated the
terms of its agreement with petitioners when it
deliberately failed to release the amount of P2,000,000.00
after petitioners complied with their terms and paid the
first P3,000,000.00 in full. The default attributed to
petitioners when they stopped paying their amortizations
on the term loan cannot be sustained by this Court
because long before they sent a Letter to BSA informing
the latter of their refusal to continue paying
amortizations, BSA had already reneged on its obligation
to release the amount previously agreed upon, i.e., the
P5,000,000.00 covered by the credit line.
Good faith is not an excuse to exempt BPI from the effects
of a merger or consolidation.
Section 80 (5) of the Corporation Code provides: “The
surviving or consolidated corporation shall be responsible
and liable for all the liabilities and obligations of each of
the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself
incurred such liabilities or obligations;”
Moreover, Section 1(e) of the Articles of Merger provides
that all liabilities and obligations of BSA shall be
transferred to and become the liabilities and obligations
of BPI in the same manner as if it had itself incurred such
liabilities or obligations.
Pursuant to such merger and consolidation, BPI's right to
foreclose the mortgage on petitioner's property depends
on the status of the contract and the corresponding
obligations of the parties originally involved, that is, the
agreement between its predecessor BSA and petitioner.
Since BSA incurred delay in the performance of its
obligations and subsequently cancelled the omnibus line
without petitioners' consent, its successor BPI cannot be
permitted to foreclose the loan for the reason that its
successor BSA violated the terms of the contract even
prior to petitioners' justified refusal to continue paying the
amortizations.
SEC v. CAP
Facts: To guarantee the payment of benefits under its
educational plans, College Assurance Plan Philippines,
Inc. (CAP) set up a Trust Fund contributing therein a
certain percentage of the amount actually collected from
each planholder. The Trust Fund, with the aid of trustee
banks, is invested in assets and securities with yields
higher than the projected increase in tuition fees. With
the adoption of the policy of deregulation of private
educational institutions by the Department of Education
in 1993 and the economic crisis and peso devaluation
which started in 1997, CAP and its Trust Fund were
adversely affected.
In compliance with the directive of SEC to submit a
funding scheme to correct the deficiency, CAP, among
others, proposed to purchase MRT III Bonds and assign
the same to the Trust Fund. Hence on August 6, 2002,
CAP purchased MRT III Bonds with a present value then
of $14 million from Smart and FEMI, and assigned the
same to the Trust Fund. The purchase price was to be
paid by CAP in sixty (60) monthly installments payable
over five (5) years.
OCRA Notes | 57
On August 23, 2005, CAP filed a Petition for
Rehabilitation. After finding the petition to be sufficient in
form and substance, a Stay Order was issued by the court
effectively staying and suspending the enforcement of all
claims against CAP. The 2006 Revised Business Plan was
approved by the court. Under the Rehabilitation Plan, CAP
intended to sell in 2009 the MRT Bonds at 60% of their
face value of US$ 81.2 million.
While negotiations to effect the sale were ongoing, Smart
demanded that CAP settle its outstanding balance of US$
10,680,045.25 and warned that, should CAP insist on
holding on to the MRT III Bonds instead of selling them,
Smart would demand the immediate return of the MRT III
Bonds as full and final settlement of CAP's outstanding
obligation. The Receiver denied that CAP has agreed to
pay its liabilities to FEMI and Smart from the proceeds of
the prospective sale of the MRT III Bonds.
In an Order, the trial court approved the sale of MRT III
Bonds "at the best possible price." Two days later, the
Receiver received a letter from FEMI that Smart intended
to annotate a notice of unpaid seller's lien on the MRT III
Bonds with Deutsche Bank, the custodian bank. However,
Smart opted not to do so and would instead assist in
finding a buyer provided that the seller's lien of US$ 9.5
million will be settled through the arrangement it
presented, subject to the approval of the rehabilitation
court.
The MRT III Bonds were in fact sold at US$ 21,501,760
to DBP and Land Bank. The receiver moved for the
payment of CAP’s obligations to Smart and FEMI.
Section 30 of R.A. No. 9829 expressly stipulates that the
trust fund is to be used at all times for the sole benefit of
the planholders, and cannot ever be applied to satisfy the
claims of the creditors of the company. Section 30
prohibits the utilization of the trust fund for purposes
other than for the benefit of the planholders. The allowed
withdrawals (specifically, the cost of benefits or services,
the termination values payable to the planholders, the
insurance premium payments for insurance-funded
benefits of memorial life plans and other costs) refer to
payments that the pre-need company had undertaken to
be made based on the contracts.
Even assuming that the obligations were incurred by CAP
in order to infuse sufficient money in the trust fund to
correct its deficiencies, such obligations should be paid for
by its assets, not by the trust fund. Indeed, Section 30
definitely provided that the trust fund could not be used
to satisfy the claims of CAP’s creditors.
MRT III Bonds already formed part of the assets of the
trust fund upon infusion. Yet, assuming that the unpaid
obligation to Smart and FEMI constituted an
administrative expense, its payment was the liability of
CAP’s assets, not of the trust fund. It is already clear and
definite enough that the trust fund was separate and
distinct from the corporate assets of CAP. In other words,
only the planholders as the beneficiaries of the trust fund
could claim against the trust fund, to the exclusion of
Smart and FEMI as CAP’s creditors.

CA reversed, stating that payment to Smart and FEMI

constituted "benefits" that could be validly withdrawn
from the trust fund pursuant to Rule 16.4 of the New
Rules on the Registration and Sale of Pre-Need Plans
under Section 16 of the Securities and Regulation Code
(New Rules) in relation to Section 30 of Republic Act No.
9829 (Pre-Need Code of the Philippines). Because the
MRT III Bonds had not been fully paid, the unpaid portion
of the purchase price thereof could not be considered as
part of the trust fund. At any rate CAP’s outstanding
obligation to Smart and FEMI could be considered as an
administrative expense not covered by the stay order, and
was an expense to preserve the assets of the trust fund.

Issue: Whether or not the unpaid portion of the purchase

price can be taken from the trust fund

Held: NO.

OCRA Notes | 58
MODULE 4
LIM TAY v. CA
Facts: Sy Guiok secured a loan from Lim Tay in the
amount of P40,000 payable within six (6) months. To
secure the payment of the aforesaid loan and interest
thereon, Guiok executed a Contract of Pledge in favor of
Lim Tay whereby he pledged his three hundred (300)
shares of stock in the Go Fay & Company Inc.
On the same date, Alfonso Sy Lim secured a loan from
Lim Tay in the amount of P40,000 payable in six (6)
months. To secure the payment of his loan, Sy Lim
executed a "Contract of Pledge" covering his three
hundred (300) shares of stock in Go Fay & Company Inc.
Guiok and Sy Lim endorsed their respective shares of
stock in blank and delivered the same to Lim Tay.
However, Guiok and Sy Lim failed to pay their respective
loans and the accrued interests thereon to Lim Tay.
Hence, Lim Tay filed before the SEC a "Petition for
Mandamus" against Go Fay & Company Inc. praying that
an order be issued directing the corporate secretary of Go
Fay & Co., Inc. to register the stock transfers and issue
new certificates in favor of Lim Tay. In the interim, Sy Lim
died. Guiok and the Intestate Estate of Alfonso Sy Lim,
represented by Conchita Lim, filed their Answer-In-
Intervention with the SEC alleging, inter alia, that SEC had
no jurisdiction and that the complaint states no cause of
action.
Issue:
(a) Whether or not SEC has jurisdiction
(b) Whether or not Lim Tay is entitled to relief of
Mandamus
Held:
(a) NO.
The registration of shares in a stockholder's name, the
issuance of stock certificates, and the right to receive
dividends which pertain to the said shares are all rights
that flow from ownership. The determination of whether
or not a shareholder is entitled to exercise the above-
mentioned rights falls within the jurisdiction of the SEC.
However, if ownership of the shares is not clearly
established and is still unresolved at the time the action
for mandamus is filed, then jurisdiction lies with the
regular courts. In the present case, Lim Tay’s claim that
he was the owner of the shares of stock in question has
no prima facie basis.
In his Complaint, Lim Tay alleged that, pursuant to the
contracts of pledge, he became the owner of the shares
when the term for the loans expired. This contractual
stipulation, which was part of the Complaint, shows that
Lim Tay was merely authorized to foreclose the pledge
upon maturity of the loans, not to own them. Such
foreclosure is not automatic, for it must be done in a
public or private sale. Nowhere did the Complaint mention
that Lim Tay had in fact foreclosed the pledge and
purchased the shares after such foreclosure. His status as
a mere pledgee does not, under civil law, entitle him to
ownership of the subject shares. It is also noteworthy that
Lim Tay’s Complaint did not aver that said shares were
acquired through extraordinary prescription, novation or
laches. Moreover, Lim Tay’s claim, subsequent to the
filing of the Complaint, that he acquired ownership of the
said shares through these three modes is not indubitable
and still has to be resolved. In fact, as will be shown, such
allegation-has no merit. Manifestly, the Complaint by itself
did not contain any prima facie showing that Lim Tay was
the owner of the shares of stocks. Quite the contrary, it
demonstrated that he was merely a pledgee, not an
owner. Accordingly, it failed to lay down a sufficient basis
for the SEC to exercise jurisdiction over the controversy.
In fact, the very allegations of the Complaint and its
annexes negated the jurisdiction of the SEC.
Without foreclosure and purchase at auction, pledgor is
not the owner of pledged shares. Lim Tay did not acquire
the shares by prescription either. The period of
prescription of any cause of action is reckoned only from
the date the cause of action accrued. Since a cause of
action requires as an essential element not only a legal
right of the plaintiff and a correlative obligation of the
defendant, but also an act or omission of the defendant
in violation of said legal right, the cause of action does
not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty."
Lim Tay expressly repudiated the pledge, only when he
filed his Complaint and claimed that he was not a mere
pledgee, but that he was already the owner of the shares.
Based on the foregoing, Lim Tay has not acquired the
certificates of stock through extraordinary prescription.
There is also no novation. Novation cannot be presumed
by (a) respondents' indorsement and delivery of the
certificates of stock covering the 600 shares, (b) Lim Tay’s
receipt of dividends from 1980 to 1983, and (c) the fact
that respondents have not instituted any action to recover
the shares since 1980. Novation is never presumed or
inferred.
OCRA Notes | 59
Neither can there be dacion en pago, in which the
certificates of stock are deemed sold to Lim Tay, the
consideration for which is the extinguishment of the loans
and the accrued interests thereon. Dacion en pago is a
form of novation in which a change takes place in the
object involved in the original contract. Absent an explicit
agreement, Lim Tay cannot simply presume dacion en
pago.
(b) NO.
The duty of a corporate secretary to record transfers of
stocks is ministerial. However, he cannot be compelled to
do so when the transferee's title to said shares has no
prima facie validity or is uncertain. More specifically, a
pledgor, prior to foreclosure and sale, does not acquire
ownership rights over the pledged shares and thus cannot
compel the corporate secretary to record his alleged
ownership of such shares on the basis merely of the
contract of pledge. Similarly, the SEC does not acquire
jurisdiction over a dispute when a party's claim to being a
shareholder is, on the face of the complaint, invalid or
inadequate or is otherwise negated by the very
allegations of such complaint. Mandamus will not issue to
establish a right, but only to enforce one that is already
established.
RURAL BANK OF LIPA v. CA
Facts: Reynaldo Villanueva, Sr., a stockholder of the Rural
Bank of Lipa City, executed a Deed of Assignment,
wherein he assigned his shares, as well as those of eight
(8) other shareholders under his control with a total of
10,467 shares, in favor of the stockholders of the Bank
represented by its directors Bernardo Bautista, Jaime
Custodio and Octavio Katigbak. Sometime thereafter,
Reynaldo Villanueva, Sr. and his wife, Avelina, executed
an Agreement wherein they acknowledged their
indebtedness to the Bank in the amount of Four Million
Pesos (P4,000,000.00), and stipulated that said debt will
be paid out of the proceeds of the sale of their real
property described in the Agreement.
At a meeting of the Board of Directors of the Bank on
November 15, 1993, the Villanueva spouses assured the
Board that their debt would be paid on or before
December 31 of that same year; otherwise, the Bank
would be entitled to liquidate their shareholdings,
including those under their control. In such an event,
should the proceeds of the sale of said shares fail to
satisfy in full the obligation, the unpaid balance shall be
secured by other collateral sufficient therefor. When the
Villanueva spouses failed to settle their obligation to the
Bank on the due date, the Board sent them a letter
demanding: (1) the surrender of all the stock certificates
issued to them; and (2) the delivery of sufficient collateral
to secure the balance of their debt amounting to
P3,346,898.54. The Villanuevas ignored the bank's
demands, whereupon their shares of stock were
converted into Treasury Stocks. Later, the Villanuevas,
through their counsel, questioned the legality of the
conversion of their shares.
On January 15, 1994, the stockholders of the Bank met
to elect the new directors and set of officers for the year
1994. The Villanuevas were not notified of said meeting.
Later on, Atty. Amado Ignacio, counsel for the Villanueva
spouses, questioned the legality of the said stockholders'
meeting and the validity of all the proceedings therein. In
reply, the new set of officers of the Bank informed Atty.
Ignacio that the Villanuevas were no longer entitled to
notice of the said meeting since they had relinquished
their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the
Securities and Exchange Commission (SEC), a petition for
annulment of the stockholders' meeting and election of
directors and officers on January 15, 1994, with damages
and prayer for preliminary injunction. SEC issued a TRO
enjoining the newly-elected officers and directors of the
Rural Bank, namely: Bernardo Bautista, Jaime Custodio,
Octavio Katigbak, Francisco Custodio and Juanita
Bautista, from acting as directors and officers of the Bank,
and from performing their duties and functions as such.
Writ of Preliminay Injuction was also later issued by the
SEC Hearing Officer.
With the impending 1995 annual stockholders' meeting
only nine (9) days away, the Villanuevas filed an Omnibus
Motion praying that the said meeting and election of
officers scheduled on January 14, 1995 be suspended or
held in abeyance, and that the 1993 Board of Directors be
allowed, in the meantime, to act as such. One (1) day
before the scheduled stockholders meeting, the SEC
Hearing Officer granted the Omnibus Motion by issuing a
temporary restraining order preventing petitioners from
holding the stockholders meeting and electing the board
of directors and officers of the Bank.
