Professional Documents
Culture Documents
2018°
Mercantile Law; Corporations; Winding Up; Section 122 of the Corporation Code provides that a
corporation whose charter is annulled, or whose corporate existence is otherwise terminated, may
continue as a body corporate for a limited period of three (3) years, but only for certain specific
purposes enumerated by law.—Section 122 of the Corporation Code provides that a corporation whose
charter is annulled, or whose corporate existence is otherwise terminated, may continue as a body
corporate for a limited period of three years, but only for certain specific purposes enumerated by law.
These include the prosecution and defense of suits by or against the corporation, and other objectives
relating to the settlement and closure of corporate affairs. Based on the provision, a defunct corporation
loses the right to sue and be sued in its name upon the expiration of the three-year period provided by law.
Jurisprudence, however, has carved out an exception to this rule. In several cases, this Court has ruled that
an appointed receiver, an assignee, or a trustee may institute suits or continue pending actions on behalf
of the corporation, even after the winding-up period.
The mere revocation of the charter of a corporation does not result in the abatement of
proceedings. Since its directors are considered trustees by legal implication.—It is evident from the
foregoing discussion of law and jurisprudence that the mere revocation of the charter of a corporation
does not result in the abatement of proceedings. Since its directors are considered trustees by legal
implication, the fact that Bancom did not convey its assets to a receiver or assignee was of no
consequence. It must also be emphasized that the dissolution of a creditor-corporation does not extinguish
any right or remedy in its favor. Section 145 of the Corporation Code is explicit on this point: Sec.
145. Amendment or repeal.—No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or
impairedeither by the subsequent dissolution of said corporation or by any subsequent amendment or
repeal of this Code or of any part thereof.
FACTS:
The dispute in this case originated from a Continuing Guaranty* executed in
favor of Bancom by Angel E. Reyes, Sr., Florencio Reyes, Jr., Rosario R. Du,
Olivia Arevalo, and the two petitioners herein, Ramon E. Reyes and Clara R.Pastor
(the Reyes Group).
In the instrument, the Reyes Group agreed to guarantee the full and due payment of
obligations incurred by Marbella under an Underwriting Agreement with Bancom.
Because of Marbella's continued failure to pay back the loan despite repeated
demands, Bancom filed a Complaint for Sum of Money with a prayer for
damages before the RTC.
The RTC held Marbella and the Reyes Group solidarily liable to Bancom. The trial
court ordered them to pay the amounts indicated on the Promissory Notes plus
interest; and to pay penalties and attorney's fees as well.
The CA denied the appeal citing the undisputed fact that Marbella and the Reyes
Group had failed to comply with their obligations under the Promissory Notes and
the guaranty.
Of the individuals comprising the Reyes Group, only petitioners filed a Motion for
Reconsideration of the CA Decision.
Petitioners contended that the action must be considered abated pursuant to Section
122 of the Corporation Code. They pointed out that the Certificate of Registration
issued to Bancom had been revoked by the Securities and Exchange Commission
(SEC) on 31 May 2004, and that no trustee or receiver had been appointed to
continue the suit; in fact, even Bancom's former counsel was compelled to
withdraw its appearance from the case, as it could no longer contact the
corporation.
Whether the CA committed a grievous error in refusing to declare the suit abated
despite the obvious fact that Bancom no longer exists.
HELD:
Section 122 of the Corporation Code provides that a corporation whose charter is
annulled, or whose corporate existence is otherwise terminated, may continue as a
body corporate for a limited period of three years, but only for certain specific
purposes enumerated by law.
These include the prosecution and defense of suits by or against the corporation,
and other objectives relating to the settlement and closure of corporate affairs.
Based on the provision, a defunct corporation loses the right to sue and be sued in
its name upon the expiration of the three-year period provided by law.
Jurisprudence, however, has carved out an exception to this rule. In several cases,
this Court has ruled that an appointed receiver, an assignee, or a trustee may
institute suits or continue pending actions on behalf of the corporation, even after
the winding-up period. The rule was first enunciated in the 1939 case Sumera v.
Valencia, in which we declared:
[I]f the corporation carries out the liquidation of its assets through its own
officers and continues and defends the actions brought by or against it, its
existence shall terminate at the end of three years from the time of dissolution;
but if a receiver or assignee is appointed, as has been done in the present case, with
or without a transfer of its properties within three years, the legal interest passes to
the assignee, the beneficial interest remaining in the members, stockholders,
creditors and other interested persons; and said assignee may bring an action,
prosecute that which has already been commenced for the benefit of the
corporation, or defend the latter against any other action already instituted or which
may be instituted even outside of the period of three years fixed for the officers of
the corporation.
For the foregoing considerations, we are of the opinion and so hold that when a
corporation is dissolved and the liquidation of its assets is placed in the hands of a
receiver or assignee, the period of three years prescribed by section 77 of Act
No. 1459 known as the Corporation Law is not applicable, and the assignee
may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
In subsequent cases, the Court further clarified that a receiver or an assignee need
not even be appointed for the purpose of bringing suits or continuing those
that are pending.
Here, it appears that the SEC revoked the Certificate of Registration issued to
Bancom on 26 May 2003.
Despite this revocation, however, Bancom does not seem to have conveyed its
assets to trustees or to its stockholders and creditors. The corporation has also
failed to appoint a new counsel after the law firm formerly representing it was
allowed to withdraw its appearance on 1 June 2004.
We disagree.
It is evident from the foregoing discussion of law and jurisprudence that the mere
revocation of the charter of a corporation does not result in the abatement of
proceedings.
Since its directors are considered trustees by legal implication, the fact that
Bancom did not convey its assets to a receiver or assignee was of no
consequence.
It must also be emphasized that the dissolution of a creditor-corporation does not
extinguish any right or remedy in its favor.
To rule otherwise would be to sanction the unjust enrichment of the debtor at the
expense of the corporation
Corporate Liquidation; While the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the corporation now pertains to the
appropriate regional trial courts—the liquidation of a corporation requires the settlement of
claims for and against the corporation, which clearly falls under the jurisdiction of the
regular courts.—The SEC’s jurisdiction does not extend to the liquidation of a corporation.
While the SEC has jurisdiction to order the dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the appropriate regional trial courts. This is the
reason why the SEC, in its 29 November 2000 Omnibus Order, directed that “the proceedings on
and implementation of the order of liquidation be commenced at the Regional Trial Court to
which this case shall be transferred.” This is the correct procedure because the liquidation of a
corporation requires the settlement of claims for and against the corporation, which clearly falls
under the jurisdiction of the regular courts. The trial court is in the best position to convene all
the creditors of the corporation, ascertain their claims, and determine their preferences.
FACTS:
CMC filed a petition for certiorari with the Court of Appeals. CMC alleged
that the trial court acted with grave abuse of discretion amounting to lack of
jurisdiction when it required CMC to file a new petition for dissolution and
liquidation with either the SEC or the trial court when the SEC clearly retained
jurisdiction over the case.
CMC filed a motion for reconsideration. CMC argued that it does not have
to file a new petition for dissolution and liquidation with the SEC but that the case
should just be remanded to the SEC as a continuation of its jurisdiction over the
petition for suspension of payment. CMC also asked that Planters Bank’s
foreclosure of the real estate mortgage be declared void.
Not satisfied with the 6 March 2002 Resolution, CMC filed this petition for
review on certiorari.
The Issues
1. Whether the present case falls under Section 121 of the Corporation Code,
which refers to the SEC’s jurisdiction over CMC’s dissolution and liquidation, or
is only a continuation of the SEC’s jurisdiction over CMC’s petition for suspension
of payment; and
Ruling:
While CMC agrees with the ruling of the Court of Appeals that the SEC has
jurisdiction over CMC’s dissolution and liquidation, CMC argues that the Court of
Appeals remanded the case to the SEC on the wrong premise that the applicable
law is Section 121 of the Corporation Code. CMC maintains that the SEC retained
jurisdiction over its dissolution and liquidation because it is only a continuation of
the SEC’s jurisdiction over CMC’s original petition for suspension of payment
which had not been "finally disposed of as of 30 June 2000."
On the other hand, Planters Bank insists that the trial court has jurisdiction
over CMC’s dissolution and liquidation. Planters Bank argues that dissolution and
liquidation are entirely new proceedings for the termination of the existence of the
corporation which are incompatible with a petition for suspension of payment
which seeks to preserve corporate existence.
Republic Act No. 8799 (RA 8799) transferred to the appropriate regional
trial courts the SEC’s jurisdiction defined under Section 5(d) of Presidential
Decree No. 902-A. Section 5.2 of RA 8799 provides:
3. Narra Nickel Mining vs Redmont MR Jan. 28, 2015 (majority decision only
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the
Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of
Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being foreign
corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs). In reaching its conclusion,
this Court upheld with approval the appellate court's finding that there was doubt as to petitioners' nationality
since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the common
stocks of the petitioners by owning equity interest of petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the
main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014 Comment, on
the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion
for reconsideration is nothing but a rehash of their arguments and should, thus, be denied outright for being
pro-forma. Petitioners have interposed on September 30, 2014 their Reply to the respondent’s Comment.
After considering the parties’ positions, as articulated in their respective submissions, We resolve to deny the
motion for reconsideration.
II.
The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.
To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous and
allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine Mining
Act of 1995, and the Rules issued by the Securities and Exchange Commission (SEC). These laws and rules
supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate
entities for purposes of determining compliance withSec. 2, Art. XII of the Constitution that only "corporations
or associations at least sixty per centum of whose capital is owned by such [Filipino] citizens" may enjoy
certain rights and privileges, like the exploration and development of natural resources.
The application of the Grandfather Rule in the present case does not abandon the Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014
Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test in
determining which corporations may be considered as Philippine nationals. Instead, to borrow Justice
Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect.
The following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake
the exploration, development and utilization of the natural resources of the Philippines. When in the
mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40
Filipino equity ownership in the corporation, then it may apply the "grandfather rule." (emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by the
Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of
natural resources to Filipino citizens and "corporations or associations at least sixty per centum of whose
capital is owned by such citizens."
Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a "corporation x x x registered in
accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines" as a
person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rule was originally conceived to look into the citizenshipof the
individuals who ultimately own and control the shares of stock of a corporation for purposes of determining
compliance with the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that the
framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the nationality of
corporations for purposes of ascertaining their right to participate in nationalized or partly nationalized
activities.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the percentage of
Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided
for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder." Thus, to arrive at the actual Filipino ownership and control in a
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corporation, both the direct and indirect shareholdings in the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a
corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section 127 (B) of the National
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Internal Revenue Code on taxes imposed on closely held corporations, in relation to Section 96 of the
Corporation Code on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares held:
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In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along
the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the
"grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code(Batas Pambansa Blg.
68) which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more
than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at
least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a
close corporation.7
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement of the
Control Test, viz:
You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in
MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s
controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the remaining 40%;
(3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide the
following figure to illustrate this structure:
xxxx
We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section 1 of the
Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In other words, there
can be no other Philippine citizens other than those falling within the enumeration provided by the
Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of the
Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources, a
corporation investing in a mining joint venture can never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The Court
held that a corporation investing in another corporation engaged ina nationalized activity cannot be considered
as a citizen for purposes of the Constitutional provision restricting foreign exploitation of natural resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural
persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions are
complied with. If the shares of stock of the immediate investor corporation is in turn held and controlled by
another corporation, then we must look into the citizenship of the individual stockholders of the latter
corporation. In other words, if there are layers of intervening corporations investing in a mining joint venture,
we must delve into the citizenship of the individual stockholders of each corporation. This is the strict
application of the grandfather rule, which the Commission has been consistently applying prior to the 1990s.
