CASE 32

G.R. No. 206038

MARY E. LIM, represented by her Attorney-in-fact, REYNALDO V. LIM, Petitioner,
vs.
MOLDEX LAND, INC., 1322 ROXAS BOULEVARD CONDOMINIUM CORPORATION,
and JEFFREY JAMINOLA, EDGARDO MACALINTAL, JOJI MILANES, and CLOTHILDA
ANNE ROMAN, in their capacity as purported MENDOZA, and LEONEN, JJ. members
of the Board of Directors of 1322 Golden Empire Corporation, Respondents.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the March 4, 2013 Decision 1 of the Regional Trial Court of Manila, Branch
24, (RTC) in Civil Case No. 12-128478, which dismissed the complaint against the
respondents for 1] annulment of the July 21, 2012 general membership meeting of 1322
Roxas Boulevard Condominium Corporation (Condocor); 2] annulment of election of
Jeffrey Jaminola (Jaminola), Edgardo Macalintal (Macalintal), Joji Milanes (Milanes), and
Clothilda Anne Roman (Roman) (collectively referred to as "individual respondents") as
members of the Board of Directors; and 3] accounting.
The primordial issue presented before the R TC, acting as a special commercial court, was
the validity, legality and effectivity of the July 21, 2012 Annual General Membership
Meeting and Organizational Meeting of Condocor's Board of Directors.2
Initially, the Court, in its Resolution3 dated April 1, 2013, denied the petition for having
availed of the wrong mode of appeal because Lim raised mixed questions of fact and law,
which should have been filed before the Court of Appeals (CA).4Upon motion for
reconsideration, however, the Court granted it. Thereafter, the respondents filed their
Comment5 and Lim filed a Reply6 thereto.
The Antecedents
Lim is a registered unit owner of 1322 Golden Empire Tower (Golden Empire Tower), a
condominium project of Moldex Land, Inc. (Moldex), a real estate company engaged in the
construction and development of high-end condominium projects and in the marketing and
sale of the units thereof to the general public. Condocor, a non-stock, non-profit
corporation, is the registered condominium corporation for the Golden Empire Tower. Lim,
as a unit owner of Golden Empire Tower, is a member of Condocor.
Lim claimed that the individual respondents are non-unit buyers, but all are members of the
Board of Directors of Condocor, having been elected during its organizational meeting in
2008. They were again elected during the July 21, 2012 general membership meeting.7
Moldex became a member of Condocor on the basis of its ownership of the 220 unsold
units in the Golden Empire Tower. The individual respondents acted: as its representatives.
On July 21, 2012, Condocor held its annual general membership meeting. Its corporate
secretary certified, and Jaminola, as Chairman, declared the existence of a quorum even
though only 29 of the 1088 unit buyers were present. The declaration of quorum was based
on the presence of the majority of the voting rights, including those pertaining to the 220
unsold units held by Moldex through its representatives. Lim, through her attorney-in-fact,
objected to the validity of the meeting. The objection was denied. Thus, Lim and all the
other unit owners present, except for one, walked out and left the meeting.
Despite the walkout, the individual respondents and the other unit owner proceeded with
the annual general membership meeting and elected the new members of the Board of
Directors for 2012-2013. All four (4) individual respondents were voted as members of the
board, together with three (3) others whose election was conditioned on their subsequent
confirmation.9 Thereafter, the newly elected members of the board conducted an
organizational meeting and proceeded with the election of its officers. The individual
respondents were elected as follows:
1. Atty. Jeffrey Jaminola - Chairman of the Board and President
2. Ms. Joji Milanes - Vice-President
3. Ms. Clothilda Ann Roman - Treasurer
4. Mr. Edgardo Macalintal - Corporate Secretary
5. Atty. Ma. Rosario Bernardo - Asst. Corporate Secretary
6. Atty. Mary Rose Pascual - Asst. Corporate Secretary
7. Atty. Jasmin Cuizon - Asst. Corporate Secretary10
Consequently, Lim filed an election protest before the RTC. Said court, however, dismissed
the complaint holding that there was a quorum during the July 21, 2012 annual
membership meeting; that Moldex is a member of Condocor, being the registered owner of
the unsold/unused condominium units, parking lots and storage areas; and that the
individual respondents, as Moldex's representatives, were entitled to exercise all
membership rights, including the right to vote and to be voted. 11 In so ruling, the trial court
explained that the presence or absence of a quorum in the subject meeting was determined
on the basis of the voting rights of all the units owned by the members in good
standing. 12 The total voting rights of unit owners in good standing was 73,376 and, as
certified by the corporate secretary, 83.33% of the voting rights in good standing were
present in the said meeting, inclusive of the 5 8,504 voting rights of Moldex. 13
Not in conformity, Lim filed the subject petition raising the following
ISSUES
A. THE LOWER COURT GRAVELY ERRED IN RULING THAT IN DETERMINING THE
PRESENCE OR ABSENCE OF QUORUM AT GENERAL OR ANNUAL MEMBERSHIP
MEETINGS OF RESPONDENT CONDOCOR, EVEN NONUNIT BUYERS SHOULD BE
INCLUDED DESPITE THE EXPRESS PROVISION OF ITS BY-LAWS, THE LAW AND
SETTLED JURISPRUDENCE;
B. THE LOWER COURT ERRED IN RULING THAT RESPONDENT MOLDEX IS A
MEMBER OF RESPONDENT CONDOCOR AND THAT IT MAY APPOINT INDIVIDUAL
RESPONDENTS TO REPRESENT IT THEREIN;
C. EVEN ASSUMING THAT RESPONDENT MOLDEX MAY BE A MEMBER OF
RESPONDENT CONDOCOR, THERE IS STILL NO BASIS FOR IT TO BE ELECTED TO
THE BOARD OF DIRECTORS OF RESPONDENT CONDOCOR BECAUSE IT IS A
JURIDICAL PERSON;
D. ASSUMING FURTHER THAT DESPITE BEING A JURIDICAL PERSON, IT MAY BE
ELECTED TO THE BOARD OF DIRECTORS OF RESPONDENT CONDOCOR, THERE
IS NO LEGAL BASIS FOR THE LOWER COURT TO HOLD THAT RESPONDENT
MOLDEX HAS AUTOMATICALLY RESERVED FOUR SEATS THEREIN; AND,
E. THE LOWER COURT GRAVELY ERRED IN RULING TO RECOGNIZE RESPONDENT
MOLDEX AS OWNERDEVELOPER HAVING FOUR RESERVED SEATS IN
RESPONDENT CONDOCOR BOARD, AS SUCH RULING EFFECTIVELY ALLOWED
THE VERY EVIL THAT PD 957 SOUGHT TO PREVENT FROM DOMINATING THE
CONTROL AND MANAGEMENT OF RESPONDENT CONDOCOR TO THE GRAVE AND
IRREPARABLE DAMAGE AND INJURY OF PETITIONER AND THE OTHER UNIT
BUYERS, WHO ARE THE BONA FIDE MEMBERS OF RESPONDENT CONDOCOR.
In sum, the primordial issues to be resolved are: 1) whether the July 21, 2012 membership
meeting was valid; 2) whether Moldex can be deemed a member of Condocor; and 3)
whether a non-unit owner can be elected as a member of the Board of Directors of
Condocor.
Procedural Issues
The issues raised being purely legal, the Court may properly entertain the subject petition.
The subject case was initially denied because it appeared that Lim raised mixed questions
of fact and law which should have been filed before the CA. After judicious perusal of Lim's
arguments, however, the Court ascertained that a reconsideration of its April 1, 2013
Resolution14 was in order.
It has been consistently held that only pure questions of law can be entertained in a petition
for review under Rule 45 of the Rules of Court. In Century Iron Works, Inc. v. Banas,15the
Court held:
A petition for review on certiorari under Rule 45 is an appeal from a ruling of a lower
tribunal on pure questions of law. It is only in exceptional circumstances that we admit and
review questions of fact.
A question of law arises when there is doubt as to what the law is on a certain state of
facts, while there is a question of fact when the doubt arises as to the truth or falsity of the
alleged facts. For a question to be one of law, the question must not involve an examination
of the probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact.
Thus, the test of whether a question is one of law or of fact is not the appellation
given to such question by the party raising the same; rather, it is whether the
appellate court can determine the issue raised without reviewing or evaluating the
evidence, in which case, it is a question of law; otherwise it is a question of
fact. 16 [Emphasis supplied]
Respondents argued that the initial denial of the petition was correct because Lim availed
of the wrong mode of appeal. As the assailed judgment involved an intra-corporate dispute
cognizable by the RTC, the appeal should have been filed before the CA, and not before
this Court.
Doubtless, this case involves intra-corporate controversies and, thus, jurisdiction lies with
the R TC, acting as a special commercial court. Section 5.2 of Republic Act No. 8799 (R.A.
No. 8799)17effectively transferred to the appropriate RTCs jurisdiction over all cases
enumerated under Section 5 of Presidential Decree No. 902-A (P.D. No. 902-A), to wit:
a) Devices or schemes employed by or any acts, of the board of directors, business
associates, its officers or partnership, 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; and
c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations. [Emphases supplied]
Pursuant to A.M. No. 04-9-07-SC, all decisions and final orders in cases falling under the
Interim Rules of Corporate Rehabilitation and the Interim Rules of Procedure Governing
Intra-Corporate Controversies shall be appealable to the CA through a petition for review
under Rule 43 of the Rules of Court. Such petition shall be taken within fifteen (15) days
from notice of the decision or final order of the RTC.18
In turn, Rule 43 governs the procedure for appeals from judgments or final orders of quasi-
judicial agencies to the CA, whether it involves questions of fact, of law, or mixed questions
of fact and law. Nevertheless, a party may directly file a petition for review
on certiorari before the Court to question the judgment of a lower court, especially when
the issue raised is purely of law and is one of novelty.
Substantive Issues
Lim is still a member of Condocor
Respondents argued that Lim had no cause of action to file the subject action because she
was no longer the owner of a condominium unit by virtue of a Deed of Assignment19 she
executed in favor of Reynaldo Valera Lim and Dianna Mendoza Lim, her nephew and
niece.
Section 90 of the Corporation Code states that membership in a non-stock corporation and
all rights arising therefrom are personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide. A perusal of Condocor's By-Laws as
regards membership and transfer of rights or ownership over the unit reveal that:
Membership in the CORPORATION is a mere appurtenance of the ownership of any unit in
the CONDOMINIUM and may not therefore be sold, transferred or otherwise encumbered
separately from the said unit. Any member who sells or transfer his/her/its unit/s in the
CONDOMINIUM shall automatically cease to be a member of the CORPORATION, the
membership being automatically assumed by the buyer or transferee upon
registration of the sale or transfer and ownership of the latter over the unit with the
Register of Deeds for the City of Manila.20 [Emphasis supplied.]
Likewise, the Master Deed of Condocor provides:
Section 11 : MORTGAGES, LIENS, LEASES, TRANSFERS OF RIGHTS AND SALE OF
UNITS: All transactions involving the transfer of the ownership or occupancy of any UNIT,
such as sale, transfer of rights or leases, as well as encumbrances involving said UNIT,
such as mortgages, liens and the like, shall be reported to the CORPORATION within
five (5) days after the effectivity of said transactions.21
Nothing in the records showed that the alleged transfer made by Lim was registered with
the Register of Deeds of the City of Manila or was reported to the corporation. Logically,
until and unless the registration is effected, Lim remains to be the registered owner of the
condominium unit and thus, continues to be a member of Condocor.
Moreover, even assuming that there was a transfer by virtue of the Deed of Assignment,
the Confirmatory Special Power of Attorney22 executed later by Lim, wherein she reiterated
her membership in Condocor and constituted Reynaldo V. Lim as her true and lawful
Attorney-in-Fact, strengthened the fact that she still owns the condominium unit and that
there has been no transfer of ownership over the said property to her nephew, but only a
mere assignment of rights to the latter. As held by the Court in Casabuena v. CA,23 at most,
an assignee can only acquire rights duplicating those which his assignor is entitled by law
to exercise. 24 Had it been otherwise, Reynaldo V. Lim himself would have questioned and
objected to the granting of the special power of attorney, and would have insisted that he
was really the owner of the condominium unit.
In non-stock corporations, quorum
is determined by the majority
of its actual members
In corporate parlance, the term "meeting" applies to every duly convened assembly either
of stockholders, members, directors, trustees, or managers for any legal purpose, or the
transaction of business of a common interest.25 Under Philippine corporate laws, meetings
may either be regular or special. A stockholders' or members' meeting must comply with
the following requisites to be valid:
1. The meeting must be held on the date fixed in the By-Laws or in accordance with law;26
2. Prior written notice of such meeting must be sent to all stockholders/members of
record;27
3. It must be called by the proper party;28
4. It must be held at the proper place;29 and
5. Quorum and voting requirements must be met. 30
Of these five (5) requirements, the existence of a quorum is crucial. Any act or transaction
made during a meeting without quorum is rendered of no force and effect, thus, not binding
on the corporation or parties concerned.