A petition for Certiorari and Annulment with Damages was
filed by the Rural Bank, its directors and officers before
the SEC en banc which however, denied the same. CA
dismissed petition for review, finding that SEC en banc is
correct in holding that the Hearing Officer did not commit
grave abuse of discretion.
Issue: Whether or not the transfer of title to the shares is
already effective and thus Villanueva spouses already
OCRA Notes | 60
relinquished all rights they may have had as stockholders
of the Bank
Held: NO.
While it may be true that there was an assignment of
Villanueva spouses’ shares to Rural Bank of Lipa, said
assignment was not sufficient to effect the transfer of
shares since there was no endorsement of the certificates
of stock by the owners, their attorneys-in-fact or any
other person legally authorized to make the transfer.
Moreover, Villanueva spouses admit that the assignment
of shares was not coupled with delivery, the absence of
which is a fatal defect. The rule is that the delivery of the
stock certificate duly endorsed by the owner is the
operative act of transfer of shares from the lawful owner
to the transferee. Thus, title may be vested in the
transferee only by delivery of the duly indorsed certificate
of stock.
For a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law.
The requirements are: (a) There must be delivery of the
stock certificate: (b) The certificate must be endorsed by
the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (c) To be valid
against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of
these requisites has not been clearly and sufficiently
shown.
It may be argued that despite non-compliance with the
requisite endorsement and delivery, the assignment was
valid between the parties, meaning the private
respondents as assignors and the petitioners as
assignees. While the assignment may be valid and binding
on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of
a stockholder, cannot vote nor be voted for, and will not
be entitled to dividends, insofar as the assigned shares
are concerned Parenthetically, the private respondents
cannot, as yet, be deprived of their rights as stockholders,
until and unless the issue of ownership and transfer of the
shares in question is resolved with finality.
There being no showing that any of the requisites
mandated by law was complied with, the SEC Hearing
Officer did not abuse his discretion in granting the
issuance of the preliminary injunction prayed for by
petitioners in SEC. Accordingly, the order of the SEC en
banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc
order, are valid and in accordance with law and
jurisprudence, thus warranting the denial of the instant
petition for review.
To enable the shareholders of the Rural Bank of Lipa City,
Inc. to meet and elect their directors, the temporary
restraining order issued by the SEC Hearing Officer must
be lifted. However, private respondents shall be notified
of the meeting and be allowed to exercise their rights as
stockholders thereat.
PONCE v. ALSONS CEMENT
Facts: The late Fausto G. Gaid was an incorporator of
Victory Cement Corporation (VCC), having subscribed to
and fully paid 239,500 shares of said corporation. Vicente
Ponce and Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby Gaid acknowledges that Ponce is
the owner of said shares and he was therefore
assigning/endorsing the same to Ponce. VCC was
renamed Floro Cement Corporation and later, FCC was
renamed Alsons Cement Corporation. From the time of
incorporation of VCC up to the present, no certificates of
stock corresponding to the 239,500 subscribed and fully
paid shares of Gaid were issued in the name of Gaid
and/or Ponce. Despite repeated demands, Alsons
continued to refuse without any justifiable reason to issue
to Ponce the certificates of stocks corresponding to the
239,500 shares of Gaid. Hence, Ponce filed a complaint
with the SEC for Mandamus and Damages against Alsons
and its corporate secretary Francisco M. Giron, Jr.
Issue: Whether or not mandamus will lie against Alsons
Held: NO.
A transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as
the corporation is concerned. As between the corporation
on the one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. It is
only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the
consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to
recognize arises.
Hence, without such recording, the transferee may not be
regarded by the corporation as one among its
stockholders and the corporation may legally refuse the
issuance of stock certificates in the name of the transferee
even when there has been compliance with the
requirements of Section 64 of the Corporation Code. This
OCRA Notes | 61
is the import of Section 63 which states that "No transfer,
however, shall be valid, except between the parties, until
the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or
certificates and the number of shares transferred." The
situation would be different if Ponce was himself the
registered owner of the stock which he sought to transfer
to a third party, for then he would be entitled to the
remedy of mandamus.
From the corporation’s point of view, the transfer is not
effective until it is recorded. Unless and until such
recording is made the demand for the issuance of stock
certificates to the alleged transferee has no legal basis.
As between the corporation on the one hand, and its
shareholders and third persons on the other, the
corporation looks only to its books for the purpose of
determining who its shareholders are. In other words, the
stock and transfer book is the basis for ascertaining the
persons entitled to the rights and subject to the liabilities
of a stockholder. Where a transferee is not yet recognized
as a stockholder, the corporation is under no specific legal
duty to issue stock certificates in the transferee’s name.
Under the provisions of our statute touching the transfer
of stock (secs. 35 and 36 of Act No. 1459), the mere
indorsement of stock certificates does not in itself give to
the indorsee such a right to have a transfer of the shares
of stock on the books of the company as will entitle him
to the writ of mandamus to compel the company and its
officers to make such transfer at his demand, because,
under such circumstances the duty, the legal obligation,
is not so clear and indisputable as to justify the issuance
of the writ. As a general rule and especially under the
above-cited statute, as between the corporation on the
one hand, and its shareholders and third persons on the
other, the corporation looks only to its books for the
purpose of determining who its shareholders are, so that
a mere indorsee of a stock certificate, claiming to be the
owner, will not necessarily be recognized as such by the
corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer
to the indorsee, or a power of attorney authorizing such
transfer.
In this case, there isn’t even any indorsement of any stock
certificate to speak of. What Ponce possesses is a
document by which Gaid supposedly transferred the
shares to him. Assuming the document has this effect,
nevertheless there is neither any allegation nor any
showing that it is recorded in the books of Alsons, such
recording being a prerequisite to the issuance of a stock
certificate in favor of the transferee.
Absent an allegation that the transfer of shares is
recorded in the stock and transfer book of ALSONS, there
appears no basis for a clear and indisputable duty or clear
legal obligation that can be imposed upon the respondent
corporate secretary, so as to justify the issuance of the
writ of mandamus to compel him to perform the transfer
of the shares to Ponce. The test of sufficiency of the facts
alleged in a petition is whether or not, admitting the facts
alleged, the court could render a valid judgment thereon
in accordance with the prayer of the petition. This test
would not be satisfied if, as in this case, not all the
elements of a cause of action are alleged in the complaint.
Where the corporate secretary is under no clear legal duty
to issue stock certificates because of Ponce’s failure to
record earlier the transfer of shares, one of the elements
of the cause of action for mandamus is clearly missing.
ONG YONG ET. AL v. TIU ET. AL
Facts: In 1994, the construction of the Masagana Citimall
in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia
Development Corporation (FLADC), which was owned by
the Tius, encountered dire financial difficulties. It was
heavily indebted to the Philippine National Bank (PNB) for
P190 million. To stave off foreclosure of the mortgage on
the two lots where the mall was being built, the Tius
invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna
L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs),
to invest in FLADC. Under the Pre-Subscription Agreement
they entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC: the Ongs were to
subscribe to 1,000,000 shares at a par value of P100.00
each while the Tius were to subscribe to an additional
549,800 shares at P100.00 each in addition to their
already existing subscription of 450,200 shares.
Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five
directors while the Ongs were entitled to nominate the
President, the Secretary and six directors (including the
chairman) to the board of directors of FLADC. Moreover,
the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their
subscription to 1,000,000 shares of stock while the Tius
committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million
(for 200,000 shares), P30 million (for 300,000 shares) and
P49.8 million (for 49,800 shares) to cover their additional
OCRA Notes | 62
549,800 stock subscription therein. The Ongs paid in
another P70 million to FLADC and P20 million to the Tius
over and above their P100 million investment, the total
sum of which (P190 million) was used to settle the P190
million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in
FLADC, however, was shortlived because the Tius, on
February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to
credit to them the FLADC shares covering their real
property contributions; (2) preventing David S. Tiu and
Cely Y. Tiu from assuming the positions of and performing
their duties as Vice-President and Treasurer, respectively,
and (3) refusing to give them the office spaces agreed
upon.
Issue: Whether or not the Tius could legally rescind the
Pre-Subscription Agreement
Held: NO.
A subscription contract necessarily involves the
corporation as one of the contracting parties since the
subject matter of the transaction is property owned by
the corporation its shares of stock. Thus, the subscription
contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested
P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC,
not between the Ongs and the Tius. Otherwise stated, the
Tius did not contract in their personal capacities with the
Ongs since they were not selling any of their own shares
to them. It was FLADC that did.
Considering therefore that the real contracting parties to
the subscription agreement were FLADC and the Ongs
alone, a civil case for rescission on the ground of breach
of contract filed by the Tius in their personal capacities
will not prosper. Assuming it had valid reasons to do so,
only FLADC (and certainly not the Tius) had the legal
personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real
party in interest therein. Article 1311 of the Civil Code
provides that "contracts take effect only between the
parties, their assigns and heirs" Therefore, a party who
has not taken part in the transaction cannot sue or be
sued for performance or for cancellation thereof, unless
he shows that he has a real interest affected thereby.
The argument that since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC,
must also fail because such an argument disregards the
separate juridical personality of FLADC.
Although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions,
rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation
Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other
than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for
it has no legal personality to do so and the requirements
of the law therefor have not been met. A contrary doctrine
will tread on extremely dangerous ground because it will
allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his
subscription and call for the distribution of some part of
the corporate assets to him without complying with the
requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek
the ultimate and extraordinary remedy of rescission of the
subject agreement based on a less than substantial
breach of subscription contract. Not only are they not
parties to the subscription contract between the Ongs and
FLADC; they also have other available and effective
remedies under the law. All this notwithstanding, granting
but not conceding that the Tius possess the legal standing
to sue for rescission based on breach of contract, said
action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the
Corporation Code.
The Trust Fund Doctrine provides that subscriptions to the
capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of
their claims. This doctrine is the underlying principle in
the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances:
(1) amendment of the Articles of Incorporation to reduce
the authorized capital stock, (2) purchase of redeemable
shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the
doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares and in Section 122
on the prohibition against the distribution of corporate
assets and property unless the stringent requirements
therefor are complied with.
The distribution of corporate assets and property cannot
be made to depend on the whims and caprices of the
stockholders, officers or directors of the corporation, or
even, for that matter, on the earnest desire of the court
OCRA Notes | 63
a quo "to prevent further squabbles and future litigations"
unless the indispensable conditions and procedures for
the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by
the court will remain nothing but a dream because this
time, it will be the creditors' turn to engage in "squabbles
and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund
Doctrine.
In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine
and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when
distribution of capital assets and property of the
corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final
analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the
Corporation Code.
The Tius' case for rescission cannot validly be deemed a
petition to decrease capital stock because such action
never complied with the formal requirements for decrease
of capital stock under Section 33 of the Corporation Code.
No majority vote of the board of directors was ever taken.
Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the
outstanding capital stock was secured. There was no
revised treasurer's affidavit and no proof that said
decrease will not prejudice the creditors' rights. On the
contrary, all their pleadings contained were alleged acts
of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the
internal affairs of the corporation to compel FLADC to file
at the SEC a petition for the issuance of a certificate of
decrease of stock. Decreasing a corporation's authorized
capital stock is an amendment of the Articles of
Incorporation. It is a decision that only the stockholders
and the directors can make, considering that they are the
contracting parties thereto. In this case, the Tius are
actually not just asking for a review of the legality and
fairness of a corporate decision. They want this Court to
make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not
voluntarily agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock
without the assent of FLADC's directors and stockholders
is a violation of the "business judgment rule." Apparently,
the Tius do not realize the illegal consequences of seeking
rescission and control of the corporation to the exclusion
of the Ongs. Such an act infringes on the law on reduction
of capital stock. Ordering the return and distribution of
the Ongs' capital contribution without dissolving the
corporation or decreasing its authorized capital stock is
not only against the law but is also prejudicial to corporate
creditors who enjoy absolute priority of payment over and
above any individual stockholder thereof.
F&S VELASCO COMPANY INC. v. MADRID
Facts: F & S Velasco Company, Inc. (FSVCI) was duly
organized and registered as a corporation with Francisco
O. Velasco (Francisco), Simona J. Velasco (Simona),
Angela V. Madrid (Angela), Dr. Rommel L. Madrid
(Madrid), and Saturnino O. Velasco (Saturnino) as its
incorporators. When Simona and Francisco died, their
daughter, Angela, inherited their shares, thereby giving
her control of 70.82% of FSVCI's total shares of stock.
The distribution of FSVCI's 24,000 total shares of stock is
as follows: (a) Angela with 16,998 shares; (b) Madrid with
1,000 shares; (c) Rosina B. Velasco-Scribner (Scribner)
with 6,000 shares; and (d) Irwin J. Seva (Seva) and
Mercedez Sunico (Sunico) with one (1) share each.
During her tenure as Chairman of the Board of Directors
of FSVCI, Angela died intestate and without issue.
MADRID as Angela's spouse, executed an Affidavit of Self-
Adjudication covering the latter's estate which includes
her 70.82% ownership of FSVCI's shares of stock.
Believing that he is already the controlling stockholder of
FSVCI by virtue of such self-adjudication, Madrid called
for a Special Stockholders' and Re-Organizational Meeting
to be held on November 18, 2009. Madrid executed
separate deeds of assignment transferring one share each
to Vitaliano B. Ricafort and to respondents Peter Paul L.
Danao (Danao), Maureen R. Labalan (Labalan), and
Manuel L. Arimado (Arimado; collectively, Madrid
Group).
As Madrid was performing the aforesaid acts, Seva, in his
then-capacity as FSVCI corporate secretary, sent a Notice
of an Emergency Meeting to FSVCI's remaining
stockholders for the purpose of electing a new president
and vice-president, as well as the opening of a bank
account. Saturnino was recognized as a member of the
FSVCI Board of Directors and thereafter, as FSVCI
President, while Scribner was elected FSVCI Vice-
President (Saturnino Group).
Despite the election conducted by the Saturnino Group,
the Madrid Group proceeded with the Special
OCRA Notes | 64
Stockholders' and Re-Organizational Meeting on
November 18, 2009, wherein: (a) the current members of
FSVCI Board of Directors (save for Madrid) were ousted
and replaced by the members of the Madrid Group; and
(b) Madrid, Danao, Arimado, and Labalan were elected
President, Vice-President, Corporate Secretary, and
Treaurer, respectively, of FSVCI.