Indeed, the framers of the Constitution intended for the "grandfather rule" to apply in case a 60%-40%
Filipino-Foreign equity corporation invests in another corporation engaging in an activity where the
Constitution restricts foreign participation.
xxxx
Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while it
is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60% ownership by
Philippine citizens isviolated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al., the 8
SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations ostensibly have
satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain the Constitutional objective
of reserving to Filipinos the utilization of natural resources, one should not stop where the percentage of the
capital stock is 60%.Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the
funds of the remaining appellee-corporations. The records disclose that: (1) Olympic Mines and Development
Corporation ("OMDC"), a domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares,
respectively, out of the authorized capital stock of Madridejos; however, OMDC paid nothing for this
subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of ₱3,331,000.00; (2) Palawan
Alpha South Resource Development Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI
subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital stock of PatriciaLouise;
however, Palawan Alpha paid nothing for this subscription while MBMI paid ₱2,796,000.00 out of its total
subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively,
out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for this subscription while
MBMI paid ₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and (4) Falcon Ridge Resources
Management Corp. ("Falcon Ridge"), another domestic corporation, and MBMI subscribed to 5,997 and 3,998
shares, respectively, out of the authorized capital stock of San Juanico; however, Falcon Ridge paid nothing for
this subscription while MBMI paid ₱2,500,000.00 out of its total subscription cost of ₱3,998,000.00. Thus,
pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.
xxxx
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that
right through the legal fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of the
Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation,
both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the
"beneficial ownership" of corporations engaged in nationalized activities must reside in the hands of
Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the
Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may
distort the actual economic or beneficial ownership of a mining corporation may be struck down as
violative of the constitutional requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract with
a foreign company granting the latter a share of not morethan 40% from the proceeds of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership registered
with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and possessing x x x.The
sixty percent Philippine equity requirement in mineral resource exploitation x x xis intended to insure, among
other purposes, the conservation of indigenous natural resources, for Filipino posterityx x x. I think it is
implicit in this provision, even if it refers merely to ownership of stock in the corporation holding the mining
concession, that beneficial ownership of the right to dispose, exploit, utilize, and develop natural resources
shall pertain to Filipino citizens, and that the nationality requirementis not satisfied unless Filipinos are the
principal beneficiaries in the exploitation of the country’s natural resources. This criterion of beneficial
ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which limits the service fee in
service contracts to 40% of the proceeds of the operation, thereby implying that the 60-40 benefit-sharing
ration is derived from the 60-40 equity requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a service fee, and therefore,
properly deductible from gross proceeds, the service contract could be employed as a means of going about or
circumventing the constitutional limit on foreign equity participation and the obvious constitutional policy to
insure that Filipinos retain beneficial ownership of our mineral resources. Thus, every service contract scheme
has to be evaluated in its entirety, on a case to case basis, to determine reasonableness of the total "service fee"
x x x like the options available tothe contractor to become equity participant in the Philippine entity holding
the concession, or to acquire rights in the processing and marketing stages. x x x (emphasis supplied)
The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control"
todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through the Grandfather Rule,
despite the fact that both the investee and investor corporations purportedly satisfy the 60-40 Filipino equity
requirement: 9
This refers to your request for opinion on whether or not there may be an investment in real estate by a
domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of which is owned
by another domestic corporation withat least 60%-40% Filipino-Foreign Equity, while the remaining thirty
percent (30%) of the capital stock is owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is implicit in the constitutional
provisions, even if it refers merely to ownership of stock in the corporation holding the land or natural resource
concession, that the nationality requirement is not satisfied unless it meets the criterion of beneficial
ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural resources(Op. No. 144, s.
1977; Op. No. 130, s. 1985), and that in applying the same "the primordial consideration is situs of control,
whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As stated in the Register of Deeds vs. Ung
Sui Si Temple (97 Phil. 58), obviously toinsure that corporations and associations allowed to acquire
agricultural land or to exploit natural resources "shall be controlled by Filipinos." Accordingly, any
arrangement which attempts to defeat the constitutional purpose should be eschewed (Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC], compliance with the sixty per centum
requirement is being monitored by SEC under the "Grandfather Rule" a method by which the percentage of
Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of activities provided
for under the Constitution and other national laws is accurately computed, and the diminution if said equity
prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied specifically in cases where the
corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is not applied, the
presence of such corporate stockholders could diminish the effective control of Filipinos.
Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in the
investing corporation is 58% while the Filipino equity is only 42%, in the investing corporation, subject of
your query, is disqualified from investing in real estate, which is a nationalized activity, as it does not meet the
60%-40% Filipino-Foreign equity requirement under the Constitution.
This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves. In its October 9, 2012
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company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the foreign creditors
would be done, both directly and indirectly, in order to meet the control test principle under the FIA.Under the
proposed structure, the foreign creditors would own 40% of the outstanding capital stock of the
telecommunications company on a direct basis, while the remaining 40% of shares would be registered to a
holding company that shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Nonetheless, the Court found the proposal non-compliant with the Constitutional requirement of Filipino
ownership as the proposed structure would give more than 60% of the ownership of the common shares of
Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis that its
shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to Unsecured Creditors
as per the Term Sheet. Evidently, the parties intend to convert the unsustainable portion of respondent’s debt
into common stocks, which have voting rights. If we indulge petitioners on their proposal, the Omnibus
Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public utility company.
This is precisely the scenario proscribed by the Filipinization provision of the Constitution.Therefore, the
Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis
supplied) As shown by the quoted legislative enactments, administrative rulings, opinions, and this Court’s
decisions, the Grandfather Rule not only finds basis, but more importantly, it implements the Filipino equity
requirement, in the Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance
with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the Control
Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the observance of foreign
ownership restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant methods
that canonly be applied alternative to each other. Rather, these methods can, if appropriate, be used
cumulatively in the determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of public utilities as in
Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in
another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the needto resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubt as to who has the "beneficial ownership" and "control" of
the corporation. In that instance, there is no need fora dissection or further inquiry on the ownership of the
corporate shareholders in both the investing and investee corporation or the application of the Grandfather
Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or
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investee corporation, a resort to the Grandfather Rule is necessary if doubt existsas to the locusof the
"beneficial ownership" and "control." In this case, a further investigation as to the nationality of the
personalities with the beneficial ownership and control of the corporate shareholders in both the investing and
investee corporations is necessary.
As explained in the April 21,2012 Decision, the "doubt" that demands the application of the Grandfather Rule
in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to the fact
that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, "doubt"
refers to various indicia that the "beneficial ownership" and "control" of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which
applied the pertinent provisions of the Anti-DummyLaw in relation to the minimum Filipino equity
requirement in the Constitution, "significant indicators of the dummy status" have been recognized in view of
reports "that some Filipino investors or businessmen are being utilized or [are] allowing themselves to be used
as dummies by foreign investors" specifically in joint ventures for national resource exploitation. These
indicators are:
1. That the foreign investors provide practically all the funds for the joint investment undertaken by
these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for the
joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and prepare
all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty
Development Corporation, the SEC held that when foreigners contribute more capital to an enterprise, doubt
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exists as to the actual control and ownership of the subject corporation even if the 60% Filipino equity
threshold is met. Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for determining the
level of foreign participation is the number of shares subscribed, regardless of the par value. Applying such an
interpretation, the EPD rules that the foreign equity participation in Linear works Realty Development
Corporation amounts to 26.41% of the corporation’s capital stock since the amount of shares subscribed by
foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject corporation is compliant with the 40%
limit on foreign equity participation. Accordingly, the EPD dismissed the complaint, and did not pursue any
investigation against the subject corporation.
xxxx
x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it did
not take into account the par value of shares in determining compliance with the constitutional and statutory
restrictionson foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the constitutional
and statutory restrictions on foreign equity. In the present case, the fact that the shares of the Japanese
nationals have a greater par value but only have similar rights to those held by Philippine citizens having much
lower par value, is highly suspicious. This is because a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him. Thus, it is reasonable to
suspectthat there may be secret arrangements between the corporation and the stockholders wherein the
Japanese nationals who subscribed to the shares with greater par value actually have greater control and
economic rights contrary to the equality of shares based on the articles of incorporation.
With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised to
avail of the Commission’s subpoena powers in order to gather sufficient evidence, and file the necessary
complaint.
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign equity
ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do
not actually have the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and
McArthur. Hence, a further investigation and dissection of the extent of the ownership of the corporate
shareholders through the Grandfather Rule is justified.
Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the
shareholdings to the point when natural persons hold rights to the stocks may very well lead to an investigation
ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace
the shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to
the number of corporate layers the attribution of the nationality of the corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges, and to
three (3) levels for closely held corporations or the shares of which are not traded in the stock
exchanges. These limits comply with the requirement in Palting v. San Jose Petroleum, Inc. that the
14 15
application of the Grandfather Rule cannot go beyond the level of what is reasonable.
A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their
investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of true
ownership and control over the petitioners as doubt exists as to the actual extent of the participation of MBMI
in the equity of the petitioners and their investing corporations.
We considered the following membership and control structures and like nuances:
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its shares.
Name Nationality Number of Shares Amount Amount Paid
Subscribed
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual
SHs in Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its
shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity requirement
imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation that Tesoro is a
foreign corporation not entitled to an MPSA is apt.
McArthur
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common
shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98% belonged
to the Canadian MBMI.
Name Nationality Number of Shares Amount Amount Paid
Subscribed
19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign individual
SHs in McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with the minimum
Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation
(PLMDC), while Canadian MBMI held 39.98% of its shares.
Name Nationality Number of Shares Amount Amount Paid
Subscribed
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs
in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its
shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity requirement imposed
in Section 2, Article XII of the Constitution. Hence, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’ Filipino equity composition
was based on their common shareholdings, not preferred or redeemable shares. Section 6 of the Corporation
Code of the Philippines explicitly provides that "no share may be deprived of voting rights except those
classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen puts it, there is "no indication that
any of the shares x x x do not have voting rights, [thus] it must be assumed that all such shares have voting
rights." It cannot therefore be gain said that the foregoing computation hewed with the pronouncements of
22
Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8) Section 2 23
of which states:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory requirement. For
1âwphi1
purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied
to BOTH (a) the total outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000
common shares. Neither is it suggested that the common shares were further divided into voting or non-voting
common shares. Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000
common shares of each of the petitioners, and there is no need to separately apply the 60-40 ratio to any
segment or part of the said common shares.
Mercantile Law; Corporations; Doing Business in the Philippines; The term “doing business in
the Philippines” implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and object of its organization.—In the old
case of The Mentholatum Co. v. Mangaliman, 72 Phil. 524 (1941), the Court discussed the test to
determine whether a foreign company is “doing business” in the Philippines, thus: No general rule or
governing principle can be laid down as to what constitutes “doing” or “engaging in” or “transacting”
business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The
true test, however, seems to be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially retired from it
and turned it over to another. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its organization. x x x
The foregoing definition found its way in Republic Act (R.A.) No. 7042, otherwise known as the Foreign
Investments Act of 1991, which repealed Articles 44-56, Book II of the Omnibus Investments Code of
1987. Said law enumerated not only the acts or activities which constitute “doing business,” but also
those activities which are not deemed “doing business.”
Taxation; When the foreign corporation transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch
or the resident foreign corporation.—The CIR argues that since IGC was already maintaining an RHQ in
the Philippines, which was subsequently converted into an ROHQ, said headquarters should be the proper
claimant of the tax refund. The IGC explained that the ROHQ had no involvement, whatsoever, in
IGC’s investments in McCann. It was only the IGC that is entitled to receive dividend income arising
from such investment. True, the alleged overpayment of FWT were incurred from the dividend income
earned by IGC, which is a separate and distinct income taxpayer from their ROHQ in the Philippines. As
explained by IGC, the ROHQ has a sole purpose of servicing IGC’s affiliates, subsidiaries, branches and
markets in the Asia-Pacific Region, but certainly not of investing in McCann. It can be concluded then
that the investment in McCann was made for purposes peculiarly germane to the conduct of IGC’s
corporate affairs and the same was not shown to be coursed through the ROHQ. Having made an
independent investment, then it is the ICG that should face the tax consequence and avail of tax reliefs
(i.e., refund, credit, preferential tax rate) appurtenant to such investment. Thus: The general rule that a
foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here.
This rule is based on the premise that the business of the foreign corporation is conducted through its
branch office, following the principal-agent relationship theory. It is understood that the branch becomes
its agent here. So that when the foreign corporation transacts business in the Philippines independently of
its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the
resident foreign corporation. Corollarily, if the business transaction is conducted through the branch
office, the latter becomes the taxpayer, and not the foreign corporation.
Facts:
Interpublic Group of Companies, Inc. (IGC) is a non-resident foreign corporation duly
organized and existing under and by virtue of the laws of the State of Delaware,
United States of America.
The IGC owns 2,999,998 shares or 30% of the total outstanding and voting capital
stock of McCann Worldgroup Philippines, Inc. (McCann), a domestic corporation
duly organized and existing under the laws of the Philippines engaged in the general
advertising business.
In 2006, McCann's Board of Directors declared cash dividends in the total amount of
P205,648,685.02 in favor of its stockholders of record, as follows:
Shareholder Percentage of Shares Amount of Dividend
Fintec Holdings, Inc. 70% P143,954,079.51
Interpublic Group of Companies, Inc. 30% 61,694,605.51
TOTAL P205,648,685.02
The IGC received cash dividends from McCann in the amount of P61,694,605.51. On
June 15, 2006, McCann withheld a Final Withholding Tax (FWT) at the rate of 35%
on IGC's cash dividends and remitted the payment of the FWT in the amount of
P21,593,111.93 to petitioner Commissioner of Internal Revenue (CIR).
On September 27, 2007, the IGC established a Regional Headquarters (RHQ) in
the Philippines. On April 30, 2008, the RHQ was converted into its Regional
Operating Headquarters (ROHQ).
On March 5, 2008, the IGC filed an administrative claim for refund or issuance of tax
credit certificate (TCC) in the amount of P12,338,921.00, representing the alleged
overpaid FWT on dividends paid by McCann to IGC. In the said administrative
claim, the IGC averred that as a non-resident foreign corporation, it may avail of
the preferential FWT rate of 15% on dividends received from a domestic
corporation under Section 28(B)(5)(b) of the Tax Code.
On May 29, 2008, the IGC submitted to CIR additional documents in support of its
administrative claim for refund or issuance of TCC. The CIR failed to act on IGC's
claim for refund or issuance of TCC. This prompted the IGC to file a petition for
review with the CTA on June 16, 2008.
On February 21, 2011, the CTA Third Division granted the IGC's petition for review.
Accordingly, the CIR was ordered to refund or to issue a TCC in favor of IGC in the
amount of P12,338,921.00, representing the overpaid FWT on cash dividends for
taxable year 2006.3
On March 14, 2011, the CIR filed a Motion for Reconsideration of the Decision dated
February 21, 2011. Said motion was denied for lack of merit on May 31, 2011.