In relation thereto, Section 52 of the Corporation Code of the Philippines (Corporation
Code) provides:
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-
laws, a quorum shall consist of the stockholders representing a majority of the outstanding
capital stock or a majority of the members in the case of non-stock corporations.
Thus, for stock corporations, the quorum is based on the number of outstanding voting
stocks while for non-stock corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of a quorum. 31
To be clear, the basis in determining the presence of quorum in non-stock corporations is
the numerical equivalent of all members who are entitled to vote, unless some other basis
is provided by the By-Laws of the corporation. The qualification "with voting rights" simply
recognizes the power of a non-stock corporation to limit or deny the right to vote of any of
its members.32 To include these members without voting rights in the total number of
members for purposes of quorum would be superfluous for although they may attend a
particular meeting, they cannot cast their vote on any matter discussed therein.
Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of a simple majority of
the members who are in good standing shall constitute a quorum ... x x x." The phrase,
"members in good standing," is a mere qualification as to which members will be counted
for purposes of quorum. As can be gleaned from Condocor's By-Laws, there are two (2)
kinds of members: 1) members in good standing; and 2) delinquent members. Section 6
merely stresses that delinquent members are not to be taken into consideration in
determining quorum. In relation thereto, Section 733 of the By-Laws, referring to voting
rights, also qualified that only those members in good standing are entitled to vote.
Delinquent members are stripped off their right to vote. Clearly, contrary to the ruling of the
RTC, Sections 6 and 7 of Condocor's By-Laws do not provide that majority of the total
voting rights, without qualification, will constitute a quorum.
It must be emphasized that insofar as Condocor is concerned, quorum is different from
voting rights. Applying the law and Condocor's By-Laws, if there are 100 members in a non-
stock corporation, 60 of which are members in good standing, then the presence of 50%
plus 1 of those members in good standing will constitute a quorum. Thus, 31 members in
good standing will suffice in order to consider a meeting valid as regards the presence of
quorum. The 31 members will naturally have to exercise their voting rights. It is in this
instance when the number of voting rights each member is entitled to becomes significant.
If 29 out of the 31 members are entitled to 1 vote each, another member (known as A) is
entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes, then
the total number of voting rights of all 31 members is 64. Thus, majority of the 64 total
voting rights, which is 33 (50% plus 1), is necessary to pass a valid act. Assuming that only
A and B concurred in approving a specific undertaking, then their 35 combined votes are
more than sufficient to authorize such act.
The By-Laws of Condocor has no rule different from that provided in the Corporation Code
with respect the determination of the existence of a quorum. The quorum during the July
21, 2012 meeting should have been majority of Condocor's members in good standing.
Accordingly, there was no quorum during the July 21, 2012 meeting considering that only
29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012 annual
membership meeting was null and void and, therefore, not binding upon the corporation or
its members. The meeting being null and void, the resolution and disposition of other legal
issues emanating from the null and void July 21, 2012 membership meeting has been
rendered unnecessary.
To serve as a guide for the bench and the bar, however, the Court opts to discuss and
resolve the same.
Moldex is a member
Of Condocor
Matters involving a condominium are governed by Republic Act No. 4726 (Condominium
Act). Said law sanctions the creation of a condominium corporation which is especially
formed for the purpose of holding title to the common areas, including the land, or the
appurtenant interests in such areas, in which the holders of separate interest shall
automatically be members or shareholders, to the exclusion of others, in proportion to the
appurtenant interest of their respective units in the common areas. 34 In relation thereto,
Section 10 of the same law clearly provides that the condominium corporation shall
constitute the management body of the project.
Membership in a condominium corporation is limited only to the unit owners of the
condominium project. This is provided in Section 10 of the Condominium Act which reads:
Membership in a condominium corporation, regardless of whether it is a stock or non-stock
corporation, shall not be transferable separately from the condominium unit of which it is an
appurtenance. When a member or stockholder ceases to own a unit in the project in
which the condominium corporation owns or holds the common areas, he shall
automatically cease to be a member or stockholder of the condominium
corporation.35 [Emphases supplied]
Although the Condominium Act provides for the minimum requirement for membership in a
condominium corporation, a corporation's articles of incorporation or by-laws may provide
for other terms of membership, so long as they are not inconsistent with the provisions of
the law, the enabling or master deed, or the declaration of restrictions of the condominium
project.
In this case, Lim argued that Moldex cannot be a member of Condocor. She insisted that a
condominium corporation is an association of homeowners for the purpose of managing the
condominium project, among others. Thus, it must be composed of actual unit buyers or
residents of the condominium project.36 Lim further averred that the ownership
contemplated by law must result from a sale transaction between the owner-developer and
the purchaser. She advanced the view that the ownership of Moldex was only in the nature
of an owner-developer and only for the sole purpose of selling the units.37 In justifying her
arguments, Lim cited Section 30 of Presidential Decreee No. 957, known as The
Subdivision and Condominium Buyers' Protective Decree (P.D. No. 957), to wit:
Section 30. Organization of Homeowners Association. The owner or developer of a
subdivision project or condominium project shall initiate the organization of a homeowners
association among the buyers and residents of the projects for the purpose of
promoting and protecting their mutual interest and assist in their community development.
[Emphasis in the original.]
Furthermore, in distinguishing between a unit buyer and an owner-developer of a project,
Lim cited Section 25 of P.D. No. 957, which provides:
Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit
to the buyer upon full payment of the lot or unit. xxx
Likewise, Lim relied on Sunset View Condominium Corp. v. Hon. Campos, Jr.,  38 where the
Court wrote:
The share of stock appurtenant to the unit will be transferred accordingly to the
purchaser of the unit only upon full payment of the purchase price at which time he
will also become the owner of the unit. Consequently, even under the contract, it is only
the owner of a unit who is a shareholder of the Condominium Corporation.
Inasmuch as owners is conveyed only upon full payment of the purchase price, it
necessarily follows that a purchaser of a unit who has not paid the full purchase
price thereof is not the owner of the unit and consequently is not a shareholder of
the Condominium Corporation. [Emphasis in the original]
On these grounds, Lim asserted that only unit buyers are entitled to become members of
Condocor. 39
The Court finds itself unable to agree.
Lim's reliance of P.D. No. 957 is misplaced. There is no provision in P.D. No. 957 which
states that an owner-developer of a condominium project cannot be a member of a
condominium corporation. Section 30 of P.D. No. 957 determines the purposes of a
homeowners association - to promote and protect the mutual interest of the buyers and
residents, and to assist in their community development. A condominium corporation,
however, is not just a management body of the condominium project. It also holds title to
the common areas, including the land, or the appurtenant interests in such areas. Hence, it
is especially governed by the Condominium Act. Clearly, a homeowners association is
different from a condominium corporation. P.D. No. 957 does not regulate condominium
corporations and, thus, cannot be applied in this case.
Sunset View merely delineated the difference between a "purchaser" and an "owner,"
whereby the former could be considered an owner only upon full payment of the purchase
price. The case merely clarified that not every purchaser of a condominium unit could be a
shareholder of the condominium corporation.
Respondents, for their part, countered that a registered owner of a unit in a condominium
project or the holders of duly issued condominium certificate of title (CCT),40automatically
becomes a member of the condominium corporation,41 relying on Sections 2 and 10 of the
Condominium Act, the Master Deed and Declaration of Restrictions, as well as the By-Laws
of Condocor. For said reason, respondents averred that as Moldex is the owner of 220
unsold units and the parking slots and storage areas attached thereto, it automatically
became a member of Condocor upon the latter's creation.42
On this point, respondents are correct.
Section 2 of the Condominium Act states:
Sec. 2. A condominium is an interest in real property consisting of separate interest in a
unit in a residential, industrial or commercial building and an undivided interest in common,
directly or indirectly, in the land on which it is located and in other common areas of the
building. A condominium may include, in addition, a separate interest in other portions of
such real property. Title to the common areas, including the land, or the appurtenant
interests in such areas, may be held by a corporation specially formed for the
purpose (hereinafter known as the "condominium corporation") in which the holders
of separate interest shall automatically be members or shareholders, to the
exclusion of others, in proportion to the appurtenant interest of their respective units
in the common areas. [Emphasis supplied]
In Sunset View,43the Court elucidated on what constitutes "separate interest," in relation to
membership, as mentioned in the Condominium Act, to wit:
By necessary implication, the "separate interest" in a condominium, which entitles
the holder to become automatically a shareholder in the condominium corporation,
as provided in Section 2 of the Condominium Act, can be no other than ownership of
a unit. This is so because nobody can be a shareholder unless he is the owner of a unit
and when he ceases to be the owner, he also ceases automatically to be a
shareholder.44 [Emphasis supplied.]
Thus, law and jurisprudence dictate that ownership of a unit entitles one to become a
member of a condominium corporation.1âwphi1 The Condominium Act does not provide a
specific mode of acquiring ownership. Thus, whether one becomes an owner of a
condominium unit by virtue of sale or donation is of no moment.
It is erroneous to argue that the ownership must result from a sale transaction between the
owner-developer and the purchaser. Such interpretation would mean that persons who
inherited a unit, or have been donated one, and properly transferred title in their names
cannot become members of a condominium corporation.
The next issue is - may Moldex appoint duly authorized representatives who will exercise
its membership rights, specifically the right to be voted as corporate directors/officers?
Moldex may appoint a
duly authorized representative
A corporation can act only through natural persons duly authorized for the purpose or by a
specific act of its board of directors.45 Thus, in order for Moldex to exercise its membership
rights and privileges, it necessarily has to appoint its representatives.
Section 58 of the Corporation Code mandates:
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed by the stockholder
or member and filed before the scheduled meeting with the corporate secretary. Unless
otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended.
No proxy shall be valid and effective for a period longer than five (5) years at any one time.
[Emphasis supplied]
Relative to the above provision is Section 1, Article II of Condocor's By-Laws, 46 which
grants registered owners the right to designate any person or entity to represent them in
Condocor, subject to the submission of a written notification to the Secretary of such
designation. Further, the owner's representative is entitled to enjoy and avail himself of all
the rights and privileges, and perform all the duties and responsibilities of a member of the
corporation. The law and Condocor's By-Laws evidently allow proxies in members'
meeting.
Prescinding therefrom, Moldex had the right to send duly authorized representatives to
represent it during the questioned general membership meeting. Records showed that,
pursuant to a Board Resolution, as certified47 by Sandy T. Uy, corporate secretary of
Moldex, the individual respondents were instituted as Moldex's representatives. This was
attested to by Mary Rose V. Pascual, Assistant Corporate Secretary of Condocor, in a
sworn statement48 she executed on August 31, 2012.
Next question is - can the individual respondents be elected as directors of Condocor?
Individual respondents who
are non-members cannot be
elected as directors and officers
of the condominium corporation
The governance and management of corporate affairs in a corporation lies with its board of
directors in case of stock corporations, or board of trustees in case of non-stock
corporations. As the board exercises all corporate powers and authority expressly vested
upon it by law and by the corporations' by-laws, there are minimum requirements set in
order to be a director or trustee, one of which is ownership of a share in one's name or
membership in a non-stock corporation. Section 23 of the Corporation Code provides:
Section 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office for one (1)
year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A majority of the directors or trustees of
all corporations organized under this Code must be residents of the Philippines. [Emphases
supplied]
This rule was reiterated in Section 92 of the Corporation Code, which states:
Section 92. Election and term of trustees. – x x x No person shall be elected as trustee
unless he is a member of the corporation. x x x
While Moldex may rightfully designate proxies or representatives, the latter, however,
cannot be elected as directors or trustees of Condocor. First, the Corporation Code clearly
provides that a director or trustee must be a member of record of the
corporation. Further, the power of the proxy is merely to vote. If said proxy is not a member
in his own right, he cannot be elected as a director or proxy.
Respondents cannot rely on the Securities and Exchange Commission (SEC) Opinions
they cited to justify the individual respondents' election as directors. In Heirs of Gamboa
v. Teves,49 the Court En Banc held that opinions issued by SEC legal officers do not have
the force and effect of SEC rules and regulations because only the SEC en banc can adopt
rules and regulations.
Following Section 25 of the Corporation Code, the election of individual respondents, as
corporate officers, was likewise invalid.