Saturnino Group filed a petition for Declaration of Nullity
of Corporate Election with Preliminary Injunction and
Temporary Restraining Order against the Madrid Group
before the RTC, which was acting as a Special Commercial
Court.
Issue:
1) Whether or not the November 18, 2009 Meeting
organized by Madrid is legal and valid;
2) Whether or not a Management Committee should
be appointed or constituted to take over the
corporate and business affairs of FSVCI.
Held:
1) NO.
Madrid's inheritance of Angela's shares of stock does not
ipso facto afford him the rights accorded to such majority
ownership of FSVCI's shares of stock. Section 63 of the
Corporation Code governs the rule on transfers of shares
of stock. Verily, all transfers of shares of stock must be
registered in the corporate books in order to be binding
on the corporation. Specifically, this refers to the Stock
and Transfer Book, which is described in Section 74 of the
same Code.
As held in the case of Batangas Laguna Tayabas Bus Co.,
Inc. v. Bitanga, the purpose of registration, is two-fold: to
enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted
for, and to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a stockholder.
Until challenged in a proper proceeding, a stockholder of
record has a right to participate in any meeting; his vote
can be properly counted to determine whether a
stockholders' resolution was approved, despite the claim
of the alleged transferee. On the other hand, a person
who has purchased stock, and who desires to be
recognized as a stockholder for the purpose of voting,
must secure such a standing by having the transfer
recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an
outsider.
At the time Madrid called for the November 18, 2009
Meeting, as well as the actual conduct thereof, he was
already the owner of 74.98% shares of stock of FSVCI as
a result of his inheritance of Angela's 70.82% ownership
thereof. However, records are bereft of any showing that
the transfer of Angela's shares of stock to Madrid had
been registered in FSVCFs Stock and Transfer Book when
he made such call and when the November 18, 2009
Meeting was held.
The submission of a General Information Sheet of a
corporation before the SEC is pursuant to the objective
sought by Section 26 of the Corporation Code which is to
give the public information, under sanction of oath of
responsible officers, of the nature of business, financial
condition, and operational status of the company, as well
as its key officers or managers, so that those dealing and
who intend to do business with it may know or have the
means of knowing facts concerning the corporation's
financial resources and business responsibility. The
contents of the GIS, however, should not be deemed
conclusive as to the identities of the registered
stockholders of the corporation, as well as their respective
ownership of shares of stock, as the controlling document
should be the corporate books, specifically the Stock and
Transfer Book.
In light of the foregoing, Madrid could not have made a
valid call of the November 18, 2009 Meeting as his stock
ownership of FSVCI as registered in the Stock and
Transfer Book is only 4.16% in view of the
non-registration of Angela's shares of stock in the FSVCI
Stock and Transfer Book in his favor. As there was no
showing that he was able to remedy the situation by the
time the meeting was held, the conduct of such meeting,
as well as the matters resolved therein, including the
reorganization of the FSVCI Board of Directors and the
election of new corporate officers, should all be declared
null and void.
2) NO.
The creation and appointment of a management
committee is an extraordinary and drastic remedy to be
exercised with care and caution; and only when the
requirements under the Interim Rules [of Procedure
Governing Intra-Corporate Controversies] are shown. It is
a drastic course for the benefit of the minority
stockholders, the parties-litigants or the general public
[and is] allowed only under pressing circumstances and
when there is inadequacy, ineffectual or exhaustion of
legal or other remedies.
OCRA Notes | 65
In view of the extraordinary nature of such a remedy,
Section 1, Rule 9 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies provides the
elements needed for the creation of a Management
Committee. Applicants for the appointment of a
management committee need to establish the confluence
of these two (2) requisites:
(1) Dissipation, loss, wastage or destruction of assets or
other properties; and
(2) Paralyzation of its business operations which may be
prejudicial to the interest of the minority stockholders,
parties-litigants or the general public.
This is because appointed management committees will
immediately take over the management of the
corporation and exercise the management powers
specified in the law. This may have a negative effect on
the operations and affairs of the corporation with third
parties, as persons who are more familiar with its
operations are necessarily dislodged from their positions
in favor of appointees who are strangers to the
corporation's operations and affairs.
In the case at bar, the CA merely based its directive of
creating a Management Committee for FSVCI on its
finding of "the persisting conflict between [the Saturn ino
and Madrid Groups], the allegations of embezzlement of
corporate funds among the parties, and the uncertainty
in the leadership and direction of the corporation had
created an imminent danger of dissipation, loss[,] and
wastage of FSVCI's assets and the paralyzation of its
business operations which may be prejudicial to the
minority stockholders, parties-litigants or the general
public." However, absent any actual evidence from the
records showing such imminent danger, the CA's findings
have no legal or factual basis to support the
appointment/constitution of a Management Committee
for FSVCI. Accordingly, the CA erred in ordering the
creation of a Management Committee in this case.
ANNA TENG v. SEC
Facts: Ting Ping purchased 480 shares of TCL Sales
Corporation (TCL) from Peter Chiu, 1,400 shares from his
brother Teng Ching Lay, who was also the president and
operations manager of TCL; and 1,440 shares from
Ismaelita Maluto.
Upon Teng Ching's death, his son Henry Teng (Henry)
took over the management of TCL. To protect his
shareholdings with TCL, Ting Ping requested TCL's
Corporate Secretary, Anna Teng, to enter the transfer in
the Stock and Transfer Book of TCL for the proper
recording of his acquisition. He also demanded the
issuance of new certificates of stock in his favor. TCL and
Teng, however, refused despite repeated demands.
Because of their refusal, Ting Ping filed a petition for
mandamus with the SEC against TCL and Teng.
Teng contends that prior to registration of stocks in the
corporate books, it is mandatory that the stock certificates
are first surrendered because a corporation will be liable
to a bona fide holder of the old certificate if, without
demanding the said certificate, it issues a new one.
Issue: Whether or not the surrender of the certificates of
stock is a requisite before registration of the transfer may
be made in the corporate books and for the issuance of
new certificates in its stead
Held: NO.
A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging
that the person named in the document is the owner of a
designated number of shares of its stock. It is prima facie
evidence that the holder is a shareholder of a corporation.
A certificate, however, is merely a tangible evidence of
ownership of shares of stock. It is not a stock in the
corporation and merely expresses the contract between
the corporation and the stockholder. The shares of stock
evidenced by said certificates, meanwhile, are regarded
as property and the owner of such shares may, as a
general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do
so is properly restricted, or the owner's privilege of
disposing of his shares has been hampered by his own
action.
Under Section 63 of the Corporation, certain minimum
requisites must be complied with for there to be a valid
transfer of stocks, to wit: (a) there must be delivery of
the stock certificate; (b) the certificate must be endorsed
by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (c) to be valid
against third parties, the transfer must be recorded in the
books of the corporation.
It is the delivery of the certificate, coupled with the
endorsement by the owner or his duly authorized
representative that is the operative act of transfer of
shares from the original owner to the transferee.
It is thus clear that Teng's position - that Ting Ping must
first surrender Chiu's and Maluto's respective certificates
of stock before the transfer to Ting Ping may be
OCRA Notes | 66
registered in the books of the corporation -does not
have legal basis. The delivery or surrender adverted to
by Teng, i.e., from Ting Ping to TCL, is not a requisite
before the conveyance may be recorded in its books. To
compel Ting Ping to deliver to the corporation the
certificates as a condition for the registration of the
transfer would amount to a restriction on the right of Ting
Ping to have the stocks transferred to his name, which is
not sanctioned by law. The only limitation imposed by
Section 63 is when the corporation holds any unpaid claim
against the shares intended to be transferred.
In the same vein, Teng cannot refuse registration of the
transfer on the pretext that the photocopies of Maluto's
certificates of stock submitted by Ting Ping covered only
1,305 shares and not 1,440. As earlier stated, the
respective duties of the corporation and its secretary to
transfer stock are purely ministerial.
Nevertheless, to be valid against third parties and the
corporation, the transfer must be recorded or registered
in the books of corporation. There are several reasons
why registration of the transfer is necessary:
one, to enable the transferee to exercise all the rights of
a stockholder;
two, to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a stockholder;
and
three, to avoid fictitious or fraudulent transfers, among
others.
In the case at bench, Ting Ping manifested from the start
his intention to surrender the subject certificates of stock
to facilitate the registration of the transfer and for the
issuance of new certificates in his name. It would be
sacrificing substantial justice if the Court were to grant
the petition simply because Ting Ping is yet to surrender
the subject certificates for cancellation instead of ordering
in this case such surrender and cancellation, and the
issuance of new ones in his name. The Court will not allow
Teng and TCL to frustrate Ting Ping's rights any longer.
Ting Ping Lay is ordered to surrender the certificates of
stock covering the shares respectively transferred by
Ismaelita Maluto and Peter Chiu. Anna Teng or the
incumbent corporate secretary of TCL Sales Corporation,
on the other hand, is ordered, under pain of contempt, to
immediately cancel Ismaelita Maluto's and Peter Chiu's
certificates of stock and to issue new ones in the name of
Ting Ping Lay, which shall include Ismaelita Maluto's
shares not covered by any existing certificate of stock but
otherwise validly transferred to Ting Ping Lay.
ANDAYA v. RURAL BANK OF CABADBARAN
Facts: Joseph Omar O. Andaya bought from Concepcion
O. Chute, 2,200 shares of stock in the Rural Bank of
Cabadbaran for P220,000. The transaction was evidenced
by a notarized document denominated as Sale of Shares
of Stocks. Chute duly endorsed and delivered the
certificates of stock to Andaya and, subsequently,
requested the bank to register the transfer and issue new
stock certificates in favor of the latter. Andaya also
separately communicated with the bank's corporate
secretary, Demosthenes P. Oraiz, reiterating Chute's
request for the issuance of new stock certificates in
Andaya’s favor.
A few days later, the bank's corporate secretary wrote
Chute to inform her that he could not register the transfer.
He explained that under a previous stockholders'
Resolution, existing stockholders were given priority to
buy the shares of others in the event that the latter
offered those shares for sale (i.e., a right of first refusal).
He then asked Chute if she, instead, wished to have her
shares offered to existing stockholders. He told her that if
no other stockholder would buy them, she could then
proceed to sell her shares to outsiders.
Meanwhile, the bank's legal counsel, Ricardo Gonzalez,
informed Andaya that the latter's request had been
referred to the bank's board of directors for evaluation.
Gonzalez also furnished him a copy of the bank's previous
reply to Chute concerning a similar request from her.
Andaya responded by reiterating his earlier request for
the registration of the transfer and the issuance of new
certificates of stock in his favor. Citing Section 98 of the
Corporation Code, he claimed that the purported
restriction on the transfer of shares of stock agreed upon
during the 2001 stockholders' meeting could not deprive
him of his right as a transferee. He pointed out that the
restriction did not appear in the bank's articles of
incorporation, bylaws, or certificates of stock.
The bank eventually denied the request of Andaya,
reasoning that he had a conflict of interest, as he was
then president and chief executive officer of the Green
Bank of Caraga, a competitor bank. RBCI concluded that
the purchase of shares was not in good faith, and that the
purchase "could be the beginning of a hostile bid to take-
over control of the [Rural Bank of Cabadbaran]."
OCRA Notes | 67
Consequently, Andaya instituted an action for mandamus
and damages against the Rural Bank of Cabadbaran; its
corporate secretary, Oraiz; and its legal counsel,
Gonzalez, seeking to compel them to record the transfer
in the bank's stock and transfer book and to issue new
certificates of stock in his name.
Issue:
(1) Whether or not Andaya is a real-party-in-interest
(2) Whether or not a writ of mandamus should issue
in Andaya’s favor
Held:
1) YES.
The registration of a transfer of shares of stock is a
ministerial duty on the part of the corporation. Aggrieved
parties may then resort to the remedy of mandamus to
compel corporations that wrongfully or unjustifiably
refuse to record the transfer or to issue new certificates
of stock. This remedy is available even upon the instance
of a bona fide transferee who is able to establish a clear
legal right to the registration of the transfer. This legal
right inherently flows from the transferee's established
ownership of the stocks. Consequently, transferees of
shares of stock are real parties in interest having a cause
of action for mandamus to compel the registration of the
transfer and the corresponding issuance of stock
certificates.
Andaya has been able to establish that he is a bona fide
transferee of the shares of stock of Chute. In proving this
fact, he presented to the RTC the following documents
evidencing the sale: (1) a notarized Sale of Shares of
Stocks showing Chute's sale of 2,200 shares of stock to
petitioner; (2) a Documentary Stamp Tax
Declaration/Return; (3) a Capital Gains Tax Return; and (
4) stock certificates covering the subject shares duly
endorsed by Chute. The existence, genuineness, and due
execution of these documents have been admitted and
remain undisputed. There is no doubt that Andaya had
the standing to initiate an action for mandamus to compel
the Rural Bank of Cabadbaran to record the transfer of
shares in its stock and transfer book and to issue new
stock certificates in his name. As the transferee of the
shares, Andaya stands to be benefited or injured by the
judgment in the instant petition, a judgment that will
either order the bank to recognize the legitimacy of the
transfer and Andaya’s status as stockholder or to deny the
legitimacy thereof.
2) The case was remanded to the RTC.
A writ of mandamus to enforce a ministerial act may issue
only when petitioner is able to establish the presence of
the following: ( l) right clearly founded in law and is not
doubtful; (2) a legal duty to perform the act; (3) unlawful
neglect in performing the duty enjoined by law; (4) the
ministerial nature of the act to be performed; and (5) the
absence of other plain, speedy, and adequate remedy in
the ordinary course of law.
Respondents primarily challenge the mandamus suit on
the grounds (1) that the transfer violated the bank
stockholders' right of first refusal and (2) that Andaya was
a buyer in bad faith. They refer to Section 98 of the
Corporation Code to support their arguments.
SECTION 98. Validity of restrictions on transfer of shares.
-Restrictions on the right to transfer shares must appear
in the articles of incorporation and in the by-laws as well
as in the certificate of stock; otherwise, the same shall
not be binding on any purchaser thereof in good faith.