After being granted an extension, the CIR filed a Petition for Review with the
CTA En Banc on July 7, 2011. On January 11, 2012, the case was submitted for
decision.
In the Decision dated October 23, 2012, the CTA En Banc denied the CIR's Petition
for Review and accordingly affirmed the February 21, 2011 Decision and the May 31,
2011 Resolution of the CTA Third Division.
The CIR filed a motion for reconsideration and the same was denied by the CTA En
Banc for lack of merit in a Resolution dated April 15, 2013.
Dissatisfied, the CIR filed the instant Petition with this Court on the lone ground of –
THE [CTA] ERRED IN RULING THAT IGC IS ENTITLED TO A TAX REFUND
OR TAX CREDIT CERTIFICATE FOR THE ALLEGED OVERPAID FINAL
WITHHOLDING TAX ON ITS CASH DIVIDENDS FOR TAXABLE YEAR 2006.4
To support its contention, the CIR argued that: (1) the IGC failed to file a Tax Treaty
Relief Application (TTRA) with the International Tax Affairs Division (ITAD) of the
Bureau of Internal Revenue (BIR) 15 days before it paid the tax on dividends, in
accordance with Revenue Memorandum Order (RMO) No. 1-2000; (2) the IGC, being
an unlicensed corporation, has no capacity to sue in Philippine courts in accordance
with the Corporation Code; and (3) claim for refund shall be construed strictissimi
juris against the taxpayer and is subject to administrative investigation/examination to
ascertain the veracity of the claimant's allegations.
I.
We resolve first the issue of whether or not the IGC has the capacity to sue in
Philippine courts. Otherwise stated, can a non-resident foreign corporation which
collects dividends from the Philippines sue here to claim tax refund?
We agree with the CTA that the issue is not one of first impression.
Section 133 of the Corporation Code provides:
SEC. 133. Doing business without a license. — No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
The aforementioned provision bars a foreign corporation "transacting business" in the
Philippines without a license access to our courts. Thus, in order for a foreign
corporation to sue in Philippine courts, a license is necessary only if it is
"transacting or doing business" in the country.5 Conversely, if an unlicensed
foreign corporation is not transacting or doing business in the Philippines, it can be
permitted to bring an action even without such license.
In the case of B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., 6 the
court categorically explained:
The law is clear. An unlicensed foreign corporation doing business in the Philippines
cannot sue before Philippine courts. On the other hand, an unlicensed foreign
corporation not doing business in the Philippines can sue before Philippine courts.
Explaining the rationale for this rule, the Court held:
The purpose of the law in requiring that foreign corporations doing business in the
country be licensed to do so, is to subject the foreign corporations doing business in
the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation
illegally doing business here because of its refusal or neglect to obtain the required
license and authority to do business may successfully though unfairly plead such
neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the
local courts.
The same danger does not exist among foreign corporations that are indubitably not
doing business in the Philippines. Indeed, if a foreign corporation does not do
business here, there would be no reason for it to be subject to the State's regulation.
As we observed, in so far as the State is concerned, such foreign corporation has no
legal existence. Therefore, to subject such corporation to the courts' jurisdiction would
violate the essence of sovereignty.7
Apparently, it is not the absence of the prescribed license, but the "doing of
business" in the Philippines without such license which debars the foreign
corporation from access to our courts. 8The operative phrase is "transacting or
doing business."
The threshold question therefore is whether the IGC was doing business in the
Philippines when it collected dividend earnings from sources within the Philippines.
The Corporation Code provides no definition for the phrase "doing business." 9
In the old case of The Mentholatum Co. v. Mangaliman,10 the Court discussed the test
to determine whether a foreign company is "doing business" in the Philippines, thus:
No general rule or governing principle can be laid down as to what constitutes "doing"
or "engaging in" or "transacting" business. Indeed, each case must be judged in the
light of its peculiar environmental circumstances. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization. 11 (Citations
omitted)
The foregoing definition found its way in Republic Act (R.A.) No. 7042, otherwise
known as the Foreign Investments Act of 1991, which repealed Articles 44-56, Book
II of the Omnibus Investments Code of 1987. Said law enumerated not only the acts
or activities which constitute "doing business," but also those activities which are not
deemed "doing business." Thus, Section 3(d) of R.A. No. 7042 provides:
SEC. 3. Definitions. – x x x
xxxx
d) The phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty
(180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization: Provided, however, That the
phrase "doing business" shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having a nominee director
or officer to represent its interests in such corporation; nor appointing a representative
or distributor domiciled in the Philippines which transacts business in its own name
and for its own account[.] (Underscoring supplied)
Inferring from the aforecited provision, mere investment as a shareholder by a foreign
corporation in a duly registered domestic corporation shall not be deemed "doing
business" in the Philippines.
It is clear then that the IGC's act of subscribing shares of stocks from McCann, a duly
registered domestic corporation, maintaining investments therein, and deriving
dividend income therefrom, does not qualify as "doing business" contemplated under
R.A. No. 7042. Hence, the IGC is not required to secure a license before it can file a
claim for tax refund.
The CIR argues that since IGC was already maintaining an RHQ in the Philippines,
which was subsequently converted into an ROHQ, said headquarters should be the
proper claimant of the tax refund. The IGC explained that the ROHQ had no
involvement, whatsoever, in IGC's investments in McCann. It was only the IGC that
is entitled to receive dividend income arising from such investment.
True, the alleged overpayment of FWT were incurred from the dividend income
earned by IGC, which is a separate and distinct income taxpayer from their ROHQ in
the Philippines.
As explained by IGC, the ROHQ has a sole purpose of servicing IGC's affiliates,
subsidiaries, branches and markets in the Asia-Pacific Region, but certainly not of
investing in McCann. It can be concluded then that the investment in McCann was
made for purposes peculiarly germane to the conduct of IGC's corporate affairs and
the same was not shown to be coursed through the ROHQ. Having made an
independent investment, then it is the ICG that should face the tax consequence and
avail of tax reliefs (i.e., refund, credit, preferential tax rate) appurtenant to such
investment. Thus:
The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following
the principal-agent relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or the resident foreign
corporation.
Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and
5. Lorente vs Star City Ply Ltd., Jan. 15, 2020 (isolated transaction rule)
Isolated Transaction Rule; A foreign corporation that is not doing business in the Philippines must
disclose such fact if it desires to sue in Philippine courts under the “isolated transaction rule” because
without such disclosure, the court may choose to deny it the right to sue.—It must be noted that the
Revised Corporation Code repealed the Corporation Code and any law, presidential decree or issuance,
executive order, letter of instruction, administrative order, rule or regulation contrary or inconsistent with
any provision of the Revised Corporation Code is modified or repealed accordingly. While the law
(presently the Revised Corporation Code or its predecessor, the Corporation Code) grants to foreign
corporations with Philippine license the right to sue in the Philippines, the Court, however, in a long line
of cases under the regime of the Corporation Code has held that a foreign corporation not engaged in
business in the Philippines may not be denied the right to file an action in the Philippine courts for an
isolated transaction. The issue on whether a foreign corporation which does not have license to engage in
business in the Philippines can seek redress in Philippine courts depends on whether it is doing business
or it merely entered into an isolated transaction. A foreign corporation that is not doing business in the
Philippines must disclose such fact if it desires to sue in Philippine courts under the “isolated transaction
rule” because without such disclosure, the court may choose to deny it the right to sue.
Thus, the CA in its Decision dated September 30, 2013 ruled that Llorente's appeal
was bereft of any merit while that of EPCIB was partially considered. 21 The
dispositive portion of the CA Decision states:
Llorente filed a motion for reconsideration while SCPL filed a motion for partial
reconsideration. The CA denied both motions in its Resolution dated April 10, 2014.
23
Hence, the instant Rule 45 petitions for review on certiorari in G.R. No. 212050 filed
by Llorente and in G.R. No. 212216 filed by SCPL, respectively. Regarding G.R. No.
212050, SCPL filed its Comment 24 dated September 24, 2014 and Llorente filed his
Reply25 dated October 8, 2014. Regarding G.R. No. 212216, EPCIB filed its
Comment26 dated October 4, 2014. Llorente filed an Explanation 27 dated August 14,
2015 wherein he manifested that he deemed it more proper and appropriate to forego
the filing of a Comment in G.R. No. 212216 considering the consolidation of the two
petitions and the issues and arguments raised therein are substantially the same and
inter-related with one another.28
The Issues
2. whether the CA erred in finding that SCPL has legal capacity to sue under the
isolated transaction rule; and
The Court's Ruling
G.R. No. 212050
Llorente's Petition lacks any merit.
On SCPL's capacity to sue, Llorente argues that the condition sine qua non of the
application of the isolated transaction rule is that the alleged delict or wrongful act
must have occurred in the Philippines and the transaction between him and SCPL was
in pursuance of the latter's casino business. 33
Regarding the resignation of JJC Law as SCPL's attorney-in-fact, Llorente argues that
it is violative of Section 69 of the Corporation Code because SCPL is not licensed to
do business in the Philippines.34 As such, SCPL's complaint is a mere scrap of paper
and any judgment rendered in connection therewith is a nullity which may be struck
down even on appeal.35
On the capacity of a foreign corporation to sue before Philippine courts, the applicable
law is clear.
Under Republic Act No. (RA) 1123236 or the Revised Corporation Code of the
Philippines (Revised Corporation Code), which became effective on February 23,
2019,37 the pertinent provision is Section 150, which states:
SEC. 150. Doing Business Without a License. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
Section 150 of the Revised Corporation Code is a verbatim reproduction of Section
133 of Batas Pambansa Blg. (BP) 68 or the Corporation Code of the Philippines
(Corporation Code), which provided:
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. (69a)
It must be noted that the Revised Corporation Code repealed the Corporation Code
and any law, presidential decree or issuance, executive order, letter of instruction,
administrative order, rule or regulation contrary or inconsistent with any provision of
the Revised Corporation Code is modified or repealed accordingly. 38
While the law (presently the Revised Corporation Code or its predecessor, the
Corporation Code) grants to foreign corporations with Philippine license the right to
sue in the Philippines, the Court, however, in a long line of cases under the regime of
the Corporation Code has held that a foreign corporation not engaged in business in
the Philippines may not be denied the right to file an action in the Philippine courts for
an isolated transaction.
The issue on whether a foreign corporation which does not have license to
engage in business in the Philippines can seek redress in Philippine courts depends on
whether it is doing business or it merely entered into an isolated transaction.
A foreign corporation that is not doing business in the Philippines must
disclose such fact if it desires to sue in Philippine courts under the "isolated
transaction rule" because without such disclosure, the court may choose to deny it the
right to sue.41
The right and capacity to sue, being, to a great extent, matters of pleading and
procedure, depend upon the sufficiency of the allegations in the complaint. Thus, as to
a foreign corporation, the qualifying circumstance that if it is doing business in the
Philippines, it is duly licensed or if it is not, it is suing upon a singular and isolated
transaction, is an essential part of the element of the plaintiffs capacity to sue and
must be affirmatively pleaded.42
These pronouncements equally obtain under the Revised Corporation Code
given the reproduction of the exact wording of Section 133, Corporation Code in
Section 150 of the Revised Corporation Code.
Based on the parameters discussed above, the CA has correctly ruled that SCPL has
personality to sue before Philippine courts under the isolated transaction rule, to wit:
x x x [A] foreign corporation needs no license to sue before Philippine courts on an
isolated transaction.43 However, to say merely that a foreign corporation not doing
business in the Philippines does not need a license in order to sue in our courts does
not completely resolve the issue. When the allegations in the complaint have a bearing
on the plaintiff’s capacity to sue and merely state that the plaintiff is a foreign
corporation existing under the laws of a country, such averment conjures two
alternative possibilities: either the corporation is engaged in business in the
Philippines, or it is not so engaged. In the first, the corporation must have been duly
licensed in order to maintain the suit; in the second, and the transaction sued upon is
singular and isolated, no such license is required. In either case, compliance with the
requirement of license, or the fact that the suing corporation is exempt therefrom, as
the case may be, cannot be inferred from the mere fact that the party suing is a foreign
corporation. The qualifying circumstance being an essential part of the plaintiff’s
capacity to sue must be affirmatively pleaded. Hence, the ultimate fact that a
foreign corporation is not doing business in the Philippines must first be
disclosed for it to be allowed to sue in Philippine courts under the isolated
transaction rule. Failing in his requirement, the complaint filed by plaintiff with the
trial court, it must be said, fails to show its legal capacity to sue. 44 x x x
In the case at bar, [SCPL] alleged in its complaint that "it is a foreign corporation
which operates its business at the Star City Casino in Sydney, New South Wales,
Australia; that it is not doing business in the Philippines; and that it is suing upon a
singular and isolated transaction". It also appointed Jimeno, Jalandoni and Cope Law
Offices as its attorney-in-fact. Following the pronouncement mentioned above and
having pleaded these averments in the complaint sufficiently clothed [SCPL] the
necessary legal capacity to sue before Philippine courts. 45
The appointment of JJC Law as attorney-in-fact of SCPL is irrelevant on the latter's
capacity to sue in the Philippines under an isolated transaction.