Section 25 of the Corporation Code mandates that the President shall be a director. As
previously discussed, Jaminola could not be elected as a director. Consequently,
Jaminola's election as President was null and void.
The same provision allows the election of such other officers as may be provided for in the
by-laws. Condocor's By-Laws, however, require that the Vice-President shall be elected by
the Board from among its member-directors in good standing, and the Secretary may
be appointed by the Board under the same circumstance. Like Jaminola, Milanes and
Macalintal were not directors and, thus, could not be elected and appointed as Vice-
President and Secretary, respectively.
Insofar as Roman's election as Treasurer is concerned, the same would have been valid,
as a corporate treasurer may or may not be a director of the corporation's board. The
general membership meeting of Condocor, however, was null and void. As a consequence,
Roman's election had no legal force and effect.
In fine, the July 21, 2012 annual general membership meeting of Condocor being null and
void, all acts and resolutions emanating therefrom are likewise null and void.
WHEREFORE, the petition is GRANTED. The March 4, 2013 Decision of the Regional Trial
Court, Branch 24, Manila, in Civil Case No. 12-128478 is hereby REVERSED and SET
ASIDE. The Court declares that:
a) The July 21, 2012 Annual General Membership Meeting of Condocor is null and void;
b) The election of members of the Board of Directors in the annual general membership
meeting is likewise null and void; and
c) The succeeding Organizational Meeting of Condocor's Board of Directors as well as the
election of its corporate officers are of no force and effect.
Costs against respondents.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice

CASE 33
G.R. No. 180416 June 2, 2014
ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners,
vs.
CEZAR T. QUIAMBAO and ERIC C. PILAPIL, Respondents.
DECISION
PEREZ, J.:
This case is a Petition for Review on Certiorari1 from the Orders2 dated 4 June 2007 and 5
November 2007 of the Regional Trial Court (RTC), Branch 154, of Pasig City in S.C.A. No.
3047.
The facts:
Background
Strategic Alliance Development Corporation (STRADEC) is a domestic corporation
operating as a business development and investment company.
On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito
Z. Yujuico (Yujuico) was elected as president and chairman of the company.3 Yujuico
replaced respondent Cezar T. Quiambao (Quiambao), who had been the president and
chairman of STRADEC since 1994.4
With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla (Sumbilla)
as treasurer and one Joselito John G. Blando (Blando) as corporate secretary.5 Blando
replaced respondent Eric C. Pilapil (Pilapil), the previous corporate secretary of
STRADEC.6
The Criminal Complaint
On 12 August 2005, petitioners filed a criminal complaint7 against respondents and one
Giovanni T. Casanova (Casanova) before the Office of the City Prosecutor (OCP) of Pasig
City. The complaint was docketed in the OCP as LS. No. PSG 05-08-07465.
The complaint accuses respondents and Casanova of violating Section 74 in relation to
Section 144 of Batas Pambansa Blg. 68 or the Corporation Code. The petitioners premise
such accusation on the following factual allegations:8
1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected
president and chairman of STRADEC-demanded Quiambao for the turnover of
the corporate records of the company, particularly the accounting files, ledgers,
journals and other records of the corporation's business. Quiambao refused.
2. As it turns out, the corporate records of STRADEC were in the possession of
Casanova-the accountant of STRADEC. Casanova was keeping custody of the
said records on behalf of Quiambao, who allegedly needed the same as part of
his defense in a pending case in court.
3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova
caused the removal of the corporate records of STRADEC from the company's
offices in Pasig City.
4. Upon his appointment as corporate secretary on 21 June 2004, Blando
likewise demanded Pilapil for the turnover of the stock and transfer book of
STRADEC. Pilapil refused.
5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and
transfer book deposited in a safety deposit box with Equitable PCI Bank, Kamias
Road, Quezon City. Blando acceded to the proposal and the stock and transfer
book was deposited in a safety deposit box with the bank identified. It was
agreed that the safety deposit box may only be opened in the presence of both
Quiambao and Blando.
6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and
transfer book from the safety deposit box and brought it to the offices of the
Stradcom Corporation (STRADCOM) in Quezon City. Quiambao thereafter asked
Blando to proceed to the STRADCOM offices. Upon arriving thereat, Quiambao
pressured Blando to make certain entries in the stock and transfer books. After
making such entries, Blando again demanded that he be given possession of the
stock and transfer book. Quiambao refused.
7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the
RTC, Branch 71, of Pasig City in Civil Case No. 70027, which directed him to
cancel the entries he made in the stock and transfer book. Hence, on even date,
 Blando wrote letters to Quiambao and Pilapil once again demanding for the
turnover of the stock and transfer book. Pilapil replied thru a letter dated 2 July
2004 where he appeared to agree to Blando's demand.
8. However, upon meeting with Pilapil and Quiambao, the latter still refused to
turnover the stock and transfer book to Blando. Instead, Blando was once again
constrained to agree to a proposal by Pilapil to have the stock and transfer book
deposited with the RTC, Branch 155, of Pasig City. The said court, however,
refused to accept such deposit on the ground that it had no place for
safekeeping.
9. Since Quiambao and Pilapil still refused to turnover the stock and transfer
book, Blando again acceded to have the book deposited in a safety deposit box,
this time, with the Export and Industry Bank in San Miguel A venue, Pasig City.
Petitioners theorize that the refusal by the respondents and Casanova to turnover
STRADEC's corporate records and stock and transfer book violates their right, as
stockholders, directors and officers of the corporation, to inspect such records and book
under Section 7 4 of the Corporation Code. For such violation, petitioners conclude,
respondents may be held criminally liable pursuant to Section 144 of the Corporation Code.
Preliminary investigation thereafter ensued.
Resolution of the OCP and the Informations
After receiving the counter-affidavits of the respondents and Casanova, as well as the other
documentary submissions9 by the parties, the OCP issued a Resolution10 dated 6 January
2006 in I.S. No. PSG 05-08-07465. In the said resolution, the OCP absolved Casanova but
found probable cause to hail respondents to court on two (2) offenses: (1) for removing the
stock and transfer book of STRADEC from its principal office, and (2) for refusing access
to, and examination of, the corporate records and the stock and transfer book of STRADEC
at its principal office.
Pursuant to the resolution, two (2) informations11 were filed against the respondents before
the Metropolitan Trial Court (MeTC) of Pasig City. The informations were docketed as
Criminal Case No. 89723 and Criminal Case No. 89724 and were raffled to Branch 69.
Criminal Case No. 89723 is for the offense of removing the stock and transfer book of
STRADEC from its principal office. The information reads:12
On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City
and within the jurisdiction of this Honorable Court, the above accused, being then members
of the Board of Directors and/or officers, as the case maybe, of Strategic Alliance
Development Corporation (STRADEC, for short), conspiring and confederating together
and mutually helping and aiding one another, did then and there willfully, unlawfully and
feloniously, remove the stock and transfer book of the said STRADEC at its principal office
at the 24th Floor, One Magnificent Mile-CITRA City Bldg., San Miguel A venue, Ortigas
Center, Pasig City, where they should all be kept, in violation of the aforesaid law, and to
the prejudice of the said complainants.
Criminal Case No. 89724, on the other hand, covers the offense of refusing access to, and
examination of, the corporate records and the stock and transfer book of STRADEC at its
principal office. The information reads:13
On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City,
and within the jurisdiction of this Honorable Court, the above accused, being then members
of the Board of Directors and/or officers, as the case maybe, of Strategic Alliance
Development Corporation (STRADEC, for short), conspiring and confederating together
and mutually helping and aiding one another, did then and there willfully, unlawfully and
feloniously, refuse to allow complainants Bonifacio C. Sumbilla and Aderito Z. Yujuico,
being then stockholders and/or directors of STRADEC, access to, and examination of, the
corporate records, including the stock and transfer book, of STRADEC at its principal office
at the 24th Floor, One Magnificent Mile-CITRA Bldg., San Miguel Avenue, Ortigas Center,
Pasig City, where they should all be kept, in violation of the aforesaid law, and to the
prejudice of the said complainants.
Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723
On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus Motion for
Judicial Determination of Probable Cause and To Defer Issuance of Warrants of Arrest
(Urgent Omnibus Motion).14
On 8 May 2006, the MeTC issued an order15 partially granting the Urgent Omnibus Motion.
The MeTC dismissed Criminal Case No. 89723 but ordered the issuance of a warrant of
arrest against respondents in Criminal Case No. 89724.
In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to
Section 144, of the Corporation Code only penalizes the act of "refus[ing] to allow any
director, trustee, stockholder or member of the corporation to examine and copy excerpts
from the records or minutes of the corporation"16 and that act is already the subject matter
of Criminal Case No. 89724. Hence, the MeTC opined, Criminal Case No. 89723-which
seeks to try respondents for merely removing the stock and transfer book of STRADEC
from its principal office-actually charges no offense and, therefore, cannot be sustained.17
Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724, the MeTC
found probable cause to do so; given the failure of the respondents to present any
evidence during the preliminary investigation showing that they do not have possession of
the corporate records of STRADEC or that they allowed petitioners to inspect the corporate
records and the stock and transfer book of STRADEC.18
Unsatisfied, the respondents filed a motion for partial Reconsideration19 of the 8 May 2006
order of the MeTC insofar as the disposition in Criminal Case No. 89724 is concerned. The
MeTC, however, denied such motion on 16 August 2006.20
Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their motion for
partial reconsideration was denied, respondents filed a certiorari petition,21 with prayer for
the issuance of a temporary restraining order (TRO), before the RTC of Pasig City on 27
September 2006. The petition was docketed as S.C.A. No. 3047.
On 16 November 2006, the RTC issued a TRO enjoining the MeTC from conducting further
proceedings in Criminal Case No. 89724 for twenty (20) days.22
On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari petition and
directing the dismissal of Criminal Case No. 89724. According to the RTC, the MeTC
committed grave abuse of discretion in issuing a warrant of arrest against respondents in
Criminal Case No. 89724.
The RTC found that the finding of probable cause against the respondents in Criminal Case
No. 89724 was not supported by the evidence presented during the preliminary
investigation but was, in fact, contradicted by them:24
1. The R TC noted that, aside from the complaint itself, no evidence was ever
submitted by petitioners to prove that they demanded and was refused access to
the corporate records of STRADEC between 1 March to 25 June 2004. What
petitioners merely submitted is their letter dated 6 September 2004 demanding
from respondents access to the corporate records of STRADEC.
2. The allegations of petitioners in their complaint, as well as 6 September 2004
letter above-mentioned, however, are contradicted by the sworn statement dated
1 July 2004 of Blando25 wherein he attested that as early as 25 June 2004, Pilapil
already turned over to him "two binders containing the minutes, board
resolutions, articles of incorporation, copies of contracts, correspondences and
other papers of the corporation, except the stock certificate book and the stock
and transfer book."
3. The RTC also took exception to the reason provided by the MeTC in
supporting its finding of probable cause against the respondents. The R TC held
that it was not incumbent upon the respondents to provide evidence proving their
innocence. Hence, the failure of the respondents to submit evidence showing
that they do not have possession of the corporate records of STRADEC or that
they have allowed inspection of the same cannot be taken against them much
less support a finding of probable cause against them.
The RTC further pointed out that, at most, the evidence on record only supports probable
cause that the respondents were withholding the stock and transfer book of STRADEC.
The RTC, however, opined that refusing to allow inspection of the stock and transfer book,
as opposed to refusing examination of other corporate records, is not punishable as an
offense under the Corporation Code.26 Hence, the directive of the RTC dismissing Criminal
Case No. 89724.
The petitioners moved for reconsideration,27 but the R TC remained steadfast.28
Hence, this petition by petitioners.
 The Instant Petition
In their petition, petitioners claim that Criminal Case No. 89724 may still be sustained
against the respondents insofar as the charge of refusing to allow access to the stock and
transfer book of STRADEC is concerned. They argue that the R TC made a legal blunder
when it held that the refusal to allow inspection of the stock and transfer book of a
corporation is not a punishable offense under the Corporation Code. Petitioners contend
that such a refusal still amounts to a violation of Section 74 of the Corporation Code, for
which Section 144 of the same code prescribes a penalty.
OUR RULING
The RTC indeed made an inaccurate pronouncement when it held that the act of refusing
to allow inspection of the stock and transfer book of a corporation is not a punishable
offense under the Corporation Code. Such refusal, when done in violation of Section 74(4)
of the Corporation Code, properly falls within the purview of Section 144 of the same code
and thus may be penalized as an offense.
The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case No. 89724
as against the respondents.
A criminal action based on the violation of a stockholder's right to examine or inspect the
corporate records and the stock and transfer book of a corporation under the second and
fourth paragraphs of Section 74 of the Corporation Code-such as Criminal Case No.