-xxx-
Section 98 applies only to close corporations. Hence,
before the Court can allow the operation of this section in
the case at bar, there must first be a factual determination
that respondent Rural Bank of Cabadbaran is indeed a
close corporation. There needs to be a presentation of
evidence on the relevant restrictions in the articles of
incorporation and bylaws of the said bank.
From the records or the RTC Decision, there is apparently
no such determination or even allegation that would assist
this Court in ruling on these two major factual matters.
With the foregoing, the validity of the transfer cannot yet
be tested using that provision. These are the factual
matters that the parties must first thresh out before the
RTC.
TEE LING KIAT v. AYALA CORPORATION
Facts: Ayala Investment and Development Corporation
(AIDC) granted in favor of Continental Manufacturing
Corporation (CMC) a money market line in the maximum
amount of P2,000,000.00. With Dewey Dee as the
President of CMC then, the Spouses Dewey and Lily Dee
executed a Surety Agreement on the same date, as
guarantee for the money market line. One of CMC's
availments under the money market line was evinced by
a Promissory Note. AIDC subsequently endorsed the
Promissory Note to Ayala Corporation. CMC defaulted on
its obligation under the promissory note, leading Ayala
Corporation to institute a claim for sum of money against
CMC and the Spouses Dee. RTC - Makati City, Branch 149
OCRA Notes | 68
ruled in favor of Ayala Corporation. Thereafter, a Notice
of Levy on Execution was issued and addressed to the
Register of Deeds of Antipolo City, to levy upon "the
rights, claims, shares, interest, title and participation" that
the Spouses Dee may have in three parcels of land and
any improvements thereon. The parcels of land were
registered in the name of Vonnel Industrial Park, Inc.
(VIP), in which Dewey Dee was an incorporator.
Before the scheduled sale on execution, Tee Ling Kiat filed
a Third-Party Claim, alleging that Mr. Dewey Dee has
already sold to Mr. Tee Ling Kiat all his stocks in VIP, as
evidenced by a cancelled check which he issued in Mr.
Tee Ling Kiat's favor. Furthermore, even assuming that
Mr. Dewey Dee is still a stockholder of VIP, at most he
merely has rights, claims, shares, interest, title and
participation to its shares of stocks, but not as to the real
properties registered under its name.
RTC denied VIP and Tee Ling Kiat's Omnibus Motion and
disallowed the third-party claim because the alleged sale
of shares of stock from Dewey Dee to Tee Ling Kiat was
not proven. The purported Deed of Sale of Shares of Stock
was not recorded in the stock and transfer books of VIP,
as required by Section 63 of the Corporation Code. Thus,
there was no valid transfer of shares as against third
persons. The RTC observed that in support of the
purported sale of shares of stock, Tee Ling Kiat merely
submitted (a) a cancelled check issued by Tee Ling Kiat
in favor of Dewey Dee and (b) a photocopy of the Deed
of Sale of Shares of Stock.
CA denied Tee Ling Kiat's petition for certiorari, on the
ground that Tee Ling Kiat is not a real party-in-interest,
especially considering that the alleged sale of Dewey
Dee's shares of stock to Tee Ling Kiat has not been
proven. Tee Ling Kiat utterly failed: (i) to prove that he is
a stockholder of VIP; and assuming he is, (ii) to show that
he was authorized by the corporation for the purpose of
prosecuting the claim on behalf of the corporation.
Issue: Whether or not Tee Ling Kiat shall be considered a
real party-in-interest
Held: NO.
A photocopy of a document has no probative value and is
inadmissible in evidence. The records likewise do not
show that Tee Ling Kiat offered any explanation as to why
the original Deed of Sale of Shares of Stock could not be
produced.
Even if it could be assumed that the sale of shares of stock
contained in the photocopies had indeed transpired, such
transfer is only valid as to the parties thereto, but is not
binding on the corporation if the same is not recorded in
the books of the corporation. Section 63 of the
Corporation Code of the Philippines provides that: "No
transfer, x x x shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares
transferred." Here, the records show that the purported
transaction between Tee Ling Kiat and Dewey Dee has
never been recorded in VIP's corporate books. Thus, the
transfer, not having been recorded in the corporate books
in accordance with law, is not valid or binding as to the
corporation or as to third persons.
It is a basic principle of law that money judgments are
enforceable only against property incontrovertibly
belonging to the judgment debtor, and certainly, a person
other than the judgment debtor who claims ownership
over the levied properties is not precluded from
challenging the levy through any of the remedies provided
for under the Rules of Court. In the pursuit of such
remedies, however, the third-party must, to reiterate,
unmistakably establish ownership over the levied
property, which Tee Ling Kiat failed to do. In as much as
the validity of the third-party claim would only be relevant
if the person instituting the same has established that he
has a real interest in the levied property, the Court will
not belabor the merits of the third-party claim in view of
the conclusive determination that Tee Ling Kiat has not
adduced evidence to prove that the shares of stock of
Dewey Dee were indeed sold to him.
II.
LEE v. CA
Facts: International Corporate Bank filed a complaint for
a sum of money against Sacoba Manufacturing Corp.,
Pablo Gonzales Jr. and Thomas Gonzales, who, in turn,
filed a third-party complaint against Alfa Integrated
Textile Mills and Ramon C. Lee and Antonio DM. Lacdao,
as its president and vice-president, respectively, after the
execution of a voting trust agreement between ALFA and
the Development Bank of the Philippines (DBP).
The trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a
consequence of Ramon Lee’s letter informing the court
that the summons for ALFA was erroneously served upon
them considering that the management of ALFA had been
transferred to the DBP.
OCRA Notes | 69
In a manifestation, DBP claimed that it was not authorized
to receive summons on behalf of ALFA since the DBP had
not taken over the company which has a separate and
distinct corporate personality and existence.
Lee and Lacdao maintain that with the execution of the
voting trust agreement between them and the other
stockholders of ALFA, as one party, and the DBP, as the
other party, the former assigned and transferred all their
shares in ALFA to DBP, as trustee. They argue that by
virtue to of the voting trust agreement Lee and Lacdao
can no longer be considered directors of ALFA. In support
of their contention, Lee and Lacdao invoke section 23 of
the Corporation Code which provides, in part, that:
“Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of
at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease
to be director . . .”
The Sacoba and the Gonzaleses, on the contrary, insist
that the voting trust agreement between ALFA and the
DBP had all the more safeguarded Lee and Lacdao’s
continuance as officers and directors of ALFA inasmuch as
the general object of voting trust is to insure permanency
of the tenure of the directors of a corporation. They cited
the commentaries by Prof. Aguedo Agbayani on the right
and status of the transferring stockholders, to wit:
“The "transferring stockholder", also called the
"depositing stockholder", is equitable owner for the stocks
represented by the voting trust certificates and the stock
reversible on termination of the trust by surrender. It is
said that the voting trust agreement does not destroy the
status of the transferring stockholders as such, and thus
render them ineligible as directors. But a more accurate
statement seems to be that for some purposes the
depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof,
remains and is treated as a stockholder. It seems to be
deducible from the case that he may sue as a stockholder
if the suit is in equity or is of an equitable nature, such
as, a technical stockholders' suit in right of the
corporation.” [Commercial Laws of the Philippines by
Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327]
(Rollo, p. 291)
Issue: Whether or not there was proper service of
summons on ALFA through Lee and Lacdao, after the
execution of a voting trust agreement between ALFA and
DBP
Held: NO.
By its very nature, a voting trust agreement results in the
separation of the voting rights of a stockholder from his
other rights such as the right to receive dividends, the
right to inspect the books of the corporation, the right to
sell certain interests in the assets of the corporation and
other rights to which a stockholder may be entitled until
the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and
other voting pools and agreements, it must pass three
criteria or tests, namely: (1) that the voting rights of the
stock are separated from the other attributes of
ownership; (2) that the voting rights granted are intended
to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to
acquire voting control of the corporation.
Under section 59 of the Corporation Code, supra, a voting
trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining
to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade
or used for purposes of fraud." (section 59, 5th paragraph
of the Corporation Code) Thus, the traditional concept of
a voting trust agreement primarily intended to single out
a stockholder's right to vote from his other rights as such
and made irrevocable for a limited duration may in
practice become a legal device whereby a transfer of the
stockholder's shares is effected subject to the specific
provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may
create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholders, on
the one hand, and the legal title thereto on the other
hand.
The law simply provides that a voting trust agreement is
an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or
their shares to a trustee in order to vest in the latter
voting or other rights pertaining to said shares for a period
not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified
in the agreement. The five year-period may be extended
in cases where the voting trust is executed pursuant to a
loan agreement whereby the period is made contingent
upon full payment of the loan.
Both under the old and the new Corporation Codes there
is no dispute as to the most immediate effect of a voting
trust agreement on the status of a stockholder who is a
OCRA Notes | 70
party to its execution — from legal titleholder or owner of corporation can only be bound by such acts which are
the shares subject of the voting trust agreement, he within the scope of the officer's or agent's authority.
becomes the equitable or beneficial owner.
REPUBLIC v. SANDIGANBAYAN
With the omission of the phrase "in his own right" in
Facts: On August 7,1991, the Presidential Commission on
Section 30 of the old code, the election of trustees and
Good Government (PCGG) conducted an ETPI
other persons who in fact are not beneficial owners of the
stockholders meeting during which a PCGG controlled
shares registered in their names on the books of the
corporation becomes formally legalized. Hence, this is a board of directors was elected. A special stockholders
meeting was later convened by the registered Eastern
clear indication that in order to be eligible as a director,
Telecommunications, Philippines, Inc. (ETPI) stockholders
what is material is the legal title to, not beneficial
wherein another set of board of directors was elected, as
ownership of, the stock as appearing on the books of the
corporation. a result of which two sets of such board and officers were
elected.
The facts of this case show that Lee and Lacdao, by virtue
Victor Africa, a stockholder of ETPI, alleging that the
of the voting trust agreement executed in 1981 disposed
PCGG had since January 29, 1988 been "illegally
of all their shares through assignment and delivery in
favor of the DBP, as trustee. Consequently, Lee and 'exercising' the rights of stockholders of ETPI," especially
in the election of the members of the board of directors,
Lacdao ceased to own at least one share standing in their
filed a motion before the Sandiganbayan, praying that
names on the books of ALFA as required under Section 23
said court order the "calling and holding of the Eastern
of the new Corporation Code. They also ceased to have
Telecommunications, Philippines, Inc. (ETPI) annual
anything to do with the management of the enterprise.
stockholders meeting for 1992 under the [c]ourt's control
Lee and Lacdao ceased to be directors. Hence, the
and supervision and prescribed guidelines." PCGG did not
transfer of the their shares to the DBP created vacancies
in their respective positions as directors of ALFA. object to Africa's motion provided primarily that an Order
be issued upholding the right of PCGG to vote all the Class
Considering that the voting trust agreement between "A" shares of ETPI.
ALFA and the DBP transferred legal ownership of the
The Sandiganbayan granted the motion and held that
stock covered by the agreement to the DBP as trustee,
only the registered owners, their duly authorized
the latter became the stockholder of record with respect
representatives or their proxies may vote their
to the said shares of stocks. In the absence of a showing
corresponding shares. Pending review before the
that the DBP had caused to be transferred in their names
Supreme Court, PCGG, in early 1995, filed before the
one share of stock for the purpose of qualifying as
Sandiganbayan a "VERY URGENT PETITION FOR
directors of ALFA, the petitioners can no longer be
AUTHORITY TO HOLD SPECIAL STOCKHOLDERS'
deemed to have retained their status as officers of ALFA
which was the case before the execution of the subject MEETING FOR [THE] SOLE PURPOSE OF INCREASING
[ETPI's] AUTHORIZED CAPITAL STOCK," it claiming that
voting trust agreement. There appears to be no dispute
the increase in authorized capital stock was necessary in
from the records that DBP has taken over full control and
management of the firm. light of the requirements laid down by Executive Order
No. 109 and Republic Act No. 7975.
It is a basic principle in Corporation Law that a corporation
Sandiganbayan issued a Resolution granting the same.
has a personality separate and distinct from the officers
or members who compose it. Thus, the above rule on The PCGG-controlled ETPI board of directors thus
authorized the ETPI Chair and Corporate Secretary to call
service of processes of a corporation enumerates the
the special stockholders meeting. The meeting was held
representatives of a corporation who can validly receive
and the increase in ETPI's authorized capital stock from
court processes on its behalf. Not every stockholder or
P250 Million to P2.6 Billion was "unanimously approved."
officer can bind the corporation considering the existence
of a corporate entity separate from those who compose Africa filed before the SC a motion to cite the PCGG "and
it. Lee and Lacdao in this case do not fall under any of the its accomplices" in contempt and "to nullify the
enumerated officers. The service of summons upon ALFA, 'stockholders meeting' called/conducted by PCGG and its
through Lee and Lacdao, therefore, is not valid. To rule accomplices.” Later, when Sandiganbayan finally resolved
otherwise, will contravene the general principle that a to deny the motions for reconsideration of its Resolution,
Africa filed a petition before the SC, alleging that that the
OCRA Notes | 71
Sandiganbayan committed "grave abuse of discretion"
and prayed that the Court set aside the Resolutions
permitting the PCGG to vote the non-sequestered ETPI
Class "A" shares and nullify the votes the PCGG had cast
in the stockholders meeting.
Issue:
(1) Whether or not the PCGG can vote the
sequestered ETPI Class "A" shares in the
stockholders meeting for the election of the board
of directors.
(2) Whether or not the Stock and Transfer Book
should not be used as the basis for determining
the voting rights of the shareholders because
some entries therein were altered "by
substitution"
(3) Whether or not PCGG can vote at least 23.9% of
the outstanding capital stock of ETPI,
representing (a) 51% of the combined
shareholdings of Roberto S. Benedicto and his
controlled corporations amounting to 12.8% of
the total equity of ETPI which was ceded to the
Republic (b) the 3.1% representing the shares
covered by the ETPI stock certificates endorsed
in blank found in Malacañang, now in its (PCGG's)
possession and (c) the 8% representing the
shares of Manuel H. Nieto, Jr. which, so it avers,
he, in an Affidavit admitted actually belong to
former President Marcos
Held:
(1) NO.