Further, the following observation of the RTC is apropos:
Besides, it is observed that defendant Llorente in [his] answer pleaded [an] affirmative
relief for damages from plaintiff [SCPL] by way of a counterclaim. This is contrary to
his position that plaintiff has no capacity to sue in the Philippines because such
contention likewise entails that plaintiff may be sued in the Philippines as defendant
Llorente also prayed for affirmative relief against the plaintiff. He is deemed to have
admitted the capacity of plaintiff to be subject of our judicial process. It would be
unfair to rule that plaintiff may be sued in the Philippines without at the same time
allowing it to sue on an isolated transaction here. 46
On the issue of jurisdiction, the argument of Llorente that Australian courts have
jurisdiction over the case because all the material acts and transactions between him
and SCPL transpired in Australia, except for the mere issuance of the two bank drafts
by EPCIB in the Philippines also fails.
Mercantile Law; Securities Regulation Code; Regional Trial Courts; Special Commercial Courts;
Jurisdiction; Under the Securities Regulation Code (SRC), jurisdiction on matters stated under Section 5
of Presidential Decree (PD) No. 902-A, which was originally vested in the Securities and Exchange
Commission (SEC), has already been transferred to the Regional Trial Court (RTC) acting as a special
commercial court (SCC).—Under the SRC, jurisdiction on matters stated under Section 5 of P.D. No.
902-A, which was originally vested in the SEC, has already been transferred to the RTC acting as a
special commercial court. Despite the said transfer, however, the SEC still retains sufficient powers to
justify its assumption of jurisdiction over matters concerning its supervisory, administrative and
regulatory functions. In Securities and Exchange Commission v. Subic Bay Golf and Country Club, Inc.
(SBGCCI) and Universal International Group Development Corporation (UIGDC), 752 SCRA 481
(2015), for instance, the Court affirmed the SEC’s assumption of jurisdiction over a complaint, which
alleged that SBGCCI and UIGDC committed misrepresentations in the sale of their shares. The Court
held in the said case that nothing prevented the SEC from assuming jurisdiction to determine if SBGCCI
and UIGDC committed administrative violations and were liable under the SRC despite the complaint
having raised intra-corporate issues. It also ruled that the SEC may investigate activities of corporations
to ensure compliance with the law.
Securities and Exchange Commission; Jurisdiction; Beyond doubt, is the authority of the Securities
and Exchange Commission (SEC) to hear cases regardless of whether an action involves issues
cognizable by the Regional Trial Court (RTC), provided that the SEC could only act upon those which
are merely administrative and regulatory in character.—Beyond doubt, therefore, is the authority of the
SEC to hear cases regardless of whether an action involves issues cognizable by the RTC, provided that
the SEC could only act upon those which are merely administrative and regulatory in character. In other
words, the SEC was never dispossessed of the power to assume jurisdiction over complaints, even if these
are riddled with intra-corporate allegations, if their invocation of authority is confined only to the extent
of ensuring compliance with the law and the rules, as well as to impose fines and penalties for violation
thereof; and to investigate even motu proprio whether corporations comply with the Corporation Code,
the SRC and the implementing rules and regulations.
It is beyond question that the Securities and Exchange Commission (SEC), as a regulator, has
broad discretion to act on matters that relate to its express power of supervision over all corporations,
partnerships or associations who are the grantees of primary franchises and/or a license or permit issued
by the Government.—It must be stressed that under Section 5.1(n) of the SRC, the SEC is permitted to
exercise such other powers as may be provided for by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out, of the express powers granted the SEC to achieve
the objectives and purposes of these laws. With such broad authority, it is beyond question that the SEC,
as a regulator, has broad discretion to act on matters that relate to its express power of supervision over all
corporations, partnerships or associations who are the grantees of primary franchises and/or a license or
permit issued by the Government. Such grant of express power of supervision, necessarily includes the
power to create a management committee following the doctrine of necessary implication. The reason is
simple. The creation of a management committee is one that is premised on the immediate and speedy
protection of the interest not only of minority stockholders, but also of the general public from immediate
danger of loss, wastage or destruction of assets or the paralyzation of business of a concerned corporation
or entity. No body is more competent to provide such a temporary relief other than the regulatory body of
these companies — the SEC.
Although the complaint is riddled with intra-corporate allegations, the SEC is not
deprived of its power to assume jurisdiction if the invocation of the SEC’s
authority is confined to the extent of ensuring compliance with the Corporation
Code and other laws, including imposition of administrative sanctions. Likewise,
the SEC has the power to create a ManCom pursuant to its implied powers as a
regulator under Section 5.1 of the SRC.
Facts:
Issue(s):
1. Whether or not the letter-complaint is within the jurisdiction of the SEC.
2. Whether or not the SEC acted in excess of jurisdiction in creating the
Management Committee.
Held:
1. Yes, the letter-complaint is within the SEC’s jurisdiction.
There is simply no doubt that the SEC acted properly in assuming
jurisdiction over the letter-complaint filed by the minority shareholders of
Capitol Hills seeking the SEC’s intervention in investigating Ramon and the
others over anomalies, fraud, growing labor unrest, unpaid individual
creditors, and negligence in the running of the business affairs.
The SEC was never dispossessed of the power to assume jurisdiction
over complaints, even if these are riddled with intra-corporate allegations, if
their invocation of authority is confined only to the extent of ensuring
compliance with the law and the rules, as well as to impose fines and
penalties for violation thereof; and to investigate even motu proprio whether
corporations comply with the Corporation Code, the SRC and the
implementing rules and regulations.
Under the SRC, jurisdiction on matters stated underSection 5 of P.D.
No. 902-A, which was originally vested in the SEC, has already been
transferred to the RTC acting as a special commercial court. Despite the said
transfer, however, the SEC still retains sufficient powers to justify its
assumption of jurisdiction over matters concerning its supervisory,
administrative and regulatory functions
In SEC vs. SBGCCI, the Court affirmed the SEC's assumption of
jurisdiction over a complaint, which alleged that SBGCCI and UIGDC
committed misrepresentations in the sale of their shares. The Court held in
the said case that nothing prevented the SEC from assuming jurisdiction to
determine if SBGCCI and UIGDC committed administrative violations and
were liable under the SRC despite the complaint having raised intracorporate
issues. 2. No, the SEC has authority to create a ManCom within its implied
powers.
Clearly, any dispute concerning intra-corporate issues is now beyond
the province of the SEC. Yet, it must be stressed that under Section 5.1 (n)
of the SRC, the SEC is permitted to exercise such other powers as may be
provided for by law as well as those which may be implied from, or which
are necessary or incidental to the carrying out, of the express powers granted
the SEC to achieve the objectives and purposes of these laws.
The creation of a management committee is one that is premised on
the immediate and speedy protection of the interest not only of minority
stockholders, but also of the general public from immediate danger of loss,
wastage or destruction of assets or the paralyzation of business of a
concerned corporation or entity. No body is more competent to provide such
a temporary relief other than the regulatory body of these companies — the
SEC.
Facts:
The petitioners are the neighbors of Jose Ancheta (respondent). The parties
occupy a duplex residential unit on Zodiac Street, Veraville Homes, Almanza Uno,
Las Piñas City. The petitioners live in unit 9-B, while the respondent occupies unit 9-
A of the duplex.3
Sometime in 1998, respondent’s septic tank overflowed; human wastes and
other offensive materials spread throughout his entire property. As a result,
respondent and his family lived through a very unsanitary environment, suffering foul
odor and filthy premises for several months.
In the early months of 1999, the respondent engaged the services of Z.E.
Malabanan Excavation & Plumbing Services to fix the overflow. It was then
discovered that the underground drainage pipe, which connected respondent’s septic
tank to the subdivision’s drainage system, had been closed by cement that blocked the
free flow of the wastes from the septic tank to the drainage system.
The respondent narrated that the petitioners had just recently renovated their
duplex unit and, in the process, had made some diggings in the same portion where
the drainage pipe had been cemented. The respondent added that the closing of the
drainage pipe with cement could not have been the result of an accident, but was the
malicious act by the petitioners.
On May 19, 1999, the respondent filed a complaint for damages against the
petitioners with the RTC, alleging that the petitioners maliciously closed a portion of
the respondent’s drainage pipe and this led to the overflowing of the respondent’s
septic tank.
The motion to dismiss
On June 24, 1999, the petitioners moved to dismiss the complaint on the
ground of lack of jurisdiction. The petitioners argued that since the parties reside
in the same subdivision and are also members of the same homeowners’
association (Veraville Homeowners Association, Inc.), the case falls within the
jurisdiction of the Home Insurance and Guaranty Corporation (HIGC).
The petitioners noted that the HIGC is a government-owned and -controlled
corporation created under Republic Act No. 5809 which vested the administrative
supervision over homeowners’ associations to the Securities and Exchange
Commission (SEC). This law was later repealed by Executive Order No. 53510 which
transferred the regulatory and adjudicative functions of the SEC over homeowners’
associations to the HIGC.
The petitioners based their arguments on Section 1(b), Rule II of the 1994 Revised
Rules of Procedure which regulates the Hearing of Homeowner’s Disputes, as
follows:
(b) Controversies arising out of intra-corporate relations between and among members
of the association; between any or all of them and the association of which they are
members; and between such association and the state/general public or other entity in
so far as it concerns its right to exist as a corporate entity.11 (emphases ours)
In its resolution promulgated on June 20, 2000, the RTC dismissed the complaint on
the ground of lack of jurisdiction. The RTC viewed the case as one involving an intra-
corporate dispute falling under the jurisdiction of the HIGC. The dispositive portion
of the RTC decision reads:
Considering that defendants have complied with the Order of this Court dated May 2,
2000 and have substantiated their allegations that Veraville Homeowners I
Association, Almanza Uno, Las Piñas City is duly registered with the Home Insurance
Guranty [sic] Corporation, this Court is of the considered view that it has no
jurisdiction over the instant case, as this Court cannot arrogate unto itself the authority
to resolve a controversy, the jurisdiction over which is initially lodged with an
administrative body equipped with special competence for the purpose.
WHEREFORE, for lack of jurisdiction, the instant case is ordered
DISMISSED.12 (italics supplied).
Aggrieved, the respondent appealed the RTC ruling to the CA. The respondent
maintained the argument that no intra-corporate dispute existed.
Ruling of the CA
On June 27, 2006, the CA reversed the judgment of the RTC and remanded the case to
the lower court for trial on the merits. The CA ruled that the factual allegations in the
complaint support the claim for damages.13
The CA noted that although the case involves a dispute between members of the
homeowners’ association, it is not an intra-corporate matter as it does not
concern the right of the corporation to exist as an entity.
The petitioners moved for reconsideration, but the CA denied the motion in its
resolution of November 7, 2006; hence, the present petition.
We resolve in this petition the lone issue of whether the CA erred in ruling that
the RTC has jurisdiction over this dispute.
The Court’s Ruling
We deny this petition for lack of merit.
An intra-corporate dispute
Jurisprudence consistently states that an intra-corporate dispute is one that arises from
intra-corporate relations; relationships between or among stockholders; or the
relationships between the stockholders and the corporation.
In order to limit the broad definition of intra-corporate dispute, this Court has applied
the relationship test and the controversy test.
These two tests, when applied, have been the guiding principle in determining
whether the dispute is an intra-corporate controversy or a civil case.
In Union Glass & Container Corp., et al. v. SEC, et al.,23 the Court declared that the
relationship test determines whether the relationship is: "
[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 [insofar] as its
franchise, permit or license to operate is concerned; and
[d] among the stockholders, partners or associates themselves."
Under this test, no doubt exists that the parties were members of the same association,
but this conclusion must still be supplemented by the controversy test before it may be
considered as an intra-corporate dispute. Relationship alone does not ipso facto make
the dispute intra-corporate; the mere existence of an intra-corporate relationship does
not always give rise to an intra-corporate controversy. The incidents of that
relationship must be considered to ascertain whether the controversy itself is intra-
corporate.24 This is where the controversy test becomes material.
Under the controversy test, the dispute must be rooted in the existence of an intra-
corporate relationship, and must refer to the enforcement of the parties' correlative
rights and obligations under the Corporation Code, as well as the internal and intra-
corporate regulatory rules of the corporation, in order to be an intra-corporate dispute.
These are essentially determined through the allegations in the complaint which
determine the nature of the action.
We found from the allegations in the complaint that the respondent did not question
the status of the petitioners as members of the association. There were no allegations
assailing the petitioners' rights or obligations on the basis of the association's rules and
by-laws, or regarding the petitioners' relationships with the association. What were
alleged were only demands for civil indemnity and damages. The intent to seek
indemnification only (and not the petitioners' status, membership, or their rights in the
association) is clear from paragraphs 7, 8 and 9 of the complaint.26 In light of these,
the case before us involves a simple civil action -the petitioners' liability for civil
indemnity or damages- that could only be determined through a full-blown hearing for
the purpose before the RTC.
2. ID.; ID.; ID.; WITHIN THE JURISDICTION OF THE SECURITIES AND EXCHANGE
COMMISSION. — It has already been settled that an intracorporate controversy would call for the
jurisdiction of the Securities and Exchange Commission. (Philippine School of Business Administration v.
Lanao, 127 SCRA 781, February 24, 1984)
Under Batas Pambansa Blg. 68 otherwise known as "The Corporation Code of the
Philippines," shares of stock are transferred as follows:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the
book 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.chanroblesvirtualawlibrary chanrobles virtual law library
As the bone of contention in this case, is the refusal of petitioner Rivera to indorse
the shares of stock in question and the refusal of the Corporation to register private
respondents' shares in its books, there is merit in the findings of the lower court
that the present controversy is not an intracorporate controversy; private
respondents are not yet stockholders; they are only seeking to be registered as
stockholders because of an alleged sale of shares of stock to them. Therefore, as
the petition is filed by outsiders not yet members of the corporation, jurisdiction
properly belongs to the regular courts.