89724--can only be maintained against corporate officers or any other persons acting on
behalf of such corporation. The submissions of the petitioners during the preliminary
investigation, however, clearly suggest that respondents are neither in relation to
STRADEC.
Hence, we deny the petition.
The act of ref using to allow inspection of the
stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.
We first address the inaccurate pronouncement of the RTC.
Section 74 is the provision of the Corporation Code that deals with the books a corporation
is required to keep. It reads:
Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and
carefully preserve at its principal office a record of all business transactions and minutes of
all meetings of stockholders or members, or of the board of directors or trustees, in which
shall be set forth in detail the time and place of holding the meeting, how authorized, the
notice given, whether the meeting was regular or special, if special its object, those present
and absent, and every act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any
action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors or trustees who
voted for such refusal: and Provided, further, That it shall be a defense to any action under
this section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured through
any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his
demand.
Stock corporations must also keep a book to be known as the "stock and transfer book'', in
which must be kept a record of all stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book shall be kept in the principal
office of the corporation or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at reasonable hours on
business days.
No stock transfer agent or one engaged principally in the business of registering transfers
of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines
unless he secures a license from the Securities and Exchange Commission and pays a fee
as may be fixed by the Commission, which shall be renewable annually: Provided, That a
stock corporation is not precluded from performing or making transfer of its own stocks, in
which case all the rules and regulations imposed on stock transfer agents, except the
payment of a license fee herein provided, shall be applicable. (5 la and 32a; P.B. No. 268.)
(Emphasis supplied)
Section 144 of the Corporation Code, on the other hand, is the general penal provision of
the Corporation Code. It reads:
Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not
less than one thousand (₱1,000.00) pesos but not more than ten thousand (₱10,000.00)
pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude
the institution of appropriate action against the director, trustee or officer of the corporation
responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.
(190 112 a) (Emphasis supplied)
In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow
inspection of the stock and transfer book, even though it may be a violation of Section
74(4), is not punishable as an offense under the Corporation Code.29 In justifying this
conclusion, the RTC seemingly relied on the fact that, under Section 7 4 of the Corporation
Code, the application of Section 144 is expressly mentioned only in relation to the act of
"refus[ing] to allow any director, trustees, stockholder or member of the corporation to
examine and copy excerpts from [the corporation's] records or minutes" that excludes its
stock and transfer book.
We do not agree.
While Section 74 of the Corporation Code expressly mentions the application of Section
144 only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from [the corporation's] records
or minutes," the same does not mean that the latter section no longer applies to any other
possible violations of the former section.
It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any
provision" of the Corporation Code "not otherwise specifically penalized therein." Hence,
we find inconsequential the fact that that Section 74 expressly mentions the application of
Section 144 only to a specific act, but not with respect to the other possible violations of the
former section.
Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be
made to apply to violations of the right of a stockholder to inspect the stock and transfer
book of a corporation under Section 74(4) given the already unequivocal intent of the
legislature to penalize violations of a parallel right, i.e., the right of a stockholder or member
to examine the other records and minutes of a corporation under Section 74(2). Certainly,
all the rights guaranteed to corporators under Section 7 4 of the Corporation Code are
mandatory for the corporation to respect. All such rights are just the same underpinned by
the same policy consideration of keeping public confidence in the corporate vehicle thru an
assurance of transparency in the corporation's operations.
Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow
inspection of the stock and transfer book is not a punishable offense under the Corporation
Code. Such refusal, when done in violation of Section 74(4) of the Corporation Code,
properly falls within the purview of Section 144 of the same code and thus may be
penalized as an offense.
A criminal action based on the violation of a
stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.
The foregoing notwithstanding, and independently of the reasons provided therefor by the
RTC, we sustain the dismissal of Criminal Case No. 89724.
Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or
inspect the corporate records and the stock and transfer book of STRADEC. It is thus a
criminal action that is based on the violation of the second and fourth paragraphs of Section
7 4 of the Corporation Code.
A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph
of the same section, reveal that they are provisions that obligates a corporation: they
prescribe what books or records a corporation is required to keep; where the corporation
shall keep them;
and what are the other obligations of the corporation to its stockholders or members in
relation to such books and records.1âwphi1 Hence, by parity of reasoning, the second and
fourth paragraphs of Section 74, including the first paragraph of the same section, can only
be violated by a corporation.
It is clear then that a criminal action based on the violation of the second or fourth
paragraphs of Section 74 can only be maintained against corporate officers or such other
persons that are acting on behalf of the corporation. Violations of the second and fourth
paragraphs of Section 74 contemplates a situation wherein a corporation, acting thru one of
its officers or agents, denies the right of any of its stockholders to inspect the records,
minutes and the stock and transfer book of such corporation.
The problem with the petitioners' complaint and the evidence that they submitted during
preliminary investigation is that they do not establish that respondents were acting on
behalf of STRADEC. Quite the contrary, the scenario painted by the complaint is that the
respondents are merely outgoing officers of STRADEC who, for some reason, withheld and
refused to turn-over the company records of STRADEC; that it is the petitioners who are
actually acting on behalf of STRADEC; and that STRADEC is actually merely trying to
recover custody of the withheld records.
In other words, petitioners are not actually invoking their right to inspect the records and the
stock and transfer book of STRADEC under the second and fourth paragraphs of Section
74. What they seek to enforce is the proprietary right of STRADEC to be in possession of
such records and book. Such right, though certainly legally enforceable by other means,
cannot be enforced by a criminal prosecution based on a violation of the second and fourth
paragraphs of Section 74. That is simply not the situation contemplated by the second and
fourth paragraphs of Section 74 of the Corporation Code.
For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable
cause.
WHEREFORE, premises considered, the petlt10n is hereby DENIED. The Orders dated 4
June 2007 and 5 November 2007 of the Regional Trial Court, Branch 154, of Pasig City in
S.C.A. No. 3047, insofar as said orders effectively dismissed Criminal Case No. 89724
pending before Metropolitan Trial Court, Branch 69, of Pasig City, are hereby AFFIRMED.
SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice
CASE 34
G.R. No. 177066 September 11, 2009
JOSELITO MUSNI PUNO (as heir of the late Carlos Puno), Petitioner,
vs.
PUNO ENTERPRISES, INC., represented by JESUSA PUNO, Respondent.
DECISION
NACHURA, J.:
Upon the death of a stockholder, the heirs do not automatically become stockholders of the
corporation; neither are they mandatorily entitled to the rights and privileges of a
stockholder. This, we declare in this petition for review on certiorari of the Court of Appeals
(CA) Decision1 dated October 11, 2006 and Resolution dated March 6, 2007 in CA-G.R. CV
No. 86137.
The facts of the case follow:
Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent Puno
Enterprises, Inc. On March 14, 2003, petitioner Joselito Musni Puno, claiming to be an heir
of Carlos L. Puno, initiated a complaint for specific performance against respondent.
Petitioner averred that he is the son of the deceased with the latter’s common-law wife,
Amelia Puno. As surviving heir, he claimed entitlement to the rights and privileges of his
late father as stockholder of respondent. The complaint thus prayed that respondent allow
petitioner to inspect its corporate book, render an accounting of all the transactions it
entered into from 1962, and give petitioner all the profits, earnings, dividends, or income
pertaining to the shares of Carlos L. Puno.2
Respondent filed a motion to dismiss on the ground that petitioner did not have the legal
personality to sue because his birth certificate names him as "Joselito Musni Muno."
Apropos, there was yet a need for a judicial declaration that "Joselito Musni Puno" and
"Joselito Musni Muno" were one and the same.
The court ordered that the proceedings be held in abeyance, ratiocinating that petitioner’s
certificate of live birth was no proof of his paternity and relation to Carlos L. Puno.
Petitioner submitted the corrected birth certificate with the name "Joselito M. Puno,"
certified by the Civil Registrar of the City of Manila, and the Certificate of Finality thereof. To
hasten the disposition of the case, the court conditionally admitted the corrected birth
certificate as genuine and authentic and ordered respondent to file its answer within fifteen
days from the order and set the case for pretrial.3
On October 11, 2005, the court rendered a Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering Jesusa Puno and/or Felicidad
Fermin to allow the plaintiff to inspect the corporate books and records of the company
from 1962 up to the present including the financial statements of the corporation.
The costs of copying shall be shouldered by the plaintiff. Any expenses to be incurred by
the defendant to be able to comply with this order shall be the subject of a bill of costs.
SO ORDERED.4
On appeal, the CA ordered the dismissal of the complaint in its Decision dated October 11,
2006. According to the CA, petitioner was not able to establish the paternity of and his
filiation to Carlos L. Puno since his birth certificate was prepared without the intervention of
and the participatory acknowledgment of paternity by Carlos L. Puno. Accordingly, the CA
said that petitioner had no right to demand that he be allowed to examine respondent’s
books. Moreover, petitioner was not a stockholder of the corporation but was merely
claiming rights as an heir of Carlos L. Puno, an incorporator of the corporation. His action
for specific performance therefore appeared to be premature; the proper action to be taken
was to prove the paternity of and his filiation to Carlos L. Puno in a petition for the
settlement of the estate of the latter.5
Petitioner’s motion for reconsideration was denied by the CA in its Resolution6 dated March
6, 2007.
In this petition, petitioner raises the following issues:
I. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE
JOSELITO PUNO IS ENTITLED TO THE RELIEFS DEMANDED HE BEING THE HEIR OF
THE LATE CARLOS PUNO, ONE OF THE INCORPORATORS [OF] RESPONDENT
CORPORATION.
II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT FILIATION OF
JOSELITO PUNO, THE PETITIONER[,] IS NOT DULY PROVEN OR ESTABLISHED.
III. THE HONORABLE COURT ERRED IN NOT RULING THAT JOSELITO MUNO AND
JOSELITO PUNO REFERS TO THE ONE AND THE SAME PERSON.
IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT WHAT
RESPONDENT MERELY DISPUTES IS THE SURNAME OF THE PETITIONER WHICH
WAS MISSPELLED AND THE FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER
AS HEIR OF CARLOS PUNO ARE DEEMED ADMITTED HYPOTHETICALLY IN THE
RESPONDENT[’S] MOTION TO DISMISS.
V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED I[N] DECREEING
THAT PETITIONER IS NOT ENTITLED TO INSPECT THE CORPORATE BOOKS OF
DEFENDANT CORPORATION.7
The petition is without merit. Petitioner failed to establish the right to inspect respondent
corporation’s books and receive dividends on the stocks owned by Carlos L. Puno.
Petitioner anchors his claim on his being an heir of the deceased stockholder. However, we
agree with the appellate court that petitioner was not able to prove satisfactorily his filiation
to the deceased stockholder; thus, the former cannot claim to be an heir of the latter.
Incessantly, we have declared that factual findings of the CA supported by substantial
evidence, are conclusive and binding.8 In an appeal via certiorari, the Court may not review
the factual findings of the CA. It is not the Court’s function under Rule 45 of the Rules of
Court to review, examine, and evaluate or weigh the probative value of the evidence
presented.9
A certificate of live birth purportedly identifying the putative father is not competent
evidence of paternity when there is no showing that the putative father had a hand in the
preparation of the certificate. The local civil registrar has no authority to record the paternity
of an illegitimate child on the information of a third person.10 As correctly observed by the
CA, only petitioner’s mother supplied the data in the birth certificate and signed the same.
There was no evidence that Carlos L. Puno acknowledged petitioner as his son.
As for the baptismal certificate, we have already decreed that it can only serve as evidence
of the administration of the sacrament on the date specified but not of the veracity of the
entries with respect to the child’s paternity.11
In any case, Sections 74 and 75 of the Corporation Code enumerate the persons who are
entitled to the inspection of corporate books, thus —
Sec. 74. Books to be kept; stock transfer agent. — x x x.
The records of all business transactions of the corporation and the minutes of any meeting
shall be open to the inspection of any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.
xxxx
Sec. 75. Right to financial statements. — Within ten (10) days from receipt of a written
request of any stockholder or member, the corporation shall furnish to him its most recent
financial statement, which shall include a balance sheet as of the end of the last taxable
year and a profit or loss of statement for said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.12
The stockholder’s right of inspection of the corporation’s books and records is based upon
his ownership of shares in the corporation and the necessity for self-protection. After all, a
shareholder has the right to be intelligently informed about corporate affairs.13 Such right
rests upon the stockholder’s underlying ownership of the corporation’s assets and
property.14
Similarly, only stockholders of record are entitled to receive dividends declared by the
corporation, a right inherent in the ownership of the shares.151avvphi1
Upon the death of a shareholder, the heirs do not automatically become stockholders of the
corporation and acquire the rights and privileges of the deceased as shareholder of the
corporation. The stocks must be distributed first to the heirs in estate proceedings, and the
transfer of the stocks must be recorded in the books of the corporation. Section 63 of the
Corporation Code provides that no transfer shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation.16 During such interim period,
the heirs stand as the equitable owners of the stocks, the executor or administrator duly
appointed by the court being vested with the legal title to the stock.17 Until a settlement and
division of the estate is effected, the stocks of the decedent are held by the administrator or
executor.18 Consequently, during such time, it is the administrator or executor who is
entitled to exercise the rights of the deceased as stockholder.