In the cases of Cojuangco v. Calpo and Presidential
Commission on Good Government v. Cojuangco, Jr., this
Court developed a "two-tiered" test in determining
whether the PCGG may vote sequestered shares:
“The issue of whether PCGG may vote the sequestered
shares in SMC necessitates a determination of at least two
factual matters:
“1. whether there is prima facie evidence showing that
the said shares are ill-gotten and thus belong to the state;
and
“2. whether there is an immediate danger of dissipation
thus necessitating their continued sequestration and
voting by the PCGG while the main issue pends with the
Sandiganbayan.”
The two-tiered test, however, does not apply in cases
involving funds of "public character." In such cases, the
government is granted the authority to vote said shares,
namely:
(1) Where government shares are taken over by private
persons or entities who/which registered them in their
own names, and
(2) Where the capitalization or shares that were acquired
with public funds somehow landed in private hands.
Citing the case of Republic v. Cocofed: The [public
character] exceptions are based on the common-sense
principle that legal fiction must yield to truth; that public
property registered in the names of non-owners is
affected with trust relations; and that the prima facie
beneficial owner should be given the privilege of enjoying
the rights flowing from the prima facie fact of ownership.
This Court summed up the rule in the determination of
whether the PCGG has the right to vote sequestered
shares as follows:
“In short, when sequestered shares registered in the
names of private individuals or entities are alleged to have
been acquired with ill-gotten wealth, then the two-tiered
test is applied. However, when the sequestered shares in
the name of private individuals or entities are shown,
prima facie, to have been (1) originally government
shares, or (2) purchased with public funds or those
affected with public interest, then the two-tiered test does
not apply. Rather, the public character exception in
Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that
is, the government shall vote the shares.”
The rule in this jurisdiction is, therefore, clear. The PCGG
cannot perform acts of strict ownership of sequestered
property. It is a mere conservator. It may not vote the
shares in a corporation and elect members of the board
of directors. The only conceivable exception is in a case
of a takeover of a business belonging to the government
or whose capitalization comes from public funds, but
which landed in private hands as in BASECO. In short, the
Sandiganbayan held that the public character exception
does not apply, in which case it should have proceeded to
apply the two-tiered test. This it failed to do.
The questions thus remain if there is prima facie evidence
showing that the subject shares are ill-gotten and if there
is imminent danger of dissipation. This Court is not,
however, a trier of facts, hence, it is not in a position to
rule on the correctness of the PCGG's contention.
Consequently, this issue must be remanded to the
Sandiganbayan for resolution.
(2) NO.
OCRA Notes | 72
The charge that there were "alterations by substitution"
in the Stock and Transfer Book is not a matter which
should preclude the Stock and Transfer Book from being
the basis or guide to determine who the true owners of
the shares of stock in ETPI are. If there be any
substitution or alterations, the anomaly, if at all, may be
explained by the corporate secretary who made the
entries therein. At any rate, the accuracy of the Stock and
Transfer Book may be checked by comparing the entries
therein with the issued stock certificates. The fact is that
any transfer of stock or issuance thereof would
necessitate an alteration of the record by substitution.
Any anomaly in any entry which may deprive a person or
entity of its right to vote may generate a controversy
personal to the corporation and the stockholder and
should not affect the issue as to whether it is the PCGG
or the shareholder who has the right to vote. In other
words, should there be a stockholder who feels aggrieved
by any alteration by substitution in the Stock and Transfer
Book, said stockholder may object thereto at the proper
time and before the stockholders meeting.
Whether the ETPI Stock and Transfer Book was falsified
and whether such falsification deprives the true owners
of the shares of their right to vote are thus issues best
settled in a different proceeding instituted by the real
parties-in-interest.
(3) NO. The PCGG may vote in its name the shares
ceded to the Republic by Benedicto pursuant to
the compromise agreement once they are
registered in its name. HOWEVER:
That the PCGG found the stock certificates endorsed in
blank does not necessarily make it the owner of the
shares represented therein. Their true ownership has to
be ascertained in a proper proceeding. Similarly, the
ownership of the Nieto shares has yet to be adjudicated.
That they allegedly belong to former President Marcos
does not make the PCGG, its owner. The PCGG must, in
an appropriate proceeding, first establish that they truly
belong to the former President and that they were ill-
gotten. Pending final judgment over the ownership of
these shares, the PCGG may not register and vote the
Nieto and the Malacañang shares in its name. If the
Sandiganbayan finds, however, that there is evidence of
dissipation of these shares, the PCGG may vote the same
as conservator thereof.
The Court Resolved to REFER the petitions at bar
to the Sandiganbayan for reception of evidence to
determine whether there is a prima facie evidence
showing that the sequestered shares in question
are ill-gotten and there is an imminent danger of
dissipation to entitle the PCGG to vote them in a
stockholders meeting to elect the ETPI Board of
Directors and to amend the ETPI Articles of
Incorporation for the sole purpose of increasing
the authorized capital stock of ETPI.
REPUBLIC v. COCOFED
Issue: Whether or not the government should be allowed
to vote the sequestered UCPB shares while the main case
for their reversion to the State is pending in the
Sandiganbayan
Held: YES.
In the cases of Cojuangco v. Calpo and Presidential
Commission on Good Government v. Cojuangco, Jr., this
Court developed a "two-tiered" test in determining
whether the PCGG may vote sequestered shares:
“The issue of whether PCGG may vote the sequestered
shares in SMC necessitates a determination of at least two
factual matters:
“1. whether there is prima facie evidence showing that
the said shares are ill-gotten and thus belong to the state;
and
“2. whether there is an immediate danger of dissipation
thus necessitating their continued sequestration and
voting by the PCGG while the main issue pends with the
Sandiganbayan.”
The two-tiered test, however, does not apply in cases
involving funds of "public character." In such cases, the
government is granted the authority to vote said shares,
namely:
(1) Where government shares are taken over by private
persons or entities who/which registered them in their
own names, and
(2) Where the capitalization or shares that were acquired
with public funds somehow landed in private hands.
Citing the case of Republic v. Cocofed: The [public
character] exceptions are based on the common-sense
principle that legal fiction must yield to truth; that public
property registered in the names of non-owners is
affected with trust relations; and that the prima facie
beneficial owner should be given the privilege of enjoying
the rights flowing from the prima facie fact of ownership.
OCRA Notes | 73
This Court summed up the rule in the determination of
whether the PCGG has the right to vote sequestered
shares as follows:
“In short, when sequestered shares registered in the
names of private individuals or entities are alleged to have
been acquired with ill-gotten wealth, then the two-tiered
test is applied. However, when the sequestered shares in
the name of private individuals or entities are shown,
prima facie, to have been (1) originally government
shares, or (2) purchased with public funds or those
affected with public interest, then the two-tiered test does
not apply. Rather, the public character exception in
Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that
is, the government shall vote the shares.”
In the present case before the Court, it is not disputed
that the money used to purchase the sequestered UCPB
shares came from the Coconut Consumer Stabilization
Fund (CCSF), otherwise known as the coconut levy funds.
Hence, by parity of reasoning, the right to vote them is
not subject to the "two-tiered test" but to the public
character of their acquisition, which must first be
determined. To avoid misunderstanding and confusion,
the Court was even more categorical and positive than its
earlier pronouncements: the coconut levy funds are not
only affected with public interest; they are, in fact, prima
facie public funds.
Public funds are those moneys belonging to the State or
to any political subdivision of the State; more specifically,
taxes, customs duties and moneys raised by operation of
law for the support of the government or for the discharge
of its obligations. Undeniably, coconut levy funds satisfy
this general definition of public funds, because of the
following reasons:
1. Coconut levy funds are raised with the use of the police
and taxing powers of the State.
2. They are levies imposed by the State for the benefit of
the coconut industry and its farmers.
3. Respondents have judicially admitted that the
sequestered shares were purchased with public funds.
4. The Commission on Audit (COA) reviews the use of
coconut levy funds.
5. The Bureau of Internal Revenue (BIR), with the
acquiescence of private respondents, has treated them as
public funds.
6. The very laws governing coconut levies recognize their
public character.
EVANGELISTA v. SANTOS
Facts: Juan D. Evangelista et. al. are minority
stockholders of the Vitali Lumber Company, Inc., a
Philippine corporation organized for the exploitation of a
lumber concession in Zamboanga, Philippines. Rafael
Santos holds more than 50 per cent of the stocks of said
corporation and also is and always has been the
president, manager, and treasurer thereof; and that
defendant, in such triple capacity, through fault, neglect,
and abandonment allowed its lumber concession to lapse
and its properties and assets, among them machineries,
buildings, warehouses, trucks, etc., to disappear, thus
causing the complete ruin of the corporation and total
depreciation of its stocks.
Complainants Evangelista, et. al. filed a complaint praying
for judgment requiring Santos: (1) to render an account
of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of their respective
participation in said assets on the basis of the value of the
stocks held by each of them; and (3) to pay the costs of
suit. Plaintiffs also ask for such other remedy as may be
and equitable.
The complaint does not give plaintiffs' residence, but, for
purposes of venue, alleges that Santos resides at 2112
Dewey Boulevard, corner Libertad Street, Pasay, province
of Rizal. Having been served with summons at that place,
Santos filed a motion for the dismissal of the complaint
on the ground of improper venue and also on the ground
that the complaint did not state a cause of action in favor
of plaintiffs.
In support of the objection to the venue, the motion,
which is under oath, states that Santos is a resident of
Iloilo City and not of Pasay, and at the hearing of the
motion defendant also presented further affidavit to the
effect that while he has a house in Pasay, where members
of his family who are studying in Manila live and where he
himself is sojourning for the purpose of attending to his
interests in Manila, yet he has permanent residence in the
City of Iloilo where he is registered as a voter for election
purposes and has been paying his residence certificate.
Plaintiffs opposed the motion for dismissal but presented
no counter proof and merely called attention to the
Sheriff's return showing service of summons on Santos
personally at his alleged residence at No. 2112 Dewey
Boulevard, Pasay.
Issue:
(1) Whether or not venue is improperly laid
(2) Whether or not plaintiffs have a cause of action
OCRA Notes | 74
Held:
(1) YES.
The fact that Santos was sojourning in Pasay at the time
he was served with summons does not make him a
resident of that place for purposes of venue. Residence is
"the permanent home, the place to which, whenever
absent for business or pleasure, one intends to return, ..."
A man can have but one domicile at a time and residence
is anonymous with domicile under section 1 of Rule 5.
(2) NO.
The injury complained of is thus primarily to the
corporation, so that the suit for the damages claimed
should be by the corporation rather than by the
stockholders. The stockholders may not directly claim
those damages for themselves for that would result in the
appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section
16 of the Corporation Law.
While it is to the corporation that the action should pertain
in cases of this nature, if the officers of the corporation,
who are the ones called upon to protect their rights,
refuse to sue, or where a demand upon them to file the
necessary suit would be futile because they are the very
ones to be sued or because they hold the controlling
interest in the corporation, then in that case any one of
the stockholders is allowed to bring suit. But in that case
it is the corporation itself and not the plaintiff stockholder
that is the real property in interest, so that such damages
as may be recovered shall pertain to the corporation. In
other words, it is a derivative suit brought by a
stockholder as the nominal party plaintiff for the benefit
of the corporation, which is the real property in interest.
In the present case, the plaintiff stockholders have
brought the action not for the benefit of the corporation
but for their own benefit, since they ask that the
defendant make good the losses occasioned by his
mismanagement and pay to them the value of their
respective participation in the corporate assets on the
basis of their respective holdings. Clearly, this cannot be
done until all corporate debts, if there be any, are paid
and the existence of the corporation terminated by the
limitation of its charter or by lawful dissolution in view of
the provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of
action in their favor so that the lower court did not err in
dismissing the complaint on that ground.
And while the action stated in their complaint is
susceptible of being converted into a derivative suit for
the benefit of the corporation by a mere change in the
prayer, such amendment, however, is not possible now,
since the complaint has been filed in the wrong court, so
that the same last to be dismissed.
CHUA v. CA
Facts: Lydia Hao, treasurer of Siena Realty Corporation,
filed a complaint-affidavit with the City Prosecutor of
Manila charging Francis Chua and his wife, Elsa Chua, of
four counts of falsification of public documents. The
charge states that the accused prepared, certified, and
falsified the Minutes of the Annual Stockholders meeting
of the Board of Directors of the Siena Realty Corporation,
duly notarized before a Notary Public, Atty. Juanito G.
Garcia, and therefore, a public document, by making or
causing it to appear in said Minutes of the Annual
Stockholders Meeting that LYDIA HAO CHUA was present
and has participated in said proceedings, when in truth
and in fact, as the said accused fully well knew that said
Lydia C. Hao was never present during the Annual
Stockholders Meeting held on April 30, 1994 and neither
has participated in the proceedings thereof to the
prejudice of public interest and in violation of public faith
and destruction of truth as therein proclaimed.
Thereafter, the City Prosecutor filed the Information
against Francis Chua but dismissed the accusation against
Elsa Chua. During the trial in the MeTC, private
prosecutors Atty. Evelyn Sua-Kho and Atty. Ariel Bruno
Rivera appeared as private prosecutors and presented
Hao as their first witness. After Hao's testimony, Chua
moved to exclude complainant's counsels as private
prosecutors in the case on the ground that Hao failed to
allege and prove any civil liability in the case. MeTC
granted Chua's motion and ordered the complainant's
counsels to be excluded from actively prosecuting the
criminal case. After Hao’s motion for reconsideration was
denied, the filed a petition for certiorari entitled Lydia C.
Hao, in her own behalf and for the benefit of Siena Realty
Corporation v. Francis Chua, and the Honorable Hipolito
dela Vega, Presiding Judge, Branch 22, Metropolitan Trial
Court of Manila, before the RTC of Manila.
RTC reversed the MeTC order. In his petition for
Certiorari, Chua argued before the Court of Appeals that
Hao had no authority whatsoever to bring a suit in behalf
OCRA Notes | 75
of the Corporation since there was no Board Resolution
authorizing her to file the suit.
The Court of Appeals held that the action was indeed a
derivative suit, for it alleged that Chua falsified documents
pertaining to projects of the corporation and made it
appear that the Chua was a stockholder and a director of
the corporation. According to the appellate court, the
corporation was a necessary party to the petition filed
with the RTC and even if Hao filed the criminal case, her
act should not divest the Corporation of its right to be a
party and present its own claim for damages.