Same; Same; Same; Same; Corporate Officers; Corporate officers are those officers of a
corporate who are given that character either by the Corporation Code or by the corporation’s
by-laws.—In Easycall Communications Phils., Inc. v. King, 478 SCRA 102 (2005), this Court
held that in the context of Presidential Decree No. 902-A, corporate officers are those officers
of a corporation who are given that character either by the Corporation Code or by the
corporation’s by-laws. Section 25 of the Corporation Code specifically enumerated who are
these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other
officers as may be provided for in the by-laws.
Same; Same; Same; Same; Same; The phrase “such other officers as may be provided for
in the by–laws” clarified and elaborated in Matling Industrial and Commercial Corporation vs.
Coros, 633 SCRA 12 (2010).—The aforesaid Section 25 of the Corporation Code, particularly
the phrase “such other officers as may be provided for in the by-laws,” has been clarified and
elaborated in this Court’s recent pronouncement in Matling Industrial and Commercial
Corporation v. Coros, 633 SCRA 12 (2010), where it held, thus: Conformably with Section 25, a
position must be expressly mentioned in the [b]y-[l]aws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate office. [In] Guerrea v.
Lezama [citation omitted] the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the Corporation Code or by the [b]y-
[l]aws; the rest of the corporate officers could be considered only as employees or
subordinate officials. Thus, it was held in Easycall Communications Phils., Inc. v. King[citation
omitted]: An “office” is created by the charter of the corporation and the officer is elected by
the directors or stockholders. On the other hand, an employee occupies no office and generally is
employed not by the 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. x x x x This
interpretation is the correct application of Section 25 of the Corporation Code, which
plainly states that the corporate officers are the President, Secretary, Treasurer and such other
officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the
context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporation’s [b]y[l]aws.37
VOL. 662, DECEMBER 12, 2011 37
Marc II Marketing, Inc. vs. Joson
Same; Same; Same; Same; Same; Corporate officers are composed of (1) Chairman; (2)
President; (3) One or more Vice-President; (4) Treasurer; and (5) Secretary.—A careful perusal
of petitioner corporation’s by-laws, particularly paragraph 1, Section 1, Article IV, would
explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3)
one or more Vice-President; (4) Treasurer; and (5) Secretary. The position of General Manager
was not among those enumerated.
; The board of directors has no power to create other corporate offices without first
amending the corporate by-laws so as to include therein the newly created corporate office.—
With the given circumstances and in conformity with Matling Industrial and Commercial
Corporation v. Coros, 633 SCRA 12 (2010), this Court rules that respondent was not a corporate
officer of petitioner corporation 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
petitioner corporation’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. Matling clearly enunciated that the board of
directors has no power to create other corporate offices without first amending the corporate by-
laws so as to include therein the newly created corporate office. Though the board of directors
may create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the
Corporation Code.
Same; Same; Same; Same; Same; The corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere employees or
subordinate officials.—It is also of no moment that respondent, being petitioner corporation’s
General Manager, was given the functions of a managing director by its Board of Directors. As
held in Matling, the only officers of a corporation are those given that character either by the
Corporation Code or by the corporate by-laws. It follows then that the corporate officers
enumerated in the by-laws are the exclusive officers of the corporation while the rest could only
be regarded as mere employees or subordinate officials. Respondent, in this case, though
occupying a high ranking and vital position in petitioner corporation but which position was not
specifically enumerated or mentioned in the latter’s by-laws, can only be regarded as its
employee or subordinate official.
Same; Same; Same; Same; Same; Not all conflicts between the stockholders and the corporation
are classified as intra-corporate; Other factors
38
38 SUPREME COURT REPORTS ANNOTATED
Marc II Marketing, Inc. vs. Joson
such as the status or relationship of the parties and the nature of the question that is the subject
of the controversy must be considered in determining whether the dispute involves corporate
matters so as to regard them as intra-corporate controversies.—That respondent was also a
director and a stockholder of petitioner corporation 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. Other factors such as the status or relationship of the parties and the nature of the
question that is the subject of the controversy must be considered in determining whether the
dispute involves corporate matters so as to regard them as intra-corporate controversies. As
previously discussed, respondent was not a corporate officer of petitioner corporation but a mere
employee thereof so there was no intra-corporate relationship between them. With regard to the
subject of the controversy or issue involved herein, i.e., respondent’s dismissal as petitioner
corporation’s General Manager, the same did not present or relate to an intra-corporate dispute.
Same; Same; Same; Same; Same; Respondent’s dismissal as petitioner corporation’s
General Manager did not amount to an intra-corporate controversy.—With all the foregoing,
this Court is fully convinced that, indeed, respondent, though occupying the General Manager
position, was not a corporate officer of petitioner corporation rather he was merely its employee
occupying a high-ranking position. Accordingly, respondent’s dismissal as petitioner
corporation’s General Manager did not amount to an intra-corporate controversy. Jurisdiction
therefor properly belongs with the Labor Arbiter and not with the RTC.
FACTS:
Respondent Alfredo Joson was the General Manager, incorporator, director and
stockholder of Marc I| Marketing (Petitioner Corporation).
However, Petitioner Corporation decided to stop and cease its operation wherein
respondent's services were then terminated.
RULING:
Yes. While Article 217(a) 229 of the Labor Code, as amended, provides that it is
the Labor Arbiter who has the original and exclusive jurisdiction over cases
involving termination or dismissal of workers when the person dismissed or
terminated is a corporate officer, the case automatically falls within the province of
the Regional Trial Court (RTC). The dismissal of a corporate officer is always
regarded as a corporate act and/or an intra-corporate controversy.
In conformity with Section 25 of the Corporation Code, whoever are the corporate
officers enumerated in the by-laws are the exclusive officers of the corporation and
the Board has no power to create other officers without amending first the
corporate by-laws. However, the Board may create appointive positions other than
the positions of the corporate officers, but the persons occupying such positions are
not considered as corporate officers within the meaning of Section 25 of the
Corporation Code and are not empowered to exercise the functions of the corporate
officers, except those functions lawfully delegated to them. Their functioning and
duties are to be determined by the Board of Directors/Trustees.
In the case at bar, the respondent was not a corporate officer of Petitioner
Corporation because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws. Thus
respondent, can only be regarded as its employee or subordinate official.
Accordingly, respondent's dismissal as Petitioner Corporation's General Manager
did not amount to an intra-corporate controversy. Jurisdiction therefore properly
belongs with the Labor Arbiter and not with the RTC.
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court,
herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the
Decision[1] dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624
for reversing and setting aside the Resolution[2] of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiters
Decision[3] dated 1 October 2001 finding herein respondent Alfredo M. Josons
dismissal from employment as illegal.
In the questioned Decision, the Court of Appeals upheld the Labor Arbiters
jurisdiction over the case on the basis that respondent was not an officer but a mere
employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latters
allegation of intra-corporate controversy.
Nonetheless, the Court of Appeals remanded the case to the NRC for further
proceedings to determine the proper amount of monetary awards that should be
given to respondent.
The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the
regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming
alleged pre-emptive rights in the case of the Abejos' shares and alleged loss of the certificates and lack of
consent and consideration in the case of Virginia Braga's shares. Such dispute clearly involves
controversies "between and among stockholders/' as to the Abejos' right to sell and dispose of their shares
to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas
and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with
the right to elect the corporate officers and the management and control of its operations, Such a dispute
and case clearly fall within the original and exclusive jurisdiction of the SEC to decide, under Section 5 of
P.D. 902-A, above-quoted. The restraining order issued by the Regional Trial Court restraining
Telectronics agents and representatives from enforcing their resolution constituting themselves as the new
set of officers of Pocket Bell and from assuming control of the corporation and discharging their
functions patently encroached upon the SEC's exclusive jurisdiction over such specialized corporate
controversies calling for its special competence. As stressed by the Solicitor General on behalf of the
SEC, the Court has held that "Nowhere does the law [PD 902-A] empower any Court of First Instance
[now Regional Trial Court] to interfere with the orders of the Commission," and consequently "any ruling
by the trial court on the issue of ownership of the shares of stock is not binding on the Commission" for
want of jurisdiction.
Same; Same; Same; Dispute at bar is an intracorporate dispute that has arisen between and among
the principal stockholders of Pocket Bell Corporation.—Basically and indubitably, the dispute at bar , as
held by the SEC, is an intracorporate dispute that has arisen between and among the principal
stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his
parents as erstwhile majority shareholders, to perform his "ministerial duty" to record the transfers of the
corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of
Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register
the transfers and issue new certificates in favor of Telectronics and its nominees was properly resorted to
under Rule XXI, Section 1 of the SEC's New Rules of Procedure, which provides for the filing of such
petitions with the SEC. Section 3 of said Rules further authorizes the SEC to "issue orders expediting the
proceedings x x x and also [to] grant a preliminary injunction for the preservation of the rights of the
parties pending such proceedings."
Same; Same; Same; Same; Filing of action for rescission and annulment of sale of stocks before
the Regional Trial Court will in no way deprive the SEC of its primary and exclusive jurisdiction to grant
or not the writ of mandamus ordering the registration of shares so transferred.—The claims of the
Bragas, which they assert in their complaint in the Regional Trial Court, praying for rescission and
annulment of the sale made by the Abejos in favor of Telectronics on the ground that they had an alleged
perfected pre-emptive right over the Abejos' shares as well as for annulment of sale to Telectronics of
Virginia Braga's shares covered by street certificates duly endorsed by her in blank, may in no way
deprive the SEC of its primary and exclusive jurisdiction to grant or not the writ of mandamus ordering
656
656 SUPREME COURT REPORTS
ANNOTATED
Abejo vs. De la Cruz
the registration of the shares so transferred. The Bragas' contention that the question of ordering the
recording of the transfers ultimately hinges on the question of ownership or right thereto over the shares
notwithstanding, the jurisdiction over the dispute is clearly vested in the SEC.
Same; Same; Same; Same; Same; Stockholders need not be a registered one before SEC can take
cognizance of a suit seeking to enforce his right as stockholders.—But as to the sale and transfer of the
Abejos' shares, the Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and
decide the case, by blocking through the corporate secretary, their son, the due recording of the transfer
and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation—
which is the very issue that the SEC is called upon to resolve. As the SEC maintains, "There is no
requirement that a stockholder of a corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder."
This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all
corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the
stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section
63 of the Code. Needless to say, any problem encountered in securing the certificates of stock
representing the investment made by the buyer must be expeditiously dealt with through administrative
mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure.
Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of
the shares and presentation of the certificates for transfer is equivalent to registration: "Whether the
refusal of the (corporation) to effect the same is valid or not is still subject to the outcome of the hearing
on the merits of the case.''
Doctrine: In all disputes affecting and dealing with the interests of the corporation
and its stockholders, following the trend and clear legislative intent of entrusting
all disputes of a specialized nature to administrative agencies, the SEC has been
given "the original and exclusive jurisdiction to hear and decide" them (under
Section 5 of P.D. 902-A) "in addition to (its] regulatory and adjudicative functions"
(under Section 3, vesting in it "absolute jurisdiction, supervision and control over
all corporations" and the Ruler-making power granted it in Section 143 of the
Corporation Code.
Case Summary:
Telectronics bought shares of Pocket Bell Philippines Inc. from Abejos and from
the alleged lost shares of Bragas.
With the purchases made, Telectronics would become the majority stockholder,
holding 56% of the outstanding stock and voting power of Pocket Bell.
However, Norberto Braga, son of the Bragas and the corporate secretary, refused to
register and issue new certificate of stock prompting the petitioners to file
madamus before the SEC.
The Bragas filed a civil case before the RTC annulling the sale and questioning
SEC's jurisdiction. RTC granted Bragas' petition.
Nonetheless, SC ruled that SEC has original and exclusive jurisdiction over the
dispute between the principal stockholders of the corporation Pocket Bell, and that
the SEC en banc correctly ruled that "the issue is not the ownership of shares but
rather the non-performance by the Corporate Secretary of the ministerial
duty of recording transfers of shares of stock.
FACTS:
This involves the dispute between the principal stockholders of Pocket Bell
Philippines, Inc. (Pocket Bell), a tone and voice paging corporation, namely:
the spouses Jose Abejo and Aurora Abejo and the purchaser, Telectronic Systems,
Inc., of their 133,000 minority shareholdings (for P5 million) and of 63,000 shares
registered in the name of Virginia Braga and covered by (for P1,674,450.00), and
the spouses Agapito Braga and Virginia Braga, the majonty stockholders.
Telectronics would become the majority stockholder, holding 56% of the
outstanding stock and voting power of the corporation Pocket Bell.
In 1982, Telectronics requested corporate secretary Norberto Braga to register in
the transfer book and the total 196,000 Pocket Bell shares, cancel the surrendered
certificates of stock and issue new certificates.