Thus, even if petitioner presents sufficient evidence in this case to establish that he is the
son of Carlos L. Puno, he would still not be allowed to inspect respondent’s books and be
entitled to receive dividends from respondent, absent any showing in its transfer book that
some of the shares owned by Carlos L. Puno were transferred to him. This would only be
possible if petitioner has been recognized as an heir and has participated in the settlement
of the estate of the deceased.
Corollary to this is the doctrine that a determination of whether a person, claiming
proprietary rights over the estate of a deceased person, is an heir of the deceased must be
ventilated in a special proceeding instituted precisely for the purpose of settling the estate
of the latter. The status of an illegitimate child who claims to be an heir to a decedent’s
estate cannot be adjudicated in an ordinary civil action, as in a case for the recovery of
property.19 The doctrine applies to the instant case, which is one for specific performance
— to direct respondent corporation to allow petitioner to exercise rights that pertain only to
the deceased and his representatives.
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals
Decision dated October 11, 2006 and Resolution dated March 6, 2007 are AFFIRMED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice

CASE 35
G.R. Nos. 107789 & 147214 April 30, 2003
REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) and VICTOR AFRICA,
respondents.
AEROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO,
MANUEL NIETO III, RAMON NIETO, ROSARIO ARELLANO, VICTORIA LEGARDA,
ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMEN TUAZON and RAFAEL
VALDEZ, intervenors.
x-----------------------------x
G.R. No. 147214 April 30, 2003
VICTOR AFRICA, petitioner,
vs.
THE HONORABLE SANDIGANBAYAN and THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, respondents.
RESOLUTION
CARPIO MORALES, J.:
These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the
second "for Review on Certiorari" although it is actually one for Certiorari, stem from a
Resolution of November 13, 1992 issued by the Sandiganbayan in Civil Case No. 0130,1 on
motion of Victor Africa (Africa) who prayed that said court order the "calling and holding of
the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting for
1992 under the [c]ourt's control and supervision and prescribed guidelines."
It is gathered that on August 7, 1991, the Presidential Commission on Good Government
(PCGG) conducted an ETPI stockholders meeting during which a PCGG controlled board
of directors was elected. A special stockholders meeting was later convened by the
registered ETPI stockholders wherein another set of board of directors was elected, as a
result of which two sets of such board and officers were elected.
Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been
"illegally 'exercising' the rights of stockholders of ETPI,"2 especially in the election of the
members of the board of directors, filed the above-said motion before the Sandiganbayan.
The PCGG did not object to Africa's motion provided that:
1. An Order be issued upholding the right of PCGG to vote all the Class "A"
shares of ETPI.
2. In the alternative, in the remote event that PCGG's right to vote the
sequestered shares be not upheld, an Order be issued:
a. Disregarding the Stock and Transfer Book and Booklet of Stock
Certificates of ETPI in determining who can vote the shares in an
Annual Stockholders Meeting of ETPI,
b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of
the total subscription in ETPI, and
c. Directing the amendment of the Articles of Incorporation and By-
laws of ETPI providing for the minimum safeguards for the
conservation of assets . . . prior to the calling of a stockholders
meeting.3
By the assailed Resolution of November 13, 1992,4 the Sandiganbayan resolved Africa's
motion, the dispositive portion of which reads:
WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern
Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27,
1992, at 2:00 o'clock in the afternoon, at the ETPI Board Room, Telecoms Plaza, 7th Floor,
316 Gil J. Puyat Avenue, Makati, Metro Manila. The Executive Clerk of Court of this
Division shall issue the call and notice of annual stockholders meeting of ETPI addressed
to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shall be
conducted under the supervision and control of this Court, through Mr. Justice Sabino R.
de Leon, Jr. In accordance with the Supreme Court ruling in Cojuangco et al vs. Azcuna, et
al., supra, only the registered owners, their duly authorized representatives or their proxies
may vote their corresponding shares.
The following minimum safeguards must be set in place and carefully maintained until final
judicial resolution of the question of whether or not the sequestered shares of stock (or in a
proper case the underlying assets of the corporation concerned) constitute ill-gotten wealth:
"a. An independent comptroller must be appointed by the Board of Directors
upon nomination of the PCGG as conservator. The comptroller shall not be
removable (nor shall his position be abolished or his compensation changed)
without the consent of the conservator. The comptroller shall, in addition to his
other functions as such, have charge of internal audit.
b. The corporate secretary must be acceptable to the conservator. If the
corporate secretary ceases to be acceptable to the conservator, a new one must
be appointed by the Board of Directors upon nomination of the conservator.
c. The external auditors of the corporation must be independent and must be
acceptable to the conservator. The independent external auditors shall not be
changed without the consent of the conservator.
d. The conservator must be represented in the Board of Directors and in the
Executive (or equivalent) and Audit Committees of the corporation involved and
of its majority-owned subsidiaries or affiliates. The representative of the
conservator must be a full director (not merely an honorary or ex-officio director)
with the right to vote and all other rights and duties of a member of the Board of
Directors under the Corporation Code. The conservator's representative shall not
be removed from the Board of Directors (or the mentioned Committees) without
the consent of the conservator. The conservator shall, however, have the right to
remove and change its representative at any time, and the new representative
shall be promptly elected to the Board and its mentioned Committees.
 e. All transactions involving the disbursement of corporate funds in excess of P5
million must have the prior approval of the director representing the conservator,
in order to be valid and effective.
f. The incurring of debt by the corporation, whether in the form of bonds,
debentures, commercial paper or any other form, in excess of P5 million, must
have the prior approval of the director representing the conservator, in order to
be valid and effective.
g. The disposition of a substantial part of assets of the corporation (substantial
meaning in excess of P5 million) shall require the prior approval of the director
representing the conservator, in order to be valid and effective.
h. The above safeguards must be written into the articles of incorporation and by-
laws of the company involved. In other words, the articles of incorporation and
by-laws of the company must be amended so as to incorporate the above
safeguards.
i. Any amendment of the articles of incorporation or by-laws of the company that
will modify in any way any of the above safeguards, shall need the prior approval
of the director representing the conservator."
SO ORDERED.5 (Emphasis supplied)
Assailing the foregoing resolution, the PCGG filed before this Court the herein first petition,
docketed as G.R. No. 107789, anchored upon the following grounds:
I
RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN
RULING THAT THE REGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO
VOTE IN SPITE OF (A) THE RULING OF THIS HONORABLE COURT IN PCGG V. SEC
AND AFRICA (G.R. NO. 82188) AND (B) A CLEAR SHOWING THAT ETPI'S STOCK AND
TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO
DETERMINE WHO CAN VOTE IN A STOCKHOLDERS' MEETING.
II
RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND
EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG CANNOT VOTE AT
LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF ETPI.
III
WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE
REPUBLIC, RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN
ORDERING THE HOLDING OF A STOCKHOLDERS' MEETING IN ETPI WITHOUT
FIRST SETTING IN PLACE — BY AMENDING THE ARTICLES AND BY-LAWS OF ETPI
TO INCORPORATE — THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE
COURT IN COJUANGCO V. ROXAS.
IV
THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH GRAVE
ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF COURT
TO PERFORM THE DUTIES OF A CORPORATE SECRETARY, AND (B) ITS OWN
JUSTICE SABINO DE LEON, JR. TO CONTROL AND SUPERVISE THE
STOCKHOLDERS' MEETING.6 (Emphasis in the original)
By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan from (a)
implementing its Resolution of November 13, 1992, and (b) holding the stockholders'
meeting of ETPI scheduled on November 27, 1992, at 2:00 p.m.
On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM), Benito Nieto,
Carlos Nieto, Manuel Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda, Angela
Lobregat, Ma. Rita de los Reyes, Carmen Tuazon and Rafael Valdez, all stockholders of
record of ETPI, filed a motion to intervene in G.R. No. 107789. Their motion was granted by
this Court by Resolution of January 14, 1993.
After the parties submitted their respective memoranda, the PCGG, in early 1995, filed a
"VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS'
MEETING FOR [THE] SOLE PURPOSE OF INCREASING [ETPI's] AUTHORIZED
CAPITAL STOCK," it claiming that the increase in authorized capital stock was necessary
in light of the requirements laid down by Executive Order No. 1097 and Republic Act No.
7975.8
By Resolution of May 7, 1996,9 this Court resolved to refer the PCGG's very urgent petition
to hold the special stockholders' meeting to the Sandiganbayan for reception of evidence
and resolution.
In compliance therewith, the Sandiganbayan issued a Resolution of December 13,
1996,10 which is being assailed in the herein second petition, granting the PCGG "authority
to cause the holding of a special stockholders' meeting of ETPI for the sole purpose of
increasing ETPI's authorized capital stock and to vote therein the sequestered Class 'A'
shares of stock. . . ." In said Resolution, the Sandiganbayan held that there was an urgent
necessity to increase ETPI's authorized capital stock; there existed a prima facie factual
foundation for the issuance of the writ of sequestration covering the Class "A" shares of
stock; and the PCGG was entitled to vote the sequestered shares of stock.
The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and
Corporate Secretary to call the special stockholders meeting. Notices were sent to those
entitled to vote for a meeting on March 17, 1997. The meeting was held as scheduled and
the increase in ETPI's authorized capital stock from P250 Million to P2.6 Billion was
"unanimously approved."11
On April 1, 1997, Africa filed before this Court a motion to cite the PCGG "and its
accomplices" in contempt and "to nullify the 'stockholders meeting' called/conducted by
PCGG and its accomplices," he contending that only this Court, and not the
Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting and
vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of December 13, 1996 authorizing the
PCGG to hold the stockholders meeting had not yet become final because the motions for
reconsideration of said resolution were still pending. Further, Africa alleged that he was not
given notice of the meeting, and the PCGG had no right to vote the sequestered Class "A"
shares.
A motion for leave to intervene relative to Africa's "Motion to Cite the PCGG and its
Accomplices in Contempt" was filed by ETPI. This Court granted the motion for leave but
ETPI never filed any pleading relative to Africa's motion to cite the PCGG in contempt.
By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the
motions for reconsideration of its Resolution of December 13, 1996, prompting Africa to file
on April 6, 2001 before this Court the herein second petition,12 docketed as G.R. No.
147214, challenging the Sandiganbayan Resolutions of December 13, 1996 (authorizing
the holding of a stockholders meeting to increase ETPI's authorized capital stock and to
vote therein the sequestered Class "A" shares of stock) and February 16, 2001 (denying
reconsideration of the December 13, 1996 Resolution).
In his petition in G.R. No. 147214, Africa alleged that the Sandiganbayan committed "grave
abuse of discretion" when, by the assailed Resolutions,
a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE
SHARES [OF "SMALL STOCKHOLDERS" OF WHICH HE IS ONE AND
AEROCOM AND POLYGON] AND/OR OWNERS THEREOF[;] [AND]
b. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS
THE RIGHTS APPURTENANT TO A STOCKHOLDER[.]
He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG
to vote the non-sequestered ETPI Class "A" shares and nullify the votes the PCGG had
cast in the stockholders meeting held on March 17, 1997.
By Resolution of February 24, 2003,13 this Court ordered the consolidation of G.R. No.
147214 with G.R. No. 107789, now the subject of the present Resolution.
I
The first issue to be resolved is whether the PCGG can vote the sequestered ETPI Class
"A" shares in the stockholders meeting for the election of the board of directors. The
leading case on the matter is Bataan Shipyard & Engineering Co., Inc. v. Presidential
Commission on Good Government14 where this Court defined the powers of the PCGG as
follows:
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. As already earlier stressed with no little insistence, the act of
sequestration[,] freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; [it] does not make the PCGG
the owner thereof. In relation to the property sequestered, frozen or provisionally
taken over, the PCGG is a conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is specially true in the situations
contemplated by the sequestration rules where, unlike cases of receivership, for
example, no court exercises effective supervision or can upon due application
and hearing, grant authority for the performance of acts of dominion.