Issue:
(1) Whether or not the criminal complaint is in the
nature of a derivative suit
(2) Whether or not Siena Realty Corporation is a
proper petitioner in the petition for certiorari
(3) Whether or not it is proper to allow the private
prosecutors to actively participate in the trial of
the criminal case
Held:
(1) YES.
Under Section 36 of the Corporation Code, read in relation
to Section 23, where a corporation is an injured party, its
power to sue is lodged with its board of directors or
trustees. An individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he
holds stocks in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the
real party in interest.
A derivative action is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a
judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an
action against it and is not asserting it, a stockholder may
intervene and defend on behalf of the corporation.
Under the Revised Penal Code, every person criminally
liable for a felony is also civilly liable. When a criminal
action is instituted, the civil action for the recovery of civil
liability arising from the offense charged shall be deemed
instituted with the criminal action, unless the offended
party waives the civil action, reserves the right to institute
it separately or institutes the civil action prior to the
criminal action.
The complaint was instituted by Hao against Chua for
falsifying corporate documents whose subject concerns
corporate projects of Siena Realty Corporation. Clearly,
Siena Realty Corporation is an offended party. Hence,
Siena Realty Corporation has a cause of action. And the
civil case for the corporate cause of action is deemed
instituted in the criminal action.
Not every suit filed in behalf of the corporation is a
derivative suit. For a derivative suit to prosper, it is
required that the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that
he is suing on a derivative cause of action on behalf of
the corporation and all other stockholders similarly
situated who may wish to join him in the suit. It is a
condition sine qua non that the corporation be impleaded
as a party because not only is the corporation an
indispensable party, but it is also the present rule that it
must be served with process. The judgment must be
made binding upon the corporation in order that the
corporation may get the benefit of the suit and may not
bring subsequent suit against the same defendants for
the same cause of action. In other words, the corporation
must be joined as party because it is its cause of action
that is being litigated and because judgment must be a
res adjudicata against it.
In the criminal complaint filed by Hao, nowhere is it stated
that she is filing the same in behalf and for the benefit of
the corporation. Thus, the criminal complaint including
the civil aspect thereof could not be deemed in the nature
of a derivative suit.
(2) YES
In the instant case, the Court finds that the recourse of
Hao to the Court of Appeals was proper. The petition was
brought in her own name and in behalf of the Corporation.
Although, the corporation was not a complainant in the
criminal action, the subject of the falsification was the
corporation's project and the falsified documents were
corporate documents. Therefore, the corporation is a
proper party in the petition for certiorari because the
proceedings in the criminal case directly and adversely
affected the corporation.
(3) YES.
When the civil action is instituted with the criminal action,
evidence should be taken of the damages claimed and the
court should determine who are the persons entitled to
such indemnity. The civil liability arising from the crime
may be determined in the criminal proceedings if the
offended party does not waive to have it adjudged or does
OCRA Notes | 76
not reserve the right to institute a separate civil action
against the defendant. Accordingly, if there is no waiver
or reservation of civil liability, evidence should be allowed
to establish the extent of injuries suffered.
In the case before us, there was neither a waiver nor a
reservation made; nor did the offended party institute a
separate civil action. It follows that evidence should be
allowed in the criminal proceedings to establish the civil
liability arising from the offense committed, and the
private offended party has the right to intervene through
the private prosecutors.
EXPERT TRAVEL & TOURS INC v. CA
Facts: On September 6, 1999, Korean Airlines (KAL), a
corporation established and registered in the Republic of
South Korea and licensed to do business in the
Philippines, through Atty. Mario Aguinaldo, filed a
complaint against Expertravel & Tours, Inc. for the
collection of the principal amount of P260,150.00, plus
attorney’s fees and exemplary damages. The verification
and certification against forum shopping was signed by
Atty. Aguinaldo, who indicated therein that he was the
resident agent and legal counsel of KAL and had caused
the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground
that Atty. Aguinaldo was not authorized to execute the
verification and certificate of non-forum shopping as
required by Section 5, Rule 7 of the Rules of Court. KAL
opposed the motion, contending that Atty. Aguinaldo was
its resident agent and was registered as such with the
Securities and Exchange Commission (SEC) as required
by the Corporation Code of the Philippines. It was further
alleged that Atty. Aguinaldo was also the corporate
secretary of KAL. Appended to the said opposition was
the identification card of Atty. Aguinaldo, showing that he
was the lawyer of KAL.
KAL submitted on March 6, 2000 an Affidavit of even date,
executed by its general manager Suk Kyoo Kim, alleging
that the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty.
Aguinaldo attended. It was also averred that in that same
teleconference, the board of directors approved a
resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping and to file the
complaint. Suk Kyoo Kim also alleged, however, that the
corporation had no written copy of the aforesaid
resolution.
RTC denied the motion to dismiss of ETI. CA dismissed
petition for certiorari and mandamus ruling that the
verification and certificate of non-forum shopping
executed by Atty. Aguinaldo was sufficient compliance
with the Rules of Court. According to the appellate court,
Atty. Aguinaldo had been duly authorized by the board
resolution approved on June 25, 1999, and was the
resident agent of KAL. As such, the RTC could not be
faulted for taking judicial notice of the said teleconference
of the KAL Board of Directors.
Issue:
(1) Whether or not there was adequate compliance
with the requirement of certification of non-forum
shopping
(2) Whether or not RTC properly took judicial notice
of the teleconferencing
Held:
(1) NO.
It is settled that the requirement to file a certificate of
non-forum shopping is mandatory and that the failure to
comply with this requirement cannot be excused. The
certification is a peculiar and personal responsibility of the
party, an assurance given to the court or other tribunal
that there are no other pending cases involving basically
the same parties, issues and causes of action. Hence, the
certification must be accomplished by the party himself
because he has actual knowledge of whether or not he
has initiated similar actions or proceedings in different
courts or tribunals. Even his counsel may be unaware of
such facts. Hence, the requisite certification executed by
the plaintiff’s counsel will not suffice.
In a case where the plaintiff is a private corporation, the
certification may be signed, for and on behalf of the said
corporation, by a specifically authorized person, including
its retained counsel, who has personal knowledge of the
facts required to be established by the documents.
As gleaned from the certification, there was no allegation
that Atty. Aguinaldo had been authorized to execute the
certificate of non-forum shopping by KAL’s Board of
Directors; moreover, no such board resolution was
appended thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of KAL in the
Philippines, this does not mean that he is authorized to
execute the requisite certification against forum
shopping. Under Section 127, in relation to Section 128 of
the Corporation Code, the authority of the resident agent
of a foreign corporation with license to do business in the
Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all
OCRA Notes | 77
actions and other legal proceedings against such
corporation.
Under the law, Atty. Aguinaldo was not specifically
authorized to execute a certificate of non-forum shopping
as required by Section 5, Rule 7 of the Rules of Court.
This is because while a resident agent may be aware of
actions filed against his principal (a foreign corporation
doing business in the Philippines), such resident may not
be aware of actions initiated by its principal, whether in
the Philippines against a domestic corporation or private
individual, or in the country where such corporation was
organized and registered, against a Philippine registered
corporation or a Filipino citizen.
(1) NO.
Generally speaking, matters of judicial notice have three
material requisites: (1) the matter must be one of
common and general knowledge; (2) it must be well and
authoritatively settled and not doubtful or uncertain; and
(3) it must be known to be within the limits of the
jurisdiction of the court. The principal guide in
determining what facts may be assumed to be judicially
known is that of notoriety. Hence, it can be said that
judicial notice is limited to facts evidenced by public
records and facts of general notoriety. Moreover, a
judicially noticed fact must be one not subject to a
reasonable dispute in that it is either: (1) generally known
within the territorial jurisdiction of the trial court; or (2)
capable of accurate and ready determination by resorting
to sources whose accuracy cannot reasonably be
questionable.
Things of "common knowledge," of which courts take
judicial matters coming to the knowledge of men
generally in the course of the ordinary experiences of life,
or they may be matters which are generally accepted by
mankind as true and are capable of ready and
unquestioned demonstration. Thus, facts which are
universally known, and which may be found in
encyclopedias, dictionaries or other publications, are
judicially noticed, provided, they are of such universal
notoriety and so generally understood that they may be
regarded as forming part of the common knowledge of
every person. As the common knowledge of man ranges
far and wide, a wide variety of particular facts have been
judicially noticed as being matters of common knowledge.
But a court cannot take judicial notice of any fact which,
in part, is dependent on the existence or non-existence of
a fact of which the court has no constructive knowledge.
In this age of modern technology, the courts may take
judicial notice that business transactions may be made by
individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in
two or more locations) through an electronic medium. In
general terms, teleconferencing can bring people
together under one roof even though they are separated
by hundreds of miles. This type of group communication
may be used in a number of ways, and have three basic
types: (1) video conferencing - television-like
communication augmented with sound; (2) computer
conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal
communication via the telephone with optional capacity
for telewriting or telecopying.
A teleconference represents a unique alternative to face-
to-face (FTF) meetings. It was first introduced in the
1960’s with American Telephone and Telegraph’s
Picturephone. At that time, however, no demand existed
for the new technology. Travel costs were reasonable and
consumers were unwilling to pay the monthly service
charge for using the picturephone, which was regarded
as more of a novelty than as an actual means for everyday
communication.
In the Philippines, teleconferencing and
videoconferencing of members of board of directors of
private corporations is a reality, in light of Republic Act
No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with
related to such conferences. Thus, the Court agrees with
the RTC that persons in the Philippines may have a
teleconference with a group of persons in South Korea
relating to business transactions or corporate governance.
KAL’s allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said
resolution (with Atty. Aguinaldo in attendance) is
incredible, given that:
(a) no such allegation was made in the complaint. If
the resolution had indeed been approved on June
25, 1999, long before the complaint was filed,
KAL should have incorporated it in its complaint,
or at least appended a copy thereof. KAL failed to
do so.
(b) It was only on January 28, 2000 that KAL claimed,
for the first time, that there was such a meeting
of the Board of Directors held on June 25, 1999;
it even represented to the Court that a copy of its
resolution was with its main office in Korea, only
to allege later that no written copy existed. It was
only on March 6, 2000 that KAL alleged, for the
OCRA Notes | 78
 first time, that the meeting of the Board of
Directors where the resolution was approved was
held via teleconference.
(c) Worse still, it appears that as early as January 10,
1999, Atty. Aguinaldo had signed a Among the changes introduced in the new Code with
Secretary’s/Resident Agent’s Certificate alleging
that the board of directors held a teleconference
on June 25, 1999.
(d) More importantly, KAL did not explain why the
said certificate was signed by Atty. Aguinaldo as
early as January 9, 1999, and yet was notarized
one year later (on January 10, 2000);
(e) it also did not explain its failure to append the
said certificate to the complaint, as well as to its
Compliance dated March 6, 2000.
GONZALES v. PNB
Facts: Ramon A. Gonzales, in his dual capacity as a
taxpayer and stockholder, instituted several cases
questioning different transactions entered into by the
Philippine National Bank with other parties, one of which
is that against Sec. Antonio Raquiza of Public Works and
Communications, the Commissioner of Public Highways,
the Bank, Continental Ore Phil., Inc., Continental Ore,
Huber Corporation, Allis Chalmers and General Motors
Corporation, wherein he questions the letters of credit
PNB has extended for the importation by the Republic of
the Philippines of public works equipment intended for the
massive development program of the President.
The court a quo denied the prayer of Gonzales that he be
allowed to examine and inspect the books and records of
PNB regarding the transactions mentioned on the grounds
that the right of a stockholder to inspect the record of the
business transactions of a corporation granted under
Section 51 of the former Corporation Law (Act No. 1459,
as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must
be asked for in good faith for a specific and honest
purpose and not gratify curiosity or for speculative or
vicious purposes; that such examination would violate the
confidentiality of the records of PNB as provided in
Section 16 of its charter, Republic Act No. 1300, as
amended; and that Gonzales has not exhausted his
administrative remedies.
Gonzales argues that his alleged improper motive in
asking for an examination of the books and records of
PNB disqualifies him to exercise the right of a stockholder
to such inspection under Section 51 of Act No. 1459, as
amended.
Issue: Whether or not Gonzales should be allowed to
inspect the records of PNB
Held: NO.
respect to the right of inspection granted to a stockholder
are the following the records must be kept at the principal
office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the
excerpts of the records or minutes; and the refusal to
allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of
inspection, the new Code has prescribed limitations to the
same. It is now expressly required as a condition for such
examination that the one requesting it must not have
been guilty of using improperly any information through
a prior examination, and that the person asking for such
examination must be "acting in good faith and for a
legitimate purpose in making his demand."
The unqualified provision on the right of inspection
previously contained in Section 51, Act No. 1459, as
amended, no longer holds true under the provisions of
the present law. The argument of Gonzales that the right
granted to him under Section 51 of the former
Corporation Law should not be dependent on the
propriety of his motive or purpose in asking for the
inspection of the books of the respondent bank loses
whatever validity it might have had before the
amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of
inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of
proper motive on the part of the stockholder demanding
the same, it is now dissipated by the clear language of
the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
Although Gonzales has claimed that he has justifiable
motives in seeking the inspection of the books of PNB, he
has not set forth the reasons and the purposes for which
he desires such inspection, except to satisfy himself as to
the truth of published reports regarding certain
transactions entered into by PNB and to inquire into their
validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of
his good faith and proper motivation. Admittedly he
sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even
before he became a stockholder. His obvious purpose was
OCRA Notes | 79
to arm himself with materials which he can use against
the respondent bank for acts done by the latter when the
petitioner was a total stranger to the same. He could have
been impelled by a laudable sense of civic consciousness,
but it could not be said that his purpose is germane to his
interest as a stockholder.
Lastly, the inspection sought to be exercised by Gonzales
would be violative of the provisions of the bank’s charter.
The Philippine National Bank is not an ordinary
corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the
Philippines. The provision of Section 74 of Batas
Pambansa Blg. 68 of the new Corporation Code with
respect to the right of a stockholder to demand an
inspection or examination of the books of the corporation
may not be reconciled with the provisions of the charter
of PNB. It is not correct to claim, therefore, that the right
of inspection under Section 74 of the new Corporation
Code may apply in a supplementary capacity to the
charter of PNB.
NESTOR CHING AND ANDREW WELLINGTON v.
SUBIC BAY GOLD AND COUNTRY CLUB
Facts: Nestor Ching and Andrew Wellington filed a
Complaint with the RTC of Olongapo City on behalf of the
members of Subic Bay Golf and Country Club, Inc.