Norberto Braga, son of the Bragas, refused to register and transfer the shares
asserting that the Bragas claim pre-emptive rights over the Abejos shares, and that
Virginia Braga never transferred her shares but had lost the five stock certificates
representing those shares
This triggered off the series of intertwined actions between the parties centered on
the question of jurisdiction over the dispute
the Abejos, claim that SEC has the original and exclusive jurisdiction and there he
filed:
a prayer for mandamus to compel Norberto to register the stocks in the transfer
books.
an injunction and a temporary restraining order that the SEC enjoin the Bragas
from disbursing or disposing funds and assets of Pocket Bell and from performing
such other acts pertaining to the functions of corporate officers.
FACTS
This is a petition for review on certiorari seeking to set aside the CA decision
granting respondent Mariam Kairuz's petition and reversing the RTC decision,
which affirmed the dismissal of the complaint for ejectment on the ground of
failure to implead an indispensable party rendered by the MCTC.
Mariam filed an ejectment case before the MCTC alleging that petitioners John
Cary Tumagan, et. al., forcibly took her property by padlocking it and posting
armed men to exclude her from the property.
In their answer, petitioners averred that Mariam could not bring the present action
for forcible entry because she was never the sole owner or possessor of the
property.
Petitioners claimed that the property is a good source of potable water and is
publicly known as Kairuz Spring.
The property was sold through a Memorandum of Agreement (MOA) to Bali Irisan
Resources, Inc. (BIRI), John is the branch manager, while the other two petitioners
are geodetic engineers hired by BIRI to survey the property.
Petitioners alleged that Mariam is a shareholder of BIRI and had succeeded her
husband's seat in the BIRI's Board of Directors and Management Committee
(ManCom) after his death. In addition, the case involves management of corporate
property, hence, petitioners claim that the MCTC has no jurisdiction over the
action filed by Mariam because the same is an intra-corporate dispute which falls
under the jurisdiction of the appropriate RTC
ISSUE:
Whether or not the issues are intra-corporate in nature which should be best
resolved before the RTC as a special commercial court?
HELD:
Yes, the issue in this case is an intra-corporate controversy.
In order that the RTC can take cognizance of an intra-corporate dispute, the
controversy must pertain to any of the following relationships: (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 as far as its
franchise, permit, or license to operate is concerned; and (d) among the
stockholders, partners, or associates themselves. However, not every conflict
between a corporation and its stockholders involves corporate matters. Concurrent
factors, such as the status or relationship of the parties, or the nature of the question
that is the subject of their controversy, must be considered in determining whether
the RTC has jurisdiction over the controversy.
Here, the Court considers two elements in determining the existence of an intra-
corporate controversy, namely: (a) the status or relationship of the parties; and (b)
the nature of the question that is the subject of their controversy.
In sum, what appears on record as the true nature of the controversy is that of a
shareholder seeking relief from the court to contest the management's decision to:
(1) post guards to secure the premises of the corporate property: (2) padlock the
premises; and (3) deny her access to the same due to her alleged default on the
provisions of the MOA.
While the case purports to be one for forcible entry filed by Mariam against BIRI's
employees and contractors in their individual capacities, the true nature of the
controversy is an intra-corporate dispute between BIRI and its shareholder,
Mariam, regarding the management of, and access to, the corporate property
subject of the MOA.
Therefore, the MCTC never acquired jurisdiction over the ejectment case filed by
Mariam.
Mercantile Law; Securities and Exchange Commission; Securities Regulation Code; With the
passage of the Securities Regulation Code (SRC), the powers granted to Securities and Exchange
Commission (SEC) under Section 5 were withdrawn, together with the incidental and ancillary powers
enumerated in Section 6.—Section 6(g) of Presidential Decree No. (P.D.) 902-A dated 11 March 1976
conferred on SEC the power “[t]o pass upon the validity of the issuance and use of proxies and voting
trust agreements for absent stockholders or members.” Section 6, however, opens thus: “In order to
effectively exercise such jurisdiction x x x.” This opening clearly refers to the preceding Section 5. The
Court pointed out therein that the power to pass upon the validity of proxies was merely incidental or
ancillary to the powers conferred on the SEC under Section 5 of the same decree. With the passage of the
SRC, the powers granted to SEC under Section 5 were withdrawn, together with the incidental and
ancillary powers enumerated in Section 6.
Same; Same; Jurisdiction; All matters affecting the manner and conduct of the election of directors
are properly cognizable by the regular courts. Otherwise, these matters may be brought before the
Securities and Exchange Commission (SEC) for resolution based on the regulatory powers it exercises
over corporations, partnerships and associations.—The Court explained that the power of the SEC to
regulate proxies remains in place in instances when stockholders vote on matters other than the election
of directors. The test is whether the controversy relates to such election. All matters affecting the manner
and conduct of the election of directors are properly cognizable by the regular courts. Otherwise, these
matters may be brought before the SEC for resolution based on the regulatory powers it exercises over
corporations, partnerships and associations.
Remedial Law; Civil Procedure; Appeals; Quasi-judicial agencies do not have the right to seek the
review of an appellate court decision reversing any of their rulings.—Calling to mind established
jurisprudential principles, the Court therein ruled that quasi-judicial agencies do not have the right to seek
the review of an appellate court decision reversing any of their rulings. This is because they are not real
parties-in-interest. Thus, the Court expunged the petition filed by the SEC for the latter’s lack of capacity
to file the suit. So it must be in the instant cases.
FACTS:
Omico Corporation (Omico) is a company whose shares of stock are listed and
traded in the Philippine Stock Exchange, Inc. Astra Securities Corporation (Astra)
is one of the stockholders of Omico owning about 18% of the latter's outstanding
capital stock.
HELD:
FIRST ISSUE: None.
The Court held that when proxies are solicited in
relation to the election of corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy solicitation, should be
properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC. Hence, the
jurisdiction is still with the Special Commercial Courts.
An election contest covers any controversy or dispute
involving the validation of proxies, in general. Thus, it can only refer to all the
beneficial purposes that validation of proxies can bring about when made in
connection with a forthcoming election of directors. Thus, there is no point in
making distinctions between who has jurisdiction before and who has iurisdiction
after the election of directors. as all controversies related thereto - whether before,
during or after - shall be passed upon by regular courts as provided by law.
SECOND ISSUE: No.
The Court held that quasi-judicial agencies do not have the right to seek the review
of an appellate court decision reversing any of their rulings. This is because they
are notreal parties-in-interest. Thus, the Court expunged the petition filed by the
SEC for the latter's lack of capacity to file the suit.
Corporation Law; Securities and Exchange Commission; Proxies; Words and Phrases;
Proxy solicitation involves the securing and submission of proxies, while proxy validation
concerns the validation of such secured and submitted proxies.—It is plain that proxy solicitation
is a procedure that antecedes proxy validation. The former involves the securing and submission
of proxies, while the latter
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concerns the validation of such secured and submitted proxies. GSIS raises the sensible point
that there was no election yet at the time it filed its petition with the SEC, hence no proper
election contest or controversy yet over which the regular courts may have jurisdiction. And the
point ties its cause of action to alleged irregularities in the proxy solicitation procedure, a process
that precedes either the validation of proxies or the annual meeting itself.
Same; Same; Same; Same; Jurisdiction; It is possible that an intra-corporate controversy
may animate a disgruntled shareholder to complain to the Securities and Exchange Commission
(SEC) a corporation’s violations of SEC rules and regulations, but that motive alone should not
be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since
such powers are exercisable on a motu proprio basis.—Under Section 20.1, the solicitation of
proxies must be in accordance with rules and regulations issued by the SEC, such as AIRR-SRC
Rule 4. And by virtue of Section 53.1, the SEC has the discretion “to make such investigations as
it deems necessary to determine whether any person has violated” any rule issued by it, such as
AIRR-SRC Rule 4. The investigatory power of the SEC established by Section 53.1 is central to
its regulatory authority, most crucial to the public interest especially as it may pertain to
corporations with publicly traded shares. For that reason, we are not keen on pursuing private
respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-corporate
controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-
corporate controversy may animate a disgruntled shareholder to complain to the SEC a
corporation’s violations of SEC rules and regulations, but that motive alone should not be
sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such
powers are exercisable on a motu propriobasis.
Same; Same; Same; Same; Same; The Securities and Exchange Commission’s (SEC’s)
power to pass upon the validity of proxies in relation to election controversies has effectively
been withdrawn, tied as it is to its abrogated jurisdictional powers.—There is an interesting
point, which neither party raises, and it concerns Section 6(g) of Presidential Decree No. 902-A,
which states: xxx xxx As promulgated then, the provision would confer on the SEC the power
to adjudicate controversies relating not only to proxy solicitation, but
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also to proxy validation. Should the proposition hold true up to the present, the position of GSIS
would have merit, especially since Section 6 of Presidential Decree No. 902-A was not expressly
repealed or abrogated by the SRC. Yet a closer reading of the provision indicates that such
power of the SEC then was incidental or ancillary to the “exercise of such jurisdiction.” Note
that Section 6 is immediately preceded by Section 5, which originally conferred on the SEC
“original and exclusive jurisdiction to hear and decide cases” involving “controversies in the
election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations.” The cases referred to in Section 5 were transferred from the
jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section
5.2. Thus, the SEC’s power to pass upon the validity of proxies in relation to election
controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers.
Same; Same; Same; Same; Same; Courts; Evidently, the jurisdiction of the regular courts
over so-called election contests or controversies under Section 5(c) of P.D. No. 902-A does not
extend to every potential subject that may be voted on by shareholders, but only to the election of
directors or trustees, in which stockholders are authorized to participate under Section 24 of
the Corporation Code; The power of the Securities and Exchange Commission (SEC) to
investigate violations of its rules on proxy solicitation is unquestioned when proxies are
obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential
Decree No. 902-A, but when proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on
proxy solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section
5(c) of Presidential Decree No. 902-A.—Under Section 5(c) of Presidential Decree No. 902-A,
in relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related
controversies is specifically confined to “controversies in the election or appointment of
directors, trustees, officers or managers of corporations, partnerships, or
associations.” Evidently, the jurisdiction of the regular courts over so-called election
contests or controversies under Section 5(c) does not extend to every potential subject that
may be voted on by shareholders, but only to the election of
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directors or trustees, in which stockholders are authorized to participate under Section 24
of the Corporation Code. This qualification allows for a useful distinction that gives due effect
to the statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of
regular courts over election contests or controversies. The power of the SEC to investigate
violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on
matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-
A. However, when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.
Same; Same; Same; Same; Same; Same; The fact that the jurisdiction of the regular courts
under Section 5(c) is confined to the voting on election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that the power of the Securities and Exchange
Commission (SEC) to regulate proxies remains extant and could very well be exercised when
stockholders vote on matters other than the election of directors.—Unlike either Section 20.1 or
Section 53.1, which merely alludes to the rule-making or investigatory power of the SEC,
Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly
granting as it does “original and exclusive jurisdiction” first to the SEC, and now to the regular
courts. The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the
voting on election of officers, and not on all matters which may be voted upon by stockholders,
elucidates that the power of the SEC to regulate proxies remains extant and could very well be
exercised when stockholders vote on matters other than the election of directors.
Same; Same; Same; Securities Regulation Code (SRC); Cease and Desist Orders (CDOs); There
are three distinct bases for the issuance by the Securities and Exchange Commission (SEC) of the Cease
and Desist Order (CDO) under the Securities Regulation Code—the first, allocated by Section 5(I), is
predicated on a necessity “to prevent fraud or injury to the investing public,” the second basis,
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found in Section 53.3, involves a determination by the Securities and Exchange Commission
(SEC) that “any person has engaged or is about to engage in any act or practice constituting a
violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of
an Exchange, registered securities association, clearing agency or other self-regulatory
organization,” and, the third basis for the issuance of a Cease and Desist Order (CDO) is
Section 64, a CDO founded on a determination of an act or practice, which unless restrained,
“will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public.”—There are three distinct bases for the issuance by the SEC
of the CDO. The first, allocated by Section 5(i), is predicated on a necessity “to prevent fraud or
injury to the investing public.” No other requisite or detail is tied to this CDOauthorized under
Section 5(i). The second basis, found in Section 53.3, involves a determination by the SEC that
“any person has engaged or is about to engage in any act or practice constituting a violation of
any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-regulatory organization.” The
provision additionally requires a finding that “there is a reasonable likelihood of continuing [or
engaging in] further or future violations by such person.” The maximum duration of
the CDO issued under Section 53.3 is ten (10) days. The third basis for the issuance of a CDO is
Section 64. This CDO is founded on a determination of an act or practice, which unless
restrained, “will operate as a fraud on investors or is otherwise likely to cause grave or
irreparable injury or prejudice to the investing public.” Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after
proper investigation or verification, (2) motu proprio, or (3) upon verified complaint by any
aggrieved party. While no lifetime is expressly specified for the CDO under Section 64, the
respondent to the CDO may file a formal request for the lifting thereof, which the SEC must hear
within fifteen (15) days from filing and decide within ten (10) days from the hearing.
Same; Same; Same; Same; Same; Notwithstanding the similarities between Section 5(i) and
Section 64.1, it remains clear that the Cease and Desist Order (CDO) issued under Section 53.3
is a distinct creation from that under Section 64.—It appears that the CDO under Section 5(i) is
similar to the CDO under Section 64.1.