Equally evident is that resort to the provisional remedies in question should entail
the least possible interference with business operations or activities so that, in
the event that the accusation of the business enterprise being "ill-gotten" be not
proven, it may be returned to its rightful owner as far as possible in the same
condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, such as to bring and defend actions in its own name; receive rents;
collect debts due; pay outstanding debts due; and generally do such other acts
and things as may be necessary to fulfill its mission as conservator and
administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual its efforts to carry out its
task; punish for direct or indirect contempt in accordance with the Rules of Court;
and seek and secure the assistance of any office, agency or instrumentality of
the government. In the case of sequestered businesses generally (i.e., going
concerns, businesses in current operation), as in the case of sequestered
objects, its essential role, as already discussed, is that of conservator, caretaker,
"watchdog" or overseer. It is not that of manager, or innovator, much less an
owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or
Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have
been "taken over by the government of the Marcos Administration or by entities
or persons close to former President Marcos," the PCGG is given power and
authority, as already adverted to, to "provisionally take (it) over in the public
interest or to prevent . . . (its) disposal or dissipation;" and since the term is
obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation, running, or
management of the business itself. But even in this special situation, the intrusion
into management should be restricted to the minimum degree necessary to
accomplish the legislative will, which is "to prevent the disposal or dissipation" of
the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or
substitution should be avoided if at all possible, and undertaken only when
justified by demonstrably tenable grounds and in line with the stated objectives of
the PCGG. And it goes without saying that where replacement of management
officers may be called for, the greatest prudence, circumspection, care and
attention should accompany that undertaking to the end that truly competent,
experienced and honest managers may be recruited. There should be no role to
be played in this area by rank amateurs, no matter how well meaning. The road
to hell, it has been said, is paved with good intentions. The business is not to be
experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost x x x of the
ultimate objective of the whole exercise, which is to turn over the business to the
Republic, once judicially established to be "ill-gotten." Reason dictates that it is
only under these conditions and circumstances that the supervision,
 administration and control of business enterprises provisionally taken over may
legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a
Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG,
"pending the outcome of proceedings to determine the ownership of **
(sequestered) shares of stock," "to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of Incorporation,
etc." The Memorandum should be construed in such a manner as to be
consistent with, and not contradictory to the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to vote
simply because the right exists, or because the stocks sequestered constitute the
controlling or a substantial part of the corporate voting power. The stock is not to
be voted to replace directors, or revise the articles or by-laws, or otherwise bring
about substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in the
context of the stated purposes of sequestration or provisional takeover, i.e., to
prevent the dispersion or undue disposal of the corporate assets. Directors are
not to be voted out simply because the power to do so exists. Substitution of
directors is not to be done without reason or rhyme, should indeed be shunned if
at all possible, and undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such circumstances as to
assure that replacements are truly possessed of competence, experience and
probity.
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and were
no longer owners of any stock in the firm, if they ever were at all. This is why, in
its Resolution of October 28, 1986[,] this Court declared that —
"Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the Memorandum
of the President ** (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in
said corporation."
It must however be emphasized that the conduct of the PCGG nominees in the
BASECO Board in the management of the company's affairs should henceforth
be guided and governed by the norms herein laid down. They should never for a
moment allow themselves to forget they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree of diligence
and rectitude is, in the premises, required. (Italics in the original)
The PCGG cannot thus vote sequestered shares, except when there are "demonstrably
weighty and defensible grounds" or "when essential to prevent disappearance or wastage
of corporate property."15
The principle laid down in Baseco was further enhanced in the subsequent cases
of Cojuangco v. Calpo16 and Presidential Commission on Good Government v. Cojuangco,
Jr.,17 where this Court developed a "two-tiered" test in determining whether the PCGG may
vote sequestered shares:
The issue of whether PCGG may vote the sequestered shares in SMC
necessitates a determination of at least two factual matters:
 1. whether there is prima facie evidence showing that the said shares
are ill-gotten and thus belong to the state; and
2. whether there is an immediate danger of dissipation thus
necessitating their continued sequestration and voting by the PCGG
while the main issue pends with the Sandiganbayan.18
The two-tiered test, however, does not apply in cases involving funds of "public character."
In such cases, the government is granted the authority to vote said shares, namely:
(1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds
somehow landed in private hands.19
This Court, in Republic v. Cocofed,20 explained:
The [public character] exceptions are based on the common-sense principle that
legal fiction must yield to truth; that public property registered in the names of
non-owners is affected with trust relations; and that the prima facie beneficial
owner should be given the privilege of enjoying the rights flowing from the prima
facie fact of ownership.
In Baseco, a private corporation known as the Bataan Shipyard and Engineering
Co. was placed under sequestration by the PCGG. Explained the Court:
"The facts show that the corporation known as BASECO was owned
and controlled by President Marcos 'during his administration, through
nominees, by taking undue advantage of his public office and/or using
his powers, authority, or influence,' and that it was by and through the
same means, that BASECO had taken over the business and/or assets
of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities."
Given this factual background, the Court discussed PCGG's right over BASECO
in the following manner:
"Now, in the special instance of a business enterprise shown by
evidence to have been 'taken over by the government of the Marcos
Administration or by entities or persons close to former President
Marcos,' the PCGG is given power and authority, as already adverted
to, to provisionally take (it) over in the public interest or to prevent **
(its) disposal or dissipation;' and since the term is obviously employed
in reference to going concerns, or business enterprises in operation,
something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation,
running, or management of the business itself."
Citing an earlier Resolution, it ruled further:
"Petitioner has failed to make out a case of grave abuse of excess of
jurisdiction in respondent's calling and holding of a stockholder's
meeting for the election of directors as authorized by the Memorandum
of the President ** (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in
said corporation." (Emphasis supplied)
The Court granted PCGG the right to vote the sequestered shares because they
appeared to be "assets belonging to the government itself." The Concurring
Opinion of Justice Ameurfina A. Melencio-Herrera, in which she was joined by
Justice Florentino P. Feliciano, explained this principle as follows:
"I have no objection to according the right to vote sequestered stock in
case of a take-over of business actually belonging to the government
or whose capitalization comes from public funds but which, somehow,
landed in the hands of private persons, as in the case of BASECO. To
my mind, however, caution and prudence should be exercised in the
 case of sequestered shares of an on-going private business enterprise,
specially the sensitive ones, since the true and real ownership of said
shares is yet to be determined and proven more conclusively by the
Courts." (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas in this wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG cannot
perform acts of strict ownership of sequestered property. It is a mere
conservator. It may not vote the shares in a corporation and elect the
members of the board of directors. The only conceivable exception is
in a case of a takeover of a business belonging to the government or
whose capitalization comes from public funds, but which landed in
private hands as in BASECO." (italics supplied)
The "public character" test was reiterated in many subsequent cases; most
recently, in Antiporda v. Sandiganbayan. Expressly citing Cojuangco-Roxas, this
Court said that in determining the issue of whether the PCGG should be allowed
to vote sequestered shares, it was crucial to find out first whether this were
purchased with public funds, as follows:
"It is thus important to determine first if the sequestered corporate
shares came from public funds that landed in private hands."
This Court summed up the rule in the determination of whether the PCGG has the right to
vote sequestered shares as follows:
In short, when sequestered shares registered in the names of private individuals
or entities are alleged to have been acquired with ill-gotten wealth, then the two-
tiered test is applied. However, when the sequestered shares in the name of
private individuals or entities are shown, prima facie, to have been (1) originally
government shares, or (2) purchased with public funds or those affected with
public interest, then the two-tiered test does not apply. Rather, the public
character exception in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that
is, the government shall vote the shares.
The PCGG contends, however, that it is entitled to vote the sequestered shares in the
election of the board of directors, it invoking this Court's alleged finding in PCGG et al. v.
Securities and Exchange Commission, et al.21 that Africa had dissipated ETPI's assets,
thus:
Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L.
Africa as Chairman and Victor Africa as President, earned from ETPI as of 1987,
more than P57 million. Likewise in 1987, ETPI paid to Jose L. Africa
P1,200,000.00 as "professional fees" and Manuel Nieto, Jr. another
P1,200,000.00 as "allowances".22
The PCGG's contention is misleading, This Court made no finding in PCGG v. SEC et al.
that Africa dissipated ETPI's assets. Precisely this Court issued a Resolution of July 28,
1988 in the same case to clarify, upon motion of Africa, that the narration of facts found in
the decision therein did not constitute a finding of facts:
The categorical statement in the decision of June 30, 1988 that the "relevant
background facts of the case culled from Petitioners' Urgent Consolidated
Petition" was not without a reason or purpose. Precisely this statement was
made to impress upon the parties that the narration of facts is just that — a
narration, without necessarily judging its truth or veracity. Being based on
mere allegations, properly controverted, it is not a finding of facts, but
more of a presentation of the complete picture of events which led to the
sequestration of Eastern Telecommunications, Philippines, Inc. as well as
to the instant petition. This Court, it must be remembered, is not a trier of facts,
and particularly so in this case where the facts narrated are precisely the facts in
litigation before the Sandiganbayan. (Emphasis supplied.)
Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992,
skirted the question of whether there is evidence of dissipation of ETPI assets, holding
instead that:
The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds
of ETPI during its administration of ETPI is a matter which is not in issue herein.
 Dissipation by the PCGG Board of Directors is also charged by the BAN group.
An investigation of the anomalies charged by one against the other may be taken
up in another case.23
And it further held that the PCGG could not vote the sequestered shares as "only the
owners of the shares of stock of subject corporation, their duly authorized representatives
or their proxies, may vote the said shares,"24 relying on this Court's ruling in Cojuangco, Jr.
v. Roxas25 that:
The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in a
corporation and elect members of the board of directors. The only conceivable exception is
in a case of a takeover of a business belonging to the government or whose capitalization
comes from public funds, but which landed in private hands as in BASECO.
In short, the Sandiganbayan held that the public character exception does not apply, in
which case it should have proceeded to apply the two-tiered test. This it failed to do.
The questions thus remain if there is prima facie evidence showing that the subject shares
are ill-gotten and if there is imminent danger of dissipation. This Court is not, however, a
trier of facts, hence, it is not in a position to rule on the correctness of the PCGG's
contention. Consequently, this issue must be remanded to the Sandiganbayan for
resolution.
II
On the PCGG's submission that the Stock and Transfer Book should not be used as the
basis for determining the voting rights of the shareholders because some entries therein
were altered "by substitution": This Court sees no grave abuse of discretion on the part of
the Sandiganbayan in ruling that:
The charge that there were "alterations by substitution" in the Stock and Transfer
Book is not a matter which should preclude the Stock and Transfer Book from
being the basis or guide to determine who the true owners of the shares of stock
in ETPI are. If there be any substitution or alterations, the anomaly, if at all, may
be explained by the corporate secretary who made the entries therein. At any
rate, the accuracy of the Stock and Transfer Book may be checked by comparing
the entries therein with the issued stock certificates. The fact is that any transfer
of stock or issuance thereof would necessitate an alteration of the record by
substitution. Any anomaly in any entry which may deprive a person or entity of its
right to vote may generate a controversy personal to the corporation and the
stockholder and should not affect the issue as to whether it is the PCGG or the
shareholder who has the right to vote. In other words, should there be a
stockholder who feels aggrieved by any alteration by substitution in the Stock
and Transfer Book, said stockholder may object thereto at the proper time and
before the stockholders meeting.26
Whether the ETPI Stock and Transfer Book was falsified and whether such falsification
deprives the true owners of the shares of their right to vote are thus issues best settled in a
different proceeding instituted by the real parties-in-interest.
III
On the PCGG's submission that the Sandiganbayan gravely abused its discretion when it
held that it cannot vote at least 23.9% of the outstanding capital stock of ETPI, which
percentage is broken down as follows:
Shares ceded to the government by virtue of the - 12.8%
Benedicto compromise
Shares represented by some stock certificates found in - 3.1%
Malacañang (at least)
Shares held and admitted by Manuel Nieto to belong to 8.0%
then President Marcos -
The PCGG alleges that the 12.8% indicated above represents 51% of the combined
shareholdings of Roberto S. Benedicto and his controlled corporations amounting to 12.8%
of the total equity of ETPI which was ceded to the Republic; the 3.1% represents the
shares covered by the ETPI stock certificates endorsed in blank found in Malacañang, now
in its (PCGG's) possession, which it submits it may, under Section 34 of the Negotiable
Instruments Law,27 take title thereto and vote the same in the stockholders meeting; and
the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, in an Affidavit
of May 28, 1986, admitted actually belong to former President Marcos:
5. That in relation to and simultaneously with the board meeting of
PHILCOMSAT, on March 21, 1986, I declared my concurrence in the disclosures
made on the participation of Mr. Ferdinand E. Marcos and associates in the
companies covered by the sequestration order dated March 14, 1986 i.e.,
39,926.2% (sic) of the total subscribed capital stock of Philippine Overseas
Telecommunications Corporation and 40% of the individual shareholdings of
Jose L. Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern
Telecommunications Philippines, Inc.28
On the question of whether the PCGG can vote all the above shares, the Sandiganbayan,
finding in the affirmative, held in its Resolution of November 13, 1992:
Considering the Compromise Agreement entered into by the PCGG and Roberto
S. Benedicto in Civil Case No. 009 wherein Roberto S. Benedicto assigned and
transferred to the Government 12.8% of the shares of stock of ETPI, which
Compromise Agreement was made the basis of a judgment of this Court, it is
only proper that the PCGG may vote these shares in the stockholders
meeting after said judgment shall have become final and executory. Besides,
before the PCGG can vote these shares, the transfer to the State of the shares
of stock must be entered in the Stock and Transfer Book, the entries therein
being the only basis for which the stockholder may vote the said shares.