(SBGCCI) against the said country club and its Board of
Directors and officers under the provisions of Presidential
Decree No. 902-A in relation to Section 5.2 of the
Securities Regulation Code. The complaint alleged that
SBGSI sold shares to them at US$22,000.00 per share,
presenting to them the Articles of Incorporation which
contained the following provision:
No profit shall inure to the exclusive benefit of any of its
shareholders, hence, no dividends shall be declared in
their favor. Shareholders shall be entitled only to a pro-
rata share of the assets of the Club at the time of
its dissolution or liquidation.
Later however, an amendment to the Articles of
Incorporation was approved by the Securities and
Exchange Commission (SEC), which allegedly makes the
shares non-proprietary, as it takes away the right of the
shareholders to participate in the pro-rata distribution of
the assets of the corporation after its dissolution.
According Ching and Wellington, this is in fraud of the
stockholders who only discovered the amendment when
they filed a case for injunction to restrain the corporation
from suspending their rights to use all the facilities of the
club. Alleging that the stockholders suffered damages as
a result of the fraudulent mismanagement of the
corporation, Ching and Wellington prayed for the issuance
of a restraining order and writ of preliminary injunction.
Respondents claimed by way of defense that Ching and
Wellington failed (a) to show that it was authorized by
SBGSI to file the Complaint on the said corporation’s
behalf; (b) to comply with the requisites for filing a
derivative suit and an action for receivership; and (c) to
justify their prayer for injunctive relief since the Complaint
may be considered a nuisance or harassment suit under
Section 1(b), Rule1 of the Interim Rules of Procedure for
Intra-Corporate Controversies.
Issue: Whether or not Ching and Wellington may file a
derivative suit
Held: NO. The complaint is not a nuisance or harassment
suit but it shall still be dismissed as Ching and Wellington
failed to state with particularity in the Complaint that they
had exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, and
laws or rules governing the corporation to obtain the relief
they desire.
A derivative suit must be differentiated from individual
and representative or class suits, thus:
"Suits by stockholders or members of a corporation based
on wrongful or fraudulent acts of directors or other
persons may be classified into individual suits, class suits,
and derivative suits. Where a stockholder or member is
denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to
the other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where
preferred stockholders’ rights are violated, a class or
representative suit will be proper for the protection of all
stockholders belonging to the same group. But where the
acts complained of constitute a wrong to the corporation
itself, the cause of action belongs to the corporation and
not to the individual stockholder or member. Although in
most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of
his interest therein would be impaired, this fact of itself is
not sufficient to give him an individual cause of action
since the corporation is a person distinct and separate
from him, and can and should itself sue the wrongdoer.
Otherwise, not only would the theory of separate entity
be violated, but there would be multiplicity of suits as well
as a violation of the priority rights of creditors.
Furthermore, there is the difficulty of determining the
amount of damages that should be paid to each individual
stockholder.
OCRA Notes | 80
However, in cases of mismanagement where the wrongful
acts are committed by the directors or trustees
themselves, a stockholder or member may find that he
has no redress because the former are vested by law with
the right to decide whether or not the corporation should
sue, and they will never be willing to sue themselves. The
corporation would thus be helpless to seek remedy.
Because of the frequent occurrence of such a situation,
the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has
been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever officials
of the corporation refuse to sue or are the ones to be sued
or hold the control of the corporation. In such actions, the
suing stockholder is regarded as the nominal party, with
the corporation as the party in interest."
Indeed, the Court notes American jurisprudence to the
effect that a derivative suit, on one hand, and individual
and class suits, on the other, are mutually exclusive, viz.:
"As the Supreme Court has explained: "A shareholder’s
derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when
injury is caused to the corporation that may not otherwise
be redressed because of failureof the corporation to act.
Thus, ‘the action is derivative, i.e., in the corporate right,
if the gravamen of the complaint is injury to the
corporation, or to the whole body of its stock and property
without any severance or distribution among individual
holders, or it seeks to recover assets for the corporation
or to prevent the dissipation of its assets.’ x x x. In
contrast, "a directaction [is one] filed by the shareholder
individually (or on behalf of a classof shareholders to
which he or she belongs) for injury to his or her interestas
a shareholder. x x x. [T]he two actions are mutually
exclusive: i.e., the right of action and recovery belongs to
either the shareholders (direct action) *651 or the
corporation(derivative action)." x x x.
The reliefs sought in the Complaint, namely that of
enjoining defendants from acting as officers and Board of
Directors of the corporation, the appointment of a
receiver, and the prayer for damages in the amount of
the decrease in the value of the sharesof stock, clearly
show that the Complaint was filed to curb the alleged
mismanagement of SBGCCI. The causes of action pleaded
by petitioners do not accrue to a single shareholder or a
class of shareholders but to the corporation itself.
However, a derivative suit cannot prosper without
first complying with the legal requisites for its
institution.
Section 1, Rule 8 of the Interim Rules of Procedure
Governing IntraCorporate Controversies imposes the
following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts
or transactions subject of the action occurred and at the
time the action was filed;
(2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-
laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
The Complaint should not have been dismissed on the
ground that it is a nuisance or harassment suit. Although
the shareholdings of Ching and Wellington are indeed
only two out of the 409 alleged outstanding shares or
0.24%, the Court has held that it is enough that a
member or a minority of stockholders file a derivative suit
for and in behalf of a corporation.
With regard, however, to the second requisite, we find
that Ching and Wellington failed to state with particularity
in the Complaint that they had exerted all reasonable
efforts to exhaust all remedies available under the articles
of incorporation, by-laws, and laws or rules governing the
corporation to obtain the relief they desire. The Complaint
contained no allegation whatsoever of any effort to avail
of intra-corporate remedies. Indeed, even if Ching and
Wellington thought it was futile to exhaust intra-corporate
remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion.
Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules.
LIM v. MOLDEX LAND
Facts: Mary E. Lim is a registered unit owner of 1322
Golden Empire Tower (Golden Empire Tower), a
condominium project of Moldex Land, Inc. (Moldex). 1322
Roxas Boulevard Condominium Corporation (Condocor) is
the registered condominium corporation for the Golden
Empire Tower. Lim, as a unit owner of Golden Empire
Tower, is a member of Condocor. Moldex became a
OCRA Notes | 81
member of Condocor on the basis of its ownership of the
220 unsold units in the Golden Empire Tower.
On July 21, 2012, Condocor held its annual general
membership meeting. Its corporate secretary certified,
and Jeffrey Jaminola, as Chairman, declared the existence
of a quorum even though only 29 of the 108 unit buyers
were present. The declaration of quorum was based on
the presence of the majority of the voting rights, including
those pertaining to the 220 unsold units held by Moldex
through its representatives. Lim, through her attorney-in-
fact, objected to the validity of the meeting. The objection
was denied. Thus, Lim and all the other unit owners
present, except for one, walked out and left the meeting.
Despite the walkout, the individual respondents and the
other unit owner proceeded with the annual general
membership meeting and elected the new members of
the Board of Directors for 2012-2013.
Lim filed an election protest before the RTC. However, the
same was dismissed as the total voting rights of unit
owners in good standing was 73,376 and, as certified by
the corporate secretary, 83.33% of the voting rights in
good standing were present in the said meeting, inclusive
of the 5 8,504 voting rights of Moldex.
Lim argued that Moldex cannot be a member of Condocor.
She insisted that a condominium corporation is an
association of homeowners for the purpose of managing
the condominium project, among others. Thus, it must be
composed of actual unit buyers or residents of the
condominium project. Lim further averred that the
ownership contemplated by law must result from a sale
transaction between the owner-developer and the
purchaser. She advanced the view that the ownership of
Moldex was only in the nature of an owner-developer and
only for the sole purpose of selling the units. In justifying
her arguments, Lim cited Section 30 of Presidential
Decreee No. 957, known as The Subdivision and
Condominium Buyers' Protective Decree (P.D. No. 957)
Issue:
(1) Whether or not there was a quorum
(2) Whether or not Moldex can be a member of
Condocor
(3) Whether or not Moldex may appoint a duly
authorized representative
(4) Whether or not individual respondents who are
non-members can be elected as directors and
officers of the Condominium Corporation
Held:
(1) NO.
Section 90 of the Corporation Code states that
membership in a non-stock corporation and all rights
arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws
otherwise provide.
Nothing in the records showed that the alleged transfer
made by Lim was registered with the Register of Deeds
of the City of Manila or was reported to the corporation.
Logically, until and unless the registration is effected, Lim
remains to be the registered owner of the condominium
unit and thus, continues to be a member of Condocor.
Moreover, even assuming that there was a transfer by
virtue of the Deed of Assignment, the Confirmatory
Special Power of Attorney executed later by Lim, wherein
she reiterated her membership in Condocor and
constituted Reynaldo V. Lim as her true and lawful
Attorney-in-Fact, strengthened the fact that she still owns
the condominium unit and that there has been no transfer
of ownership over the said property to her nephew, but
only a mere assignment of rights to the latter.
In corporate parlance, the term "meeting" applies to
every duly convened assembly either of stockholders,
members, directors, trustees, or managers for any legal
purpose, or the transaction of business of a common
interest.25 Under Philippine corporate laws, meetings
may either be regular or special. A stockholders' or
members' meeting must comply with the following
requisites to be valid:
1. The meeting must be held on the date fixed in the By-
Laws or in accordance with law;
2. Prior written notice of such meeting must be sent to all
stockholders/members of record;
3. It must be called by the proper party;
4. It must be held at the proper place; and
5. Quorum and voting requirements must be met.
Of these five (5) requirements, the existence of a quorum
is crucial. Any act or transaction made during a meeting
without quorum is rendered of no force and effect, thus,
not binding on the corporation or parties concerned. For
stock corporations, the quorum is based on the number
of outstanding voting stocks while for non-stock
corporations, only those who are actual, living members
with voting rights shall be counted in determining the
existence of a quorum.
OCRA Notes | 82
The basis in determining the presence of quorum in non-
stock corporations is the numerical equivalent of all
members who are entitled to vote, unless some other
basis is provided by the By-Laws of the corporation. The
qualification "with voting rights" simply recognizes the
power of a non-stock corporation to limit or deny the right
to vote of any of its members. To include these members
without voting rights in the total number of members for
purposes of quorum would be superfluous for although
they may attend a particular meeting, they cannot cast
their vote on any matter discussed therein.
It must be emphasized that insofar as Condocor is
concerned, quorum is different from voting rights.
Applying the law and Condocor's By-Laws, if there are 100
members in a non-stock corporation, 60 of which are
members in good standing, then the presence of 50%
plus 1 of those members in good standing will constitute
a quorum. Thus, 31 members in good standing will suffice
in order to consider a meeting valid as regards the
presence of quorum. The 31 members will naturally have
to exercise their voting rights. It is in this instance when
the number of voting rights each member is entitled to
becomes significant. If 29 out of the 31 members are
entitled to 1 vote each, another member (known as A) is
entitled to 20 votes and the remaining member (known
as B) is entitled to 15 votes, then the total number of
voting rights of all 31 members is 64. Thus, majority of
the 64 total voting rights, which is 33 (50% plus 1), is
necessary to pass a valid act. Assuming that only A and B
concurred in approving a specific undertaking, then their
35 combined votes are more than sufficient to authorize
such act.
The By-Laws of Condocor has no rule different from that
provided in the Corporation Code with respect the
determination of the existence of a quorum. The quorum
during the July 21, 2012 meeting should have been
majority of Condocor's members in good standing.
Accordingly, there was no quorum during the July 21,
2012 meeting considering that only 29 of the 108 unit
buyers were present. As there was no quorum, any
resolution passed during the July 21, 2012 annual
membership meeting was null and void and, therefore,
not binding upon the corporation or its members. The
meeting being null and void, the resolution and
disposition of other legal issues emanating from the null
and void July 21, 2012 membership meeting has been
rendered unnecessary.
(2) YES.
Law and jurisprudence dictate that ownership of a unit
entitles one to become a member of a condominium
corporation. The Condominium Act does not provide a
specific mode of acquiring ownership. Thus, whether one
becomes an owner of a condominium unit by virtue of
sale or donation is of no moment.
It is erroneous to argue that the ownership must result
from a sale transaction between the owner-developer and
the purchaser. Such interpretation would mean that
persons who inherited a unit, or have been donated one,
and properly transferred title in their names cannot
become members of a condominium corporation.
(3) YES.
A corporation can act only through natural persons duly
authorized for the purpose or by a specific act of its board
of directors. Thus, in order for Moldex to exercise its
membership rights and privileges, it necessarily has to
appoint its representatives.
Moldex had the right to send duly authorized
representatives to represent it during the questioned
general membership meeting. Records showed that,
pursuant to a Board Resolution, as certified by Sandy T.
Uy, corporate secretary of Moldex, the individual
respondents were instituted as Moldex's representatives.
This was attested to by Mary Rose V. Pascual, Assistant
Corporate Secretary of Condocor, in a sworn statement48
she executed on August 31, 2012.
(4) NO.
The governance and management of corporate affairs in
a corporation lies with its board of directors in case of
stock corporations, or board of trustees in case of non-
stock corporations. As the board exercises all corporate
powers and authority expressly vested upon it by law and
by the corporations' by-laws, there are minimum
requirements set in order to be a director or trustee, one
of which is ownership of a share in one's name or
membership in a non-stock corporation.
While Moldex may rightfully designate proxies or
representatives, the latter, however, cannot be elected as
directors or trustees of Condocor. First, the Corporation
Code clearly provides that a director or trustee must be a
member of record of the corporation. Further, the power
of the proxy is merely to vote. If said proxy is not a
member in his own right, he cannot be elected as a
director or proxy.
OCRA Notes | 83
Following Section 25 of the Corporation Code, the election
of individual respondents, as corporate officers, was
likewise invalid.
Section 25 of the Corporation Code mandates that the
President shall be a director. As previously discussed,
Jaminola could not be elected as a director. Consequently,
Jaminola's election as President was null and void.
The same provision allows the election of such other
officers as may be provided for in the by-laws. Condocor's
By-Laws, however, require that the Vice-President shall
be elected by the Board from among its member-directors
in good standing, and the Secretary may be appointed by
the Board under the same circumstance. Like Jaminola,
Milanes and Macalintal were not directors and, thus, could
not be elected and appointed as Vice-President and
Secretary, respectively.