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Both require a common finding of a need to prevent fraud or injury to the investing public. At
the same time, no mention is made whether the CDO defined under Section 5(i) may be
issued ex-parte, while the CDO under Section 64.1 requires “grave and irreparable” injury,
language absent in Section 5(i). Notwithstanding the similarities between Section 5(i) and
Section 64.1, it remains clear that the CDOissued under Section 53.3 is a distinct creation from
that under Section 64.
Same; Same; Same; Same; Same; A singular Cease and Desist Order (CDO) could not be
founded on Section 5.1, Section 53.3 and Section 64 collectively—at the very least, the CDO
under Section 53.3 and under Section 64 have their respective requisites and terms.—
Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1,
Section 53.3 or Section 64 of the SRC. The CDO actually refers and cites all three provisions,
yet it is apparent that a singular CDOcould not be founded on Section 5.1, Section 53.3 and
Section 64 collectively. At the very least, the CDOunder Section 53.3 and under Section 64 have
their respective requisites and terms.
GSIS vs. CA
G.R. No. 183905. April 16, 2009
DOCTRINE:
The SEC's power to pass upon the validity of proxies in relation to election
controversies has effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.
The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A. However, when
proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in
relation to Section 5(c) of Presidential Decree No. 902-A
FACTS:
The annual stockholders' meeting (annual meeting) of the Manila Electric
Company (Meralco) was scheduled on 27 May 2008. In connection with the annual
meeting, proxies were required to be submitted on or before 17 May 2008, and the
proxy validation was slated for five days later, or 22 May.
In view of the resignation of Camilo Quiason, the position of corporate secretary of
Meralco became vacant. The board of directors of Meralco designated Jose Vitug
to act as corporate secretary for the annual meeting. However, when the proxy
validation began on 22 May, the proceedings were presided over by respondent
Anthony Rosete (Rosete), assistant corporate secretary and in-house chief legal
counsel of Meralco. Private respondents nonetheless argue that Rosete was the
acting corporate secretary of Meralco. Petitioner GSIS, a major shareholder in
Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.
GSIS filed a complaint with the RTC of Pasay City, seeking the declaration of
certain proxies as invalid.
Three days later, GSIS filed a Notice with the RTC manifesting the dismissal of
the complaint. On the same day, GSIS filed an Urgent Petition with the Securities
and Exchange Commission (SEC) seeking to restrain Rosete from "recognizing,
counting and tabulating, directly or indirectly, notionally or actually or in whatever
way, form, manner or means, or otherwise honoring the shares covered by" the
proxies in favor of respondents "or any officer representing MERALCO
Management", and to annul and declare invalid said proxies. GSIS also prayed for
the issuance of a Cease and Desist Order (CDO) to restrain the use of said proxies
during the annual meeting scheduled for the following day. A CDO to that effect
signed by SEC Commissioner Jesus Martinez was issued, the same day the
complaint was filed. During the annual meeting held on the following day, Rosete
announced that the meeting would push through, expressing the opinion that the
CDO is null and void.
SEC issued a Show Cause Order (SCO) against private respondents, ordering them
to appear before the Commission and explain why they should not be cited in
contempt. Respondents filed a petition for certiorari with prohibition with the
Court of Appeals, praying that the CDO and the SCO be annulled.
CA ordered that complaint filed by GSIS in the SEC be DISMISSED due to SEC's
lack of jurisdiction, due to forum shopping by respondent GSIS, and due to
splitting of causes of action by respondent GSIS.
Consequently, the SEC's undated cease and desist order and the SEC's show cause
order are DECLARED
ISSUE:
1. Whether or not the proxy challenge is an election contest cognizable by the
regular courts.
2. Whether or not the SEC has jurisdiction over the petition filed by SIS against
private respondents.
3. Whether or not the CDO and SCO issued by the SEC are valid.
RULING:
1. Yes. Section 2, Rule 6 of the Interim Rules broadly defines the term "election
contest" as encompassing all plausible incidents arising from the election of
corporate directors, including: (1) any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation,
(2) the validation of proxies, 3) the manner and validity of elections and (4) the
qualifications of candidates, including the proclamation of winners.
Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-related controversies
is specifically confined to "controversies in the election or appointment of
directors, trustees, officers or managers of corporations, partnerships, or
associations." Evidently, the jurisdiction of the regular courts over so-called
election contests or controversies under Section 5(c) does not extend to every
potential subject that may be voted on by
sharenolders, but only to the electon of directors or trustees, in which stocknolders
are autnorized to participate under Section 24 of the Corporation Code.
The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A. However, when
proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in
relation to Section 5(c) of Presidential Decree No. 902-A.
That the proxy challenge raised by GSIS relates to the election of the directors of
Meralco is undisputed.
The controversy was engendered by the looming annual meeting, during which the
stockholders of Meralco were to elect the directors of the corporation. GSIS very
well knew of that fact.
SEC Jurisdiction on Proxy Validation
The SEC's power to pass upon the validity of proxies in relation to election
controversies has effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.
2. No. SEC has no Jurisdiction. Under Section 5(c) of Presidential Decree No. 902-
A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to
election-related controversies is specifically confined to "controversies in the
election or appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations." Evidently, jurisdiction of the regular courts over so-
called election contests or controversies under Section 5c does not extend to every
potential subject that may be voted on by shareholders, but only to the election of
directors or trustees, in which stockholders are authorized to participate under
Section 24 of the Corporation Code.
This qualification allows for a useful distinction that gives due effect to the
statutory right of the
SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts
over election contests or controversies. The power of the SEC to investigate
violations of its rules on proxy solicitation is unquestioned when broxies are
obtained to vote on matters unrelated to the cases enumerated under Section 5 of
Presidential Decree No. 902-A. However, when proxies are solicited in relation to
the election of corporate directors, the resulting controversy, even if it ostensibly
raised the violation of the SEC rules on proxy solicitation, should be properly seen
as an election controversy within the original and exclusive jurisdiction of the trial
courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential
Decree No. 902-A.
3. No. CDO and SCO issued by the SEC are not valid. The lack of jurisdiction of
the SEC over the subject matter of SIS's petition necessarily invalidates the CDO
and SCO issued by that body.
The error of the SEC in granting the CDO without stating which kind of CDO it
was issuing is more unpardonable, as it is an act that contravenes due process of
law. The CDO bore the signature of Commissioner Jesus Martinez, identified
therein as "Officer-in-Charge," and nobody else's. The SEC is a collegial body
composed of a Chairperson and four (4) Commissioners. In order to constitute a
quorum to conduct business, the presence of at least three (3) Commissioners is
required. Commissioner Martinez is not the SEC. He alone does not speak for and
in behalf of the SEC The SEC acts through a five-person body, and the five
members of the commission each has one vote to cast in every deliberation
conceming a case or any incident therein that is subject to the jurisdiction of the
SEC. It is clear that Martinez was designated as OIC because of the official travel
of only one member, Chairperson Fe Barin. Martinez was not commissioned to act
as the SEC itself.
3 Distinct bases of Cease-and-desist order
There are three distinct bases for the issuance by the SEC of the CDO.
1. The first, allocated by Section 5 (i), is predicated on a necessity "to prevent
fraud or injury to the investing public". No other requisite or detail is tied to this
CDO authorized under Section 5 (i).
2. The second basis, found in Section 53.3, involves a determination by the SEC
that "any person has
engaged or is about to engage in anv act or practice constutng a violation of anv
provision ot this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency or other self-
regulatory organization". The provision additionally requires a finding that "there
is a reasonable likelihood of continuing [or engaging in] further or future violations
by such person". The maximum duration of the CDO issued under Section 53.3 is
ten (10) days.
3. The third basis for the issuance of a CDO is Section 64. This CDO is founded on
a determination of an act or practice, which unless restrained, "will operate as a
fraud on investors or is otherwise likely to cause grave or irreparable injury or
prejudice to the investing public". Section 64.1 plainly provides three segregate
instances upon which the SEC may issue the CDO under this provision: (1) after
proper investigation or verification, (2) motu proprio, or (3) upon verified
complaint by any aggrieved party. While no lifetime is expressly specified for the
CDO under Section 64, the respondent to the CDO may file a formal request for
the lifting thereof, which the SEC must hear within fifteen (15) days from filing
and decide within ten (10) days from the hearing.
Remedial Law; Civil Procedure; Jurisdiction; The settled rule is that jurisdiction over the subject
matter of a case is conferred by law and determined by the allegations in the complaint, which comprise
a concise statement of the ultimate facts constituting the plaintiff’s cause of action.—The settled rule is
that jurisdiction over the subject matter of a case is conferred by law and determined by the allegations in
the complaint, which comprise a concise statement of the ultimate facts constituting the plaintiff’s cause
of action. The nature of an action, as well as which court or body has jurisdiction over it, is determined
based on the allegations contained in the complaint of the plaintiff. The averments in the complaint and
the character of the relief sought are the ones to be consulted. Once vested by the allegations in the
complaint, jurisdiction also remains vested, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein.
Corporations; Intra-Corporate Controversies; Jurisdiction; Special Commercial Courts; Regional
Trial Courts; As it now stands, jurisdiction over the cases enumerated under. Section 5 of Presidential
Decree (PD) No. 902-A, collectively known as intra-corporate controversies or disputes, now falls under
the jurisdiction of the Regional Trial Courts (RTCs).—As it now stands, jurisdiction over the cases
enumerated under Section 5 of PD No. 902-A, collectively
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* THIRD DIVISION.
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known as intra-corporate controversies or disputes, now falls under the jurisdiction of the RTCs. In
this regard, it is worthy to reiterate this Court’s ruling in Gonzales, et al. v. GJH Land, Inc., et al., 774
SCRA 242 (2015), which characterizes and explains the transfer of jurisdiction of all cases enumerated
under Section 5 of PD No. 902-A from the Securities and Exchange Commission (SEC) to the RTCs. In
the said Decision, which was promulgated subsequent to the issuance of the questioned RTC Orders in
the present case, this Court made a distinction between a court’s “subject matter jurisdiction” and its
“exercise of jurisdiction.”
Same; Same; Same; Same; Same; Jurisdiction over intra-corporate controversies is transferred by
law (Republic Act [RA] No. 8799) from the Securities Exchange Commission (SEC) to the Regional Trial
Courts (RTCs) in general, but the authority to exercise such jurisdiction is given by the Supreme Court
(SC), in the exercise of its rulemaking power under the Constitution, to RTCs which are specifically
designated as Special Commercial Courts (SCC).—In short, jurisdiction over intra-corporate
controversies is transferred by law (RA No. 8799) from the SEC to the RTCs in general, but the authority
to exercise such jurisdiction is given by the Supreme Court, in the exercise of its rulemaking power under
the Constitution, to RTCs which are specifically designated as Special Commercial Courts. On the other
hand, the cases enumerated under Section 19 of BP 129, as amended, are taken cognizance of by the
RTCs in the exercise of their general jurisdiction. Thus, based on the allegations in petitioner’s
Complaint, in relation to the above provisions of law, there is no dispute that the case falls under the
jurisdiction of the RTC. However, whether or not the RTC shall take cognizance of the case in the
exercise of its general jurisdiction, or as a special commercial court, is another matter. In resolving this
issue, what needs to be determined, at the first instance, is the nature of petitioner’s complaint. Is it an
ordinary civil action for collection, specific performance and damages as would fall under the jurisdiction
of regular courts or is it an intra-corporate controversy or of such nature that it is required to be heard and
tried by a special commercial court?
Same; Same; In determining whether a dispute constitutes an intra-corporate controversy, the
Supreme Court (SC) uses two (2) tests, namely, the relationship test and the nature of the controversy
test.—In the case of Medical Plaza Makati Condominium Corporation v.
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Ku vs. RCBC Securities, Inc.
Cullen, 709 SCRA 110 (2013), this Court held as follows: In determining whether a dispute
constitutes an intra-corporate controversy, the Court uses two tests, namely, the relationship test and the
nature of the controversy test. An intra-corporate controversy is one which pertains to any of the
following relationships: (1) between the corporation, partnership or association and the public; (2)
between the corporation, partnership or association and the State insofar as its franchise, permit or license
to operate is concerned; (3) between the corporation, partnership or association and its stockholders,
partners, members or officers; and (4) among the stockholders, partners or associates themselves. Thus,
under the relationship test, the existence of any of the above intra-corporate relations makes the case
intra-corporate. Under the nature of the controversy test, “the controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’
correlative rights and obligations under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation.” In other words, jurisdiction should be determined by considering
both the relationship of the parties as well as the nature of the question involved. Applying the above
tests, the Court finds, and so holds, that the case is not an intra-corporate dispute and, instead, is an
ordinary civil action. There are no intra-corporate relations between the parties. Petitioner is neither a
stockholder, partner, member or officer of respondent corporation. The parties’ relationship is limited to
that of an investor and a securities broker. Moreover, the questions involved neither pertain to the parties’
rights and obligations under the Corporation Code, if any, nor to matters directly relating to the regulation
of the corporation.
FACTS:
Stephen Y. Ku opened an account with RCBC Securities on June 5, 2007 for the
purchase and sale of securities.
On February 22, 2013, Ku filed with the RTC of Makati a Complaint for Sum of
Money and Specific Performance with Damages against respondent. Pertinent
portions of his allegations read as follows:
4. Unknown to plaintiff, the name of M.G. Valuena ("MGV) was deliberately
inserted beside the name of Ivan L.
Zalameda as one of. the agents after plaintiff completed and signed the Agreement.