The same ruling is made in respect to the shares of stock represented by stock
certificates found in Malacañang (3.1%) and the shares of stock allegedly
admitted by Manuel H. Nieto to belong to former President Ferdinand E. Marcos
(8.0%).29 (Emphasis supplied)
The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the shares
representing 12.8% of ETPI's outstanding capital stock, the only requirement it imposed
being that the transfer of the shares be registered in the Stock and Transfer Book and that,
in the case of the Benedicto shares, the Compromise Agreement be final and executory.
In requiring that the transfer of the Benedicto shares be first recorded in ETPI's Stock and
Transfer Book before the PCGG may vote them, the Sandiganbayan committed no grave
abuse of discretion. For Section 63 of the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which the 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 the delivery of the certificate or certificates endorsed
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
to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
xxx xxx xxx.
Explaining why registration is a prerequisite for the voting of shares, this Court, in Batangas
Laguna Tayabas Bus Company, Inc., v. Bitanga,30 discoursed:
Indeed, until registration is accomplished, the transfer, though valid between the
parties, cannot be effective as against the corporation. Thus, the unrecorded
transferee x x x cannot vote nor be voted for. The purpose of registration,
therefore, is two-fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to inform the
corporation of any change in share ownership so that it can ascertain the
persons entitled to the rights and subject to the liabilities of a stockholder. Until
challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting; his vote can be properly counted to determine
whether a stockholders' resolution was approved, despite the claim of the alleged
transferee. On the other hand, a person who has purchased stock, and who
desires to be recognized as a stockholder for the purpose of voting, must secure
 such a standing by having the transfer recorded on the corporate books. Until the
transfer is registered, the transferee is not a stockholder but an outsider.
Whether the PCGG needs to await the finality of the judgment31 based on the Republic-
Benedicto compromise agreement is now moot since it is not disputed that it had long
become final and executory. Accordingly, the PCGG may vote in its name the shares
ceded to the Republic by Benedicto pursuant to the said agreement once they are
registered in its name.
With respect to the PCGG's submission that under Section 34 of the Negotiable
Instruments Law, it may take title to the shares represented by the blank stock certificates
found in Malacañang and vote the same, the same is untenable. The PCGG assumes that
stock certificates are negotiable. They are not.
x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in
the sense that it may be transferred by delivery, it is well settled that the
instrument is non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel.32
That the PCGG found the stock certificates endorsed in blank does not necessarily make it
the owner of the shares represented therein. Their true ownership has to be ascertained in
a proper proceeding. Similarly, the ownership of the Nieto shares has yet to be adjudicated.
That they allegedly belong to former President Marcos does not make the PCGG, its
owner. The PCGG must, in an appropriate proceeding, first establish that they truly belong
to the former President and that they were ill-gotten. Pending final judgment over the
ownership of these shares, the PCGG may not register and vote the Nieto and the
Malacañang shares in its name. If the Sandiganbayan finds, however, that there is
evidence of dissipation of these shares, the PCGG may vote the same
as conservator thereof.
IV
On the PCGG's imputation of grave abuse of discretion upon the Sandiganbayan for
ordering the holding of a stockholders meeting to elect the ETPI board of directors without
first setting in place, through the amendment of the articles of incorporation and the by-laws
of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas.33 This Court laid down those
safeguards because of the obvious need to reconcile the rights of the stockholder whose
shares have been sequestered and the duty of the conservator to preserve what could be
ill-gotten wealth.
It is through the right to vote that the stockholder participates in the management
of the corporation. The right to vote, unlike the rights to receive dividends and
liquidating distributions, is not a passive thing because management or
administration is, under the Corporation Code, vested in the board of directors,
with certain reserved powers residing in the stockholders directly. The board of
directors and executive committee (or management committee) and the
corporate officers selected by the board may make it very difficult if not
impossible for the PCGG to carry out its duties as conservator if the Board or
officers do not cooperate, are hostile or antagonistic to the conservator's
objectives.
Thus, it is necessary to achieve a balancing of or a reconciliation between the
stockholders' right to vote and the conservator's statutory duty to recover and in
the process thereof, to conserve assets, thought to be ill-gotten wealth, until final
judicial determination of the character of such assets or until a final compromise
agreement between the parties is reached.
There are, in the main, two (2) types of situations that need to be addressed. The
first situation arises where the sequestered shares of stock constitute a distinct
minority of the voting shares of the corporation involved, such that the registered
owners of such sequestered shares would in any case be able to vote in only
a minority of the Board of Directors of the corporation. The second situation
arises where the sequestered shares of stock constitute a majority of the voting
shares of the corporation concerned, such that the registered owners of such
shares of stock would in any case be entitled to elect a majority of the Board of
Directors of the corporation involved.
Turning to the first situation, the Court considers and so holds that in order to
enable the PCGG to perform its functions as conservator of the sequestered
shares of stock pending final determination by the courts as to whether or not the
same constitute ill-gotten wealth or a final compromise agreement between the
parties, the PCGG must be represented in the Board of Directors of the
corporation and to its majority-owned subsidiaries or affiliates and in the
Executive Committee (or its equivalent) and the Audit Committee thereof, in at
least an ex officio (i.e., non-voting) capacity. The PCGG representative must
have a right of full access to and inspection of (including the right to obtain copies
of) the books, records and all other papers of the corporation relating to its
business, as well as a right to receive copies of reports to the Board of Directors,
its Executive (or equivalent) and Audit Committees. By such representation and
rights of full access, the PCGG must be able so to observe and monitor the
carrying out of the business of the corporation as to discover in a timely manner
any move or effort on the part of the registered owners of the sequestered stock
alone or in concert with other shareholders, to conceal, waste and dissipate the
assets of the corporation, or the sequestered shares themselves, and
seasonably to bring such move or effort to the attention of the Sandiganbayan for
appropriate action.
In the second situation above referred to, the Court considers and so holds that
the following minimum safeguards must be set in place and carefully maintained
until final judicial resolution of the question of whether or not the sequestered
shares of stock (or, in a proper case, the underlying assets of the corporation
concerned) constitute ill-gotten wealth or until a final compromise agreement
between the parties is reached:
a. An independent comptroller must be appointed by the Board of
Directors upon nomination of the PCGG as conservator. The
comptroller shall not be removable (nor shall his position be abolished
or his compensation changed) without the consent of the conservator.
The comptroller shall, in addition to his other functions as such, have
charge of internal audit.
b. The corporate secretary must be acceptable to the conservator. If
the corporate secretary ceases to be acceptable to the conservator, a
new one must be appointed by the Board of Directors upon nomination
of the conservator.
c. The external auditors of the corporation must be independent and
must be acceptable to the conservator. The independent external
auditors shall not be changed without the consent of the conservator.
d. The conservator must be represented in the Board of Directors and
in the Executive (or equivalent) and Audit Committees of the
corporation involved and of its majority-owned subsidiaries or affiliates.
The representative of the conservator must be a full director (not
merely an honorary or ex officio director) with the right to vote and all
other rights and duties of a member of the Board of Directors under the
Corporation Code. The conservator's representative shall not be
removed from the Board of Directors (or the mentioned Committees)
without the consent of the conservator. The conservator shall,
however, have the right to remove and change its representative at
any time, and the new representative shall be promptly elected to the
Board and its mentioned Committees.
e. All transactions involving the disbursement of corporate funds in
excess of P5 million must have the prior approval of the director
representing the conservator, in order to be valid and effective.
f. The incurring of debt by the corporation, whether in the form of
bonds, debentures, commercial paper or any other form, in excess of
 P5 million, must have the prior approval of the director representing the
conservator, in order to be valid and effective.
g. The disposition of a substantial part of assets of the corporation
(substantial meaning in excess of P5 million) shall require the prior
approval of the director representing the conservator, in order to be
valid and effective.
h. The above safeguards must be written into the articles of
incorporation and by-laws of the company involved. In other words, the
articles of incorporation and by-laws of the company must be amended
so as to incorporate the above safeguards.
i. Any amendment of the articles of incorporation or by-laws of the
company that will modify in any way any of the above safeguards, shall
need the prior approval of the director representing the conservator.
The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g)
above is intended merely to be indicative. The precise amount may
differ depending upon the size of the corporation involved and the
reasonable operating requirements of its business.
Whether a particular case falls within the first or the second type of situation
described above, the following safeguards are indispensably necessary:
1. The sequestered shares and any stock dividends pertaining to such
shares, may not be sold, transferred, alienated, mortgaged, or
otherwise disposed of and no such sale, transfer or other disposition
shall be registered in the books of the corporation, pending final judicial
resolution of the question of ill-gotten wealth or a final compromise
agreement between the parties; and
2. Dividend and liquidating distributions shall not be delivered to the
registered stockholders of the sequestered shares, including stock
dividends pertaining to such shares, but shall instead be deposited in
an escrow, interest-bearing, account in a first class bank or banks,
acceptable to the Sandiganbayan, to be held by such banks for the
benefit of whoever is held by final judicial decision or final compromise
agreement, to be entitled to the shares involved. (Emphasis in the
original)
There is nothing in the Cojuangco case that would suggest that the above measures should
be incorporated in the articles and by-laws before a stockholders meeting for the election of
the board of directors is held. The PCGG nonetheless insists that those measures should
be written in the articles and by-laws before such meeting, "otherwise, the [Marcos] cronies
will elect themselves or their representatives, control the corporation, and for an
appreciable period of time, have every opportunity to disburse funds, destroy or alter
corporate records, and dissipate assets." That could be a possibility, but the peculiar
circumstances of this case require that the election of the board of directors first be held
before the articles of incorporation are amended. Section 16 of the Corporation Code
requires the majority vote of the board of directors to amend the articles of incorporation:
Sec. 16. Amendment of Articles of Incorporation. — Unless otherwise prescribed
by this Code or by special law, and for legitimate purposes, any provision or
matter stated in the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at
least two thirds (2/3) of the members if it be a non-stock corporation.
xxx xxx xxx. (Emphasis supplied)
At the time Africa filed his motion for the holding of the annual stockholders meeting, there
were two sets of ETPI directors, one controlled by the PCGG and the other by the
registered stockholders. Which of them is the legitimate board of directors? Which of them
may rightfully vote to amend the articles of incorporation and integrate the safeguards laid
down in Cojuangco? It is essential, therefore, to cure this aberration of two boards of
directors sitting in a single corporation before the articles of incorporation are amended to
set in place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation and dissipating
its assets is, of course, a legitimate concern of the PCGG, charged as it is with the duties of
a conservator. Nevertheless, such danger may be averted by the "substantially
contemporaneous" amendment of the articles after the election of the board. This Court
said as much in Cojuangco:
The Court is aware that the implementation of some of the above safeguards
may require agreement between the registered stockholders and the PCGG as
well as action on the part of the Securities and Exchange Commission. The
Court, therefore, directs petitioners and the PCGG to effect the implementation of
this decision under the supervision and control of the Sandiganbayan so that the
right to vote the sequestered shares and the installation and operation of the
safeguards above-specified may be exercised and effected in a substantially
contemporaneous manner and with all deliberate dispatch.
V
As for the PCGG's contention that the Sandiganbayan gravely abused its discretion in
ordering the Division Clerk of Court to call the stockholders meeting and in appointing then
Sandiganbayan Associate Justice Sabino de Leon, Jr. to control and supervise the same, it
is impressed with merit.
The Clerk of Court, who is already saddled with judicial responsibilities, need not be
burdened with the additional duties of a corporate secretary. Moreover, the Clerk of Court
may not have the requisite knowledge and expertise to discharge the functions of a
corporate secretary. It is not thus surprising to find the PCGG complaining that:
x x x ETPI's By-laws provide:
"Sec. 4. Notice of Meeting. — Except as otherwise provided by law,
written or printed notice of all annual and special meetings of
stockholders, stating the place and time of the meeting and the general
nature of the business to be considered, shall be transmitted by
personal delivery, registered air-mail, telegraph, or cable to each
stockholder of record entitled to vote thereat at his address last known
to the Secretary of the Company, at least ten (10) days before the date
of the meeting, if an annual meeting, or at least five (5) days before the
date of the meeting, if a special meeting."
Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the
Sandiganbayan to "issue the call and Notice of Annual Stockholder's Meeting in
ETPI" because under ETPI's By-laws such meeting should be held in the month
of May. x x x . In the Resolution dated November 13, 1992, the Sandiganbayan
granted the Motion and authorized its Division Clerk of Court to issue such
"Notice of Annual Stockholder's Meeting." However, for inexplicable reasons, the
Division Clerk of Court issued a "Notice of Special Stockholder's Meeting". x x x .
which requires only a prior 5-day notice, instead of a "notice of (Delayed) Annual
Stockholder's Meeting" which requires a prior 10-day notice.
Instead of sending the Notices to each stockholder at his recorded address, the
Division Clerk of Court whimsically sent all the Notices meant for the Class B
stockholders to Atty. Eduardo de los Angeles (who returned the Notices because
he was not authorized to receive such Notices). According to him . . ., he does
not know some of the Class B stockholders for whom notices were sent to him.
As a result, at this late stage, no proper notice has been sent to Class B
stockholders. Yet, the Sandiganbayan has scheduled and is dead set to
supervise a stockholder's meeting on November 27, 1992. This clearly violates
the substantial rights of the Class B stockholders who own 40% of ETPI. Under
the Articles of Incorporation . . . and By-laws . . . of ETPI, Class B stockholders
are entitled to vote two members of the Board of Directors. Unless properly
notified, most of the Class B stockholders who reside in the United Kingdom (and
whose shares are not sequestered) will not be able to exercise their right to
vote.34 (Emphasis in the original)
The appointment of a sitting member of the Sandiganbayan is particularly unsound for, as
the PCGG points out:
x x x What then is the reason for him to attend and supervise the meeting? To
observe so that he can later testify in the court where he himself sits — in the
court which will eventually decide any controversy which may arise from the
meeting?35
Obviously, under such situation, the justice so appointed would be compelled to inhibit
himself from any judicial controversy arising from the stockholders meeting.36 Worse, if he
were to preside at the meeting and rule upon the objections that may be raised by some
stockholders, the Sandiganbayan would be faced with the "anomaly"37 of eventually
reviewing the decisions rendered by a member of its court during the stockholders meeting.
This Court appreciates the quandary that the Sandiganbayan faced when it ordered its
Division Clerk of Court to call the meeting: ETPI has two sets of officers and, presumably,
two corporate secretaries. And given the stakes involved, the stockholders meeting would
be contentious, to say the least, hence, the need for an impartial referee to supervise and
control the meeting.
Happily, the case of Board of Directors and Election Committee of SMB Workers Savings
and Loan Asso., Inc. v. Tan, etc., et al.38 provides a solution to the Sandiganbayan's
dilemma. There, this Court upheld the creation of a committee empowered to call, conduct
and supervise the election of the board of directors:
As regards the creation of a committee of three vested with the authority to call,
conduct and supervise the election, and the appointment thereto of Candido C.
Viernes as chairman and representative of the court and one representative each
from the parties, the Court in the exercise of its equity jurisdiction may appoint
such committee, it having been shown that the Election Committee that
conducted the election annulled by the respondent court if allowed to act as such
may jeopardize the rights of the respondents.
In a proper proceeding a court of equity may direct the holding of a
stockholders' meeting under the control of a special master, and the
action taken at such a meeting will not be set aside because of a
wrongful use of the court's interlocutory decree, where not brought to
the attention of the court prior to the meeting. (18 C.J.S. 1270.)
A court of equity may, on showing of good reason, appoint a master to
conduct and supervise an election of directors when it appears that a
fair election cannot otherwise be had. Such a court cannot make
directions contrary to statute and public policy with respect to the
conduct of such election. (19 C.J.S. 41)
This Court also approved a similar action by the Securities and Exchange Commission in
Sales v. Securities and Exchange Commission.39
Such a committee composed of impartial persons knowledgeable in corporate proceedings
would provide the needed expertise and objectivity in the calling and the holding of the
meeting without compromising the Sandiganbayan or its officers. The appointment of the
committee members and the delineation of the scope of the duties of the committee may be
made pursuant to an agreement by the parties or in accordance with the provisions of Rule
9 (Management Committee) of the Interim Rules of Procedure for Intra-Corporate
Controversies insofar as they are applicable.
VI
And now, Africa's motion to cite the PCGG and its "accomplices" in contempt for calling and
holding a stockholders meeting to increase ETPI's authorized capital stock without this
Court's authority and despite the pendency of motions for reconsideration of the
Sandiganbayan Resolution of December 13, 1996 granting the PCGG authority to cause
the holding of such meeting. In the same motion, Africa asks this Court to nullify the March
17, 1997 stockholders meeting which increased ETPI's authorized capital stock on the
grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG voted
the sequestered ETPI shares despite the absence of evidence of dissipation of assets.
Intervenor AEROCOM has shared Africa's assertions.
As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGG's "VERY
URGENT MOTION FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS
MEETING . . ." to the Sandiganbayan for reception of evidence and resolution. The
dispositive portion of said Resolution reads:
Taking account of all the foregoing, the Court Resolved to REFER the "VERY
URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS'
MEETING FOR SOLE PURPOSE OF INCREASING EASTERN'S AUTHORIZED
CAPITAL STOCK" to the Sandiganbayan for reception of evidence and
resolution — WITH ALL DELIBERATE DISPATCH but no longer than sixty (60)
days from notice hereof — of the factual issues raised by the parties as
herein set out, and such others, factual or otherwise as are relevant, in
order to decide the basic question in this proceeding of the necessity and
propriety of the holding of the special stockholders' meeting of EASTERN for the
"sole purpose of increasing ** (its) authorized capital stock" and the exercise by
the PCGG of the right to vote at said meeting.40 (Emphasis supplied)
Clearly, when the PCGG's "VERY URGENT PETITION TO HOLD SPECIAL
STOCKHOLDERS MEETING . . . " was referred to the Sandiganbayan, this Court gave the
latter full authority to decide the issue of whether a stockholders meeting should be held.
Implicit in this authority was the power to grant (or deny) the petition. There is thus no need
for the parties to seek this Court's imprimatur to hold the same.
Africa's motion must thus be denied.
Even assuming arguendo that the holding of the meeting was contemptuous because the
December 13, 1996 Sandiganbayan Resolution had not yet attained finality, it was the
Sandiganbayan, and not this Court, which was contemned. Consequently, it is the
Sandiganbayan, and not this Court, which has jurisdiction over the motion to declare the
PCGG and "its accomplices" in contempt.
In whatever context it may arise, contempt of court involves the doing of an act,
or the failure to do an act, in such a manner as to create an affront to the court
and the sovereign dignity with which it is clothed. As a matter of practical judicial
administration, jurisdiction has been felt properly to rest in only one tribunal at a
time with respect to a given controversy. Partly because of administrative
considerations, and partly to visit the full personal effect of the punishment on a
contemnor, the rule has been that no other court than the one contemned will
punish a given contempt.
The rationale that is usually advanced for the general rule that the power to
punish for contempt rests with the court contemned is that contempt proceedings
are sui generic and are triable only by the court against whose authority the
contempts are charged; the power to punish for contempt exists for the purpose
of enabling a court to compel due decorum and respect in its presence and due
obedience to its judgments, orders and processes; and in order that a court may
compel obedience to its orders, it must have the right to inquire whether there
has been any disobedience thereof, for to submit the question of disobedience to
another tribunal would operate to deprive the proceeding of half its efficiency. 41
The above rule is not of course absolute as it admits exception "when the entire case has
already been appealed [in which case] jurisdiction to punish for contempt rests with the
appellate court where the appeal completely transfers to proceedings thereto or where
there is a tendency to affect the status quo or otherwise interfere with the jurisdiction of the
appellate court."42 This exception does not, however, apply to Africa's motion since at the
time he filed it on April 1, 1997 before this Court, his petition in G.R. No. L-147214 assailing
the December 17, 1996 Resolution of the Sandiganbayan had not yet been filed.
The motion to nullify the March 17, 1997 stockholders meeting must likewise be denied for
lack of jurisdiction. Such motion is but an incident to Sandiganbayan Civil Case No.
0130.43 As such, jurisdiction over it pertains exclusively and originally to the
Sandiganbayan.
Under Section 2 of the President's Executive Order No. 14 issued on May 7,
1986, all cases of the Commission regarding "the Funds, Moneys, Assets, and
Properties Illegally Acquired or Misappropriated by Former President Ferdinand
Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives, Subordinates,
Business Associates, Dummies, Agents, or Nominees" whether civil or criminal
are lodged within the "exclusive and original jurisdiction of the
 Sandiganbayan" and all incidents arising from, incidental to, or related to,
such cases necessarily fall likewise under the Sandiganbayan's exclusive
and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court.44
This is another reason for the denial of the motion to cite the PCGG and its "accomplices"
in contempt.
VII
FINALLY, the question on the validity of the PCCG's voting the Class "A" shares to
increase the authorized capital stock of ETPI.
In his petition in G.R. No. 147214, Africa faults the Sandiganbayan for failing to
acknowledge, in its Resolution of February 16, 2001, the Decisions of this Court declaring
that his shares in ETPI45 and those of AEROCOM46 and POLYGON (Polygon Investors &
Managers, Inc.)47 were not sequestered. Hence, so he contends, they, and not the PCGG,
should have been allowed to vote their respective shares during the meeting.
Two matters require clarification at this point. First, that this Court rendered decisions
holding that the shares of Africa, AEROCOM and POLYGON are not or are no longer
sequestered is of little consequence since the decisions were promulgated after the
Sandiganbayan issued its resolution granting the PCGG authority to call and hold the
stockholders meeting to increase the authorized capital stock. At that time, the shares were
presumed to have been regularly sequestered. The more fundamental question that
confronts this Court is: Was the PCGG entitled to vote the sequestered shares in the
stockholders meeting of March 17, 1997?
Second, the PCGG correctly argues that Africa has no cause of action to claim on behalf of
AEROCOM and POLYGON that these two companies are entitled to vote their respective
shares in the stockholders meeting to increase ETPI's authorized capital stock. The claim is
personal to AEROCOM and POLYGON. Nevertheless, this does not preclude Africa from
invoking his own right as a "small stockholder" of ETPI to vote in the stockholders meeting
for the purpose of increasing ETPI's authorized capital stock. The PCGG maintains,
however, that it is entitled to vote said shares because this Court, by its claim, recognized
in PCGG v. SEC, supra, that ETPI's assets were being dissipated by the BAN (Benedicto,
Africa, Nieto) Group, thus:
Under the Management of Cable and Wireless ETPI grew and prospered. But
when its dividends, which were paid in dollars to the BAN Group, began to run
into millions, said group also started to intervene in the corporation's operations
and management. Requests for employment of family relatives and high salaries
for them were made. The BAN Group likewise placed the majority of their
individual stockholdings in three separate companies, namely: Aerocom
Investors, Universal Molasses, and Polygon, so that in 1986, the ownership of
the Class "A" stocks of the corporation was as follows:
Roberto S. Benedicto - 3.3 percent
Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africa's relatives - .3 percent
Polygon Investors and Managers Inc. - 17.5 percent
By the end of 1987, the initial capital of P1M of the BAN Group, its corporations
and relatives had grown to the astronomical sum of P784,185,198.00. Cash
dividends paid to them as of 1986 had amounted to P225,845,000.00 even as
another P180,000,000.00 is due them for 1987, for a grand total of
P405,845,000.00. In 1984, cash dividends to the BAN Group, et al. in the amount
of $1M were remitted to the United States.
 Under a consultancy contract, Polygon Investors and Managers with Jose L.
Africa as Chairman and his son, Victor Africa as President, earned from ETPI as
of 1987 more than P57M. Likewise in 1987, ETPI paid to Jose L. Africa
P1,200,000.00 as "professional fees" and Manuel H. Nieto, Jr., another
P1,200,000.00 as "allowances".48
As stated early on, however, the foregoing narration does not constitute a finding of fact.
The PCGG further submits that the Sandiganbayan found prima facie evidence for the
issuance of the writ of sequestration covering the Class "A" shares of ETPI. Such reliance
on the Sandiganbayan's ruling is misplaced because the issue is not whether there is prima
facie evidence to warrant sequestration of the shares, but whether there is prima
facie evidence showing that the shares are