Insofar as Roman's election as Treasurer is concerned,
the same would have been valid, as a corporate treasurer
may or may not be a director of the corporation's board.
The general membership meeting of Condocor, however,
was null and void. As a consequence, Roman's election
had no legal force and effect.
In fine, the July 21, 2012 annual general membership
meeting of Condocor being null and void, all acts and
resolutions emanating therefrom are likewise null and
void.
ROQUE v. PEOPLE
Facts: Oscar Ongjoco, a member of Barangay Mulawin
Tricycle Operators and Drivers Association, Inc.
(BMTODA), learned that BMTODA's funds were missing.
In a letter, Ongjoco requested copies of the Association's
documents pursuant to his right to examine records under
Section 74 of the Corporation Code of the Philippines
(Corporation Code). However, Singson, the Secretary of
BMTODA, denied his request.
Ongjoco also learned that the incumbent officers were
holding office for three years already, in violation of the
one-year period provided for in BMTODA's by-laws. He
then requested from Roque, the President of BMTODA, a
copy of the list of its members with the corresponding
franchise numbers of their respective tricycle fees and the
franchise fees paid by each member, but Roque denied
Ongjoco's request.
Ongjoco filed an Affidavit-Complaint against Roque and
Singson for violation of Section 74 in relation to Section
144 of the Corporation Code because of their refusal to
furnish him copies of records pertaining to BMTODA.
The Office of the City Prosecutor of San Jose Del Monte,
Bulacan found probable cause to indict Roque and
Singson. Hence, an Information was filed against them.
RTC granted Roque’s demurrer to evidence, stating that
BMTODA failed to prove its existence as a corporation.
Hence, a violation under the Corporation Code cannot be
made applicable against its officers.
CA reversed and set aside the order, ruling that a Petition
to Lift Order of Revocation and the SEC Order Lifting the
Revocation were presented in evidence; and that logic
dictates that such documentary evidence presupposes a
duly registered and existing entity.
Roque filed a petition for certiorari, contending that there
is want of evidence to prove that BMTODA is a corporation
duly established and organized under the Corporation
Code; thus, he cannot be prosecuted under the penal
provisions of the said code.
Issue: Whether or not BMTODA is a duly established
corporation
Held: YES.
Section 74 of the Corporation Code provides for the
liability for damages of any officer or agent of the
corporation for refusing to allow any director, trustee,
stockholder or member of the corporation to examine and
copy excerpts from its records or minutes. Section 144 of
the same Code further provides for other applicable
penalties in case of violation of any provision of the
Corporation Code.
Hence, to prove any violation under the aforementioned
provisions, it is necessary that: (1) a director, trustee,
stockholder or member has made a prior demand in
writing for a copy of excerpts from the corporations
records or minutes; (2) any officer or agent of the
concerned corporation shall refuse to allow the said
director, trustee, stockholder or member of the
corporation to examine and copy said excerpts; (3) if such
refusal is made pursuant to a resolution or order of the
board of directors or trustees, the liability under this
section for such action shall be imposed upon the
directors or trustees who voted for such refusal; and (4)
where the officer or agent of the corporation sets up the
defense that the person demanding to examine and copy
excerpts from the corporation's records and minutes has
improperly used any information secured through any
prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting
OCRA Notes | 84
in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved.
Clearly, Ongjoco, as a member of BMTODA, had a right
to examine documents and records pertaining to said
association. To recall, Ongjoco made a prior demand in
writing for copy of pertinent records of BMTODA from
Roque and Singson. Ongjoco sent his letters dated
December 13, 2003 and August 29, 2004 to Roque and
Singson, respectively. However, both of them refused to
furnish Ongjoco copies of such pertinent records.
The termination of the life of a juridical entity does not,
by itself, cause the extinction or diminution of the rights
and liabilities of such entity nor those of its owners and
creditors. Thus, the revocation of BMTODA's registration
does not automatically strip off Ongjoco of his right to
examine pertinent documents and records relating to
such association. For his individual and separate act,
Roque should be held accountable. Hence, Roque's denial
is unquestionably considered as a violation under the
Corporation Code.
BELO MEDICAL GROUP v. SANTOS
Facts: Belo Medical Group received a request from Jose
L. Santos for the inspection of corporate records. Santos
claimed that he was a registered shareholder and a co-
owner of Victoria G. Belo's shares, as these were acquired
while they cohabited as husband and wife. Santos'
concern over the corporate operations arose from the
alleged death of a patient in one (1) of its clinics.
After the first attempt to inspect, Belo wrote Belo Medical
Group to repudiate Santos' co-ownership of her shares
and his interest in the corporation. She claimed that
Santos held the 25 shares in his name merely in trust for
her, as she, and not Santos, paid for these shares. She
informed Belo Medical Group that Santos already had a
pending petition with the Regional Trial Court to be
declared as co-owner of her properties. She asserted that
unless a decision was rendered in Santos' favor, he could
not exercise ownership rights over her properties. Belo
also informed Belo Medical Group that Santos had a
business in direct competition with it. She suspected that
Santos' request to inspect the records of Belo Medical
Group was a means to obtain a competitor's business
information, and was, therefore, in bad faith.
After the second attempt to inspect, Belo reiterated her
objections and further manifested that she was exercising
her right as a shareholder to inspect the books herself to
establish that the 25 shares were not owned by Santos,
and that he did not pay for these shares.
Thus, Belo Medical Group filed a Complaint for
Interpleader before the RTC of Makati City. Belo Medical
Group alleged that while Santos appeared to be a
registered stockholder, there was nothing on the record
to show that he had paid for the shares under his name.
Later, Belo Medical Group filed a Supplemental Complaint
for declaratory relief, praying that Santos be perpetually
barred from inspecting its books due to his business
interest in a competitor.
Belo Medical Group's Complaint and Supplemental
Complaint were raffled to Branch 149 of the Regional Trial
Court of Makati, a special commercial court,27 thus
classifying them as intra-corporate.
Belo in her answer with cross-claim, argued that the
proceedings should not have been classified as intra-
corporate because while their right of inspection as
shareholders may be considered intra-corporate, "it
ceases to be that and becomes a full-blown civil law
question if competing rights of ownership are asserted as
the basis for the right of inspection.” Belo Medical Group
filed an Omnibus Motion for Clarificatory Hearing and for
Leave to File Consolidated Reply, praying that the case be
tried as a civil case and not as an intra-corporate
controversy. Belo Medical Group clarified that the issue on
ownership of the shares of stock must first be resolved
before the issue on inspection could even be considered
ripe for determination.
Belo Medical Group later on moved that Santos be
declared in default. Instead of filing an answer Santos
filed a Motion to Dismiss alleging that the complaint failed
to state a cause of action.
Based on the corporation's 2007 Articles of Incorporation
and General Information Sheet, Santos was reflected as
a stockholder and owner of the 25 shares of stock. No
documentary evidence was submitted to prove that Belo
owned these shares and merely transferred them to
Santos as nominal shares. Santos further argued that the
filing of the complaints was an afterthought to take
attention away from Belo Medical Group's criminal liability
when it refused Santos' demand to inspect the records of
the corporation. Santos denied any conflict of interest
because Belo Medical Group's products and services
differed from House of Obagi's Belo Medical Group's
primary purpose was the management and operation of
skin clinics while the House of Obagi's main purpose was
the sale and distribution of high-end facial products.
The trial court characterized the dispute as "intrinsically
connected with the regulation of the corporation as it
OCRA Notes | 85
involves the right of inspection of corporate records."
Included in Santos and Belo's conflict was a shareholder's
exclusive right to inspect corporate records. In addition,
the issue on the ownership of shares requires the
application of laws and principles regarding corporations.
However, the Complaint could not flourish as Belo Medical
Group "failed to sufficiently allege conflicting claims of
ownership over the subject shares." Also, Complaint for
Declaratory Relief was struck down as improper because
it sought an initial determination on whether Santos was
in bad faith and if he should be barred from inspecting
the books of the corporation. Only after resolving these
issues can the trial court determine his rights under
Sections 74 and 75 of the Corporation Code.
Belo filed her Petition for Review before the Court of
Appeals. Belo Medical Group, on the other hand, directly
filed its Petition for Review with the Supreme Court.
Belo Medical Group argues that it is enough that there are
two (2) people who have adverse claims against each
other and who are in positions to make effective claims
for interpleader to be given due course.
Issue:
(1) Whether or not there is forum shopping
(2) Whether or not the case involves an intra-
corporate dispute
Held:
(1) NO.
The issue of forum shopping has become moot. The
appeal under Rule 43 filed by Belo has been dismissed by
the Court of Appeals on the ground of litis pendencia.85
The purpose of proscribing forum shopping is the
proliferation of contradictory decisions on the same
controversy. This possibility no longer exists in this case.
(2) YES
A.M. No. 01-2-04-SC, or the Interim Rules of Procedure
Governing Intra-Corporate Controversies, enumerates the
cases where the rules will apply:
Section 1. (a) Cases Covered - These Rules shall govern
the procedure to be observed in civil cases involving the
following:
1. Devices or schemes employed by, or any act of,
the board of directors, business associates,
officers or partners, amounting to fraud or
misrepresentation which may be detrimental to
the interest of the public and/or of the
stockholders, partners, or members of any
corporation, partnership, or association;
2. Controversies arising out of intra-corporate,
partnership, or association relations, between
and among stockholders, members, or
associates; and between, any or all of them and
the corporation, partnership, or association of
which they are stockholders, members, or
associates, respectively;
3. Controversies in the election or appointment of
directors, trustees, officers, or managers of
corporations, partnerships, or associations;
4. Derivative suits; and
5. Inspection of corporate books.
To determine whether an intra-corporate dispute exists
and whether this case requires the application of these
rules of procedure, this Court evaluated the relationship
of the parties. The types of intra-corporate relationships
were reviewed in Union Glass & Container Corporation v.
Securities and Exchange Commission:
“[a] between the corporation, partnership or association
and the public; [b] between the corporation, partnership
or association and its stockholders, partners, members, or
officers; [c] between the corporation, partnership or
association and the state in so far as its franchise, permit
or license to operate is concerned; and [d] among the
stockholders, partners or associates themselves.”
For as long as any of these intra-corporate relationships
exist between the parties, the controversy would be
characterized as intra-corporate. This is known as the
"relationship test."
DMRC Enterprises v. Este del Sol Mountain Reserve, Inc.
employed what would later be called as the "nature of
controversy test." It became another means to determine
if the dispute should be considered as intra--corporate. It
avoids the circumstances where the courts would be
divested of jurisdiction not by reason of the nature
of the dispute submitted to them for adjudication,
but solely for the reason that the dispute involves a
corporation.
This Court now uses both the relationship test and
the nature of the controversy test to determine if
an intra-corporate controversy is present.
Applying the relationship test, this Court notes that both
Belo and Santos are named shareholders in Belo Medical
Group's Articles of Incorporation and General Information
Sheet for 2007. The conflict is clearly intra-corporate as it
OCRA Notes | 86
involves two (2) shareholders although the ownership of
stocks of one stockholder is questioned. The two
defendants in that case are both stockholders on record.
They continue to be stockholders until a decision is
rendered on the true ownership of the 25 shares of stock
in Santos' name. If Santos' subscription is declared
fictitious and he still insists on inspecting corporate books
and exercising rights incidental to being a stockholder,
then, and only then, shall the case cease to be intra-
corporate.
Applying the nature of the controversy test, this is still an
intra--corporate dispute. Ultimately, the goal is to stop
Santos from inspecting corporate books. This goal is so
apparent that, even if Santos is declared the true owner
of the shares of stock upon completion of the interpleader
case, Belo Medical Group still seeks his disqualification
from inspecting the corporate books based on bad faith.
Therefore, the controversy shifts from a mere question of
ownership over movable property to the exercise of a
registered stockholder's proprietary right to inspect
corporate books.
The circumstances of the case and the aims of the parties
must not be taken in isolation from one another. The
totality of the controversy must be taken into account to
improve upon the existing tests. This Court notes that
Belo Medical Group used its Complaint for interpleader as
a subterfuge in order to stop Santos, a registered
stockholder, from exercising his right to inspect corporate
books.
corporate disputes. Considering that the controversy was
still classified as intra-corporate upon filing of appeal,
special rules, over general ones, must apply.
Assuming this case continues on as an interpleader, it
cannot be joined with the Supplemental Complaint for
declaratory relief as both are special civil actions.
However, as the case was classified and will continue as
an intra-corporate dispute, the simultaneous complaint
for declaratory relief becomes superfluous. The right of
Santos to inspect the books of Belo Medical Group and
the appreciation for his motives to do so will necessarily
be determined by the trial court together with
determining the ownership of the shares of stock under
Santos' name.
The trial court may make a declaration first on who owns
the shares of stock and suspend its ruling on whether
Santos should be allowed to inspect corporate records.
Or, it may rule on whether Santos has the right to inspect
corporate books in the meantime while there has yet to
be a resolution on the ownership of shares. Remedies are
available to Belo Medical Group and Belo at any stage of
the proceeding, should they carry on in prohibiting Santos
from inspecting the corporate books.
The Petition for Review of Belo Medical Group, Inc. is
PARTIALLY GRANTED. The resolution of the RTC is
REVERSED regarding its dismissal of the intra-corporate
case. Let this case be REMANDED to the commercial court
of origin for further proceedings.

Based on the facts of this case and applying the

relationship and nature of the controversy tests, it was
understandable how the trial court could classify the
interpleader case as intra-corporate and dismiss it. There
was no ostensible debate on the ownership of the shares
that called for an interpleader case. The issues and
remedies sought have been muddled when, ultimately, at
the front and center of the controversy is a registered
stockholder's right to inspect corporate books.

As an intra-corporate dispute, Santos should not have

been allowed to file a Motion to Dismiss. The trial court
should have continued on with the case as an intra-
corporate dispute considering that it called for the
judgments on the relationship between a corporation and
its two warring stockholders and the relationship of these
two stockholders with each other.

Belo Medical Group availed of the proper remedy of

appeal. Since it raises only questions of law, the proper
mode of appeal is Rule 45 filed directly to the SC. This is
correct assuming there were no rules specific to intra-
OCRA Notes | 87