5. As to when the fraudulent insertion was made, plaintiff has no idea. Plaintiff
only discovered this anomaly when plaintiff recently requested for a copy of his
Account Information.
6. In the course of plaintiff's trading transactions with
RSEC, MGV represented herself as a Sales Director of RSEC, duly authorized to
transact business on behalf of the latter. xxxx
7. With this representation, plaintiff continued to transact business with RSEC
through MGV, on the honest belief that the latter was acting for and in behalf of
RSEC. Xxx
13. Sometime in January 2012, it came to the knowledge of plaintiff that his
account with REC was subject of mismanagement. MGV was blacklisted by REC
due to numerous fraudulent and unauthorized transactions committed by the
former. Worse, MGV allegedly was able to divert investments made by "high
networth" clients of REC into some other accounts. xxX
16. In the same letter, plaintiff made clear to RSEC that
it has never authorized a discretionary account with MGV and requested for all
documents relative to plaintiff's audit. xxxx
17. After audit, plaintiff has conclusively determined that
there were FOUR HUNDRED SIXTY-SEVEN (467) unauthorized transactions in
his account. A review of the said transactions
would show that multiple buying and selling transactions on the same day were
repeatedly done over a period of four (4) years.
Ku prayed for the payment of the amounts and the shares of stock resulting from
his independent audit after excluding all unauthorized trades. Ku also sought the
recovery of treble damages, exemplary damages and attorney's fees.
The Complaint, docketed as Civil Case No. 13-171, was raffled off to Branch 63,
RTC of Makati. On May 29, 2013, RCBC Securities filed a Motion to Dismiss.
The RTC of Makati, Branch 63, issued its questioned Order dated September 12,
2013, to wit:
xxxx After going over plaintiff's [herein Ku's] Complaint and defendant's [herein
respondent's] Motion to Dismiss and the Reply that followed, the Court is of the
considered view that this case involves trading of securities.
Consequently, the case should be heard and tried before a Special Commercial
Court. Accordingly, the Court's Branch Clerk of Court is forthwith directed to
forward the entire record of the case to the Office of the Clerk of Court for re-
raffle.
The case was, subsequently, re-raffled to Branch 149 of the RTC of Makati.
Thereafter, in its Order dated October 25, 2013, the RTC of Makati, Branch 149,
denied the Motion to Dismiss for lack of merit. It held that Ku's payment of
insufficient docket fees does not warrant the dismissal of the Complaint and that
the trial court still acquires jurisdiction over the case subject to the payment of the
deficiency assessment. The RTC, thus, ordered Ku "to pay the docket fees on the
value of the shares of stocks being prayed to be returned to him, within thirty (30)
days from receipt" of the said Order.
The CA reversed and dismissed Ku's complaint, on the ground of lack of
jurisdiction by Branch 63. Thus, the case should have been dismissed.
ISSUES:
1. WoN RTC Branch 63 has jurisdiction
YES. The Court finds, and so holds, that the case is not an intra-corporate dispute
and, instead, is an ordinary civil action. There are no intra-corporate relations
between the parties. Ku is neither a stockholder, partner, member or officer of
RCBC Securities corporation. The parties' relationship is limited to that of an
investor and a securities broker. Moreover, the questions involved neither pertain
to the parties' rights and obligations under the Corporation Code, if any, nor to
matters directly relating to the regulation of the corporation.
On the basis of the foregoing, since the Complaint filed by Ku partakes of the
nature of an ordinary civil action, it is clear that it was correctly raffled-off to
Branch 63. Hence, it is improper for it (Branch 63) to have ordered the re-raffle of
the case to another branch of the Makati RTC.
Nonetheless, the September 12, 2013 Order of Branch 63, although erroneous, was
issued in the valid exercise of the RT's jurisdiction. Such mistaken Order can, thus,
be considered as a mere procedural lapse which does not affect the jurisdiction
which the RTC of Makati had already acquired.
Moreover, while designated as a Special Commercial Court, Branch 149, to which
it was subsequently re-raffled, retains its general jurisdiction to try ordinary civil
cases such as Ku's Complaint. In addition, after its re-raffle to Branch 149, the case
remained docketed as an ordinary civil case. Thus, the Order dated October 12,
2013 was, likewise issued by Branch 149 in the valid exercise of the RTC's
jurisdiction.
2. WoN the trial court acquired jurisdiction despite payment of insufficient docket
fees
YES/NO. In the present case, the Court does not agree with the CA when it ruled
that "the intention of [Ku] Ku to evade payment of the correct filing fees] if not to
mislead the docket clerk in the assessment of the filing fees[.] is manifest." The
fact alone that Ku failed to indicate in the body of his Complaint as well as in his
prayer, the value of the shares of stocks he wishes to recover from RCBC
Securities is not sufficient proof of a deliberate intent to defraud the court in the
payment of docket fees. On the contrary, there is no dispute that upon filing of his
Complaint, Ku paid docket fees amounting to P1,465,971.41, which was based on
the assessment made by the clerk of court.
In a number of cases, this Court has ruled that the plaintiff's payment of the docket
fees based on the assessment made by the docket clerk negates bad faith or intent
to defraud the government. There is, likewise, no dispute that, subsequently, when
ordered by Branch 149 to pay additional docket fees corresponding to the value of
the shares of stocks being recovered, Ku immediately paid an additional sum of
P464,535.83.
Moreover, unlike in Manchester where the complainant specified in the body of the
complaint the amount of damages sought to be recovered but omitted the same in
its prayer, Ku in the instant case consistently indicated both in the body of his
Complaint and in his prayer, the number of shares sought to be recovered, albeit
without their corresponding values. The foregoing circumstances would show that
there was no deliberate intent to defraud the court in the payment of docket fees.
NOTES: CA decision REVERSED. Civil Case No. 13-171, entitled Stephen Y. Ku
v. RCBC Securities, Inc., is hereby REINSTATED and the Regional Trial Court of
Makati City, Branch 149, is DIRECTED to PROCEED WITH THE HEARING of
the case, with utmost dispatch, until its termination. •
_______________
* SECOND DIVISION.
482
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Securities and Exchange Commission vs. Subic
Bay Golf and Country Club, Inc.
dential Decree No. 902-A, the Securities and Exchange Commission has jurisdiction over acts
amounting to fraud and misrepresentation by a corporation’s board of directors, business associates, and
officers. It also provides that it has jurisdiction over intra-corporate disputes. Thus: WHEREAS,in line
with the government’s policy of encouraging investments, both domestic and foreign, and more active
public participation in the affairs of private corporations and enterprises through which desirable activities
may be pursued for the promotion of economic development; and to promote a wider and more
meaningful equitable distribution of wealth, there is a need for an agency of the government to be
invested with ample powers to protect such investment and the public; . . . . SEC.5. In addition to the
regulatory and adjudicative functions of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a.
Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or organizations registered with the
Commission; b. Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity; c. Controversies in the election or appointments of directors, trustees, officers
or managers of such corporations, partnerships or associations.
Same; Same; Same; Regional Trial Courts; Jurisdiction over intra-corporate disputes and all other
cases enumerated in Section 5 of Presidential Decree (PD) No. 902-A had already been transferred to
designated Regional Trial Courts (RTCs).—Jurisdiction over intra-corporate disputes and all other cases
enumerated in Section 5 of Presidential Decree No. 902-A had already been transferred to designated
Regional Trial Courts. Section 5.2 of Republic Act No. 8799 provides: 5.2. The Commission’s
jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate
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Securities and Exchange Commission vs. Subic
Bay Golf and Country Club, Inc.
Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intracorporate disputes submitted for
final resolution which should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of
30 June 2000 until fully disposed. Hence, actions pertaining to intra-corporate disputes should be filed
directly before designated Regional Trial Courts. Intra-corporate disputes brought before other courts or
tribunals are dismissible for lack of jurisdiction.
Intra-Corporate Controversies; For a dispute to be “intra-corporate,” it must satisfy the
relationship and nature of controversy tests.—For a dispute to be “intra-corporate,” it must satisfy the
relationship and nature of controversy tests. The relationship test requires that the dispute be between a
corporation/partnership/association and the public; a corporation/partnership/association and the state
regarding the entity’s franchise, permit, or license to operate; a corporation/partnership/association and its
stockholders, partners, members, or officers; and among stockholders, partners, or associates of the entity.
The nature of the controversy test requires that the action involves the enforcement of corporate rights
and obligations. Courts and tribunals must consider both the parties’ relationship and the nature of the
controversy to determine whether they should assume jurisdiction over a case.
Same; Villareal and Filart alleged in their letter-complaint that the world-class golf course that was
promised to them when they purchased shares did not materialize. This is an intra-corporate matter that
is under the designated Regional Trial Court’s (RTC’s) jurisdiction.—Villareal and Filart’s right to a
refund of the value of their shares was based on SBGCCI and UIGDC’s alleged failure to abide by their
representations in their prospectus. Specifically, Villareal and Filart alleged in their letter-complaint that
the world-class golf course that was promised to them when they purchased shares did not materialize.
This is an intracorporate matter that is under the designated Regional Trial Court’s jurisdiction. It
involves the determination of a shareholder’s rights under the Corporation
484
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Securities and Exchange Commission vs. Subic
Bay Golf and Country Club, Inc.
Code or other intra-corporate rules when the corporation or association fails to fulfill its obligations.
Securities and Exchange Commission; Jurisdiction; In relation to securities, the Securities and
Exchange Commission’s (SEC’s) regulatory power pertains to the approval and rejection, and
suspension or revocation, of applications for registration of securities for, among others, violations of the
law, fraud, and misrepresentations.—The Securities and Exchange Commission is organized in line with
the policy of encouraging and protecting investments. It also administers the Securities Regulation Code,
which was enacted to “promote the development of the capital market, protect investors, ensure full and
fair disclosure about securities, [and] minimize if not totally eliminate insider trading and other fraudulent
or manipulative devices and practices which create distortions in the free market.” Pursuant to these
policies, the Securities and Exchange Commission is given regulatory powers and “absolute jurisdiction,
supervision and control over all corporations, partnership or association. . . .” In relation to securities, the
Securities and Exchange Commission’s regulatory power pertains to the approval and rejection, and
suspension or revocation, of applications for registration of securities for, among others, violations of the
law, fraud, and misrepresentations.
Same; Same; The Securities and Exchange Commission’s (SEC’s) power to suspend or revoke
registrations and to impose fines and other penalties provides the public with a certain level of assurance
that the securities contain representations that are true, and that misrepresentations if later found, would
be detrimental to the erring corporation.—Any fraud or misrepresentation in the issuance of securities
injures the public. The Securities and Exchange Commission’s power to suspend or revoke registrations
and to impose fines and other penalties provides the public with a certain level of assurance that the
securities contain representations that are true, and that misrepresentations if later found, would be
detrimental to the erring corporation. It creates risks to corporations that issue securities and adds cost to
errors, misrepresentations, and violations related to the issuance of those securities. This protects the
public who will rely on representations of corporations and partnerships regarding financial instruments
that they issue. The Securities and Exchange Commission’s regulatory power over securities-related
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Securities and Exchange Commission vs. Subic
Bay Golf and Country Club, Inc.
activities is tied to the government’s duty to protect the investing public from illegal and fraudulent
instruments.
Intra-Corporate Controversies; The issue of refund is intra-corporate or civil in nature.—However,
The Securities and Exchange Commission’s regulatory power does not include the authority to order the
refund of the purchase price of Villareal’s and Filart’s shares in the golf club. The issue of refund is intra-
corporate or civil in nature. Similar to issues such as the existence or inexistence of appraisal rights,
preemptive rights, and the right to inspect books and corporate records, the issue of refund is an intra-
corporate dispute that requires the court to determine and adjudicate the parties’ rights based on law or
contract. Injuries, rights, and obligations involved in intracorporate disputes are specific to the parties
involved. They do not affect the Securities and Exchange Commission or the public directly.
Securities and Exchange Commission; The implementing rules cannot be interpreted to give the
Securities and Exchange Commission (SEC) the power that is more than what is provided under the
Securities Regulation Code (SRC).—The implementing rules cannot be interpreted to give the Securities
and Exchange Commission the power that is more than what is provided under the Securities Regulation
Code. Implementing rules are limited by the laws they implement. The rules cannot be used to amend,
expand, or modify the law being implemented. The law shall prevail in case of inconsistency between the
law and the rules.
Case Summary
In 1973, the State adopted the concept of “telephone subscriber self-financing”
through Presidential Decree No. 217, by which a telephone subscriber had to
purchase shares of PLDT-the sole telephone utility at the time-to partly finance the
corporation’s capital investments in telephone installations. In relation to this,
PLDT issued preferred shares (10% Cumulative Convertible) under its “Subscriber
Investment Plan.” Petitioner Edgardo De Leon owned 180 of these preferred
shares.
Among others, De Leon’s camp argued that the additional preferred shares were
created to circumvent the nationality requirements for public utilities under Article
XII, Section 11 of the Constitution, as well as the ruling in Gamboa, which
provided that a public utility corporation’s “capital” under Article XII, Section 11
consists of shares of stock entitled to vote. Thus, by redeeming the Subscribers
Investment Plan preferred shares, the respondent’s outstanding capital stock
allegedly became dominated by aliens.
Issue resolved:
HELD – NO.
Unless expressly prohibited by some other law, a public utility corporation may
issue and repurchase redeemable shares upon the expiration of a fixed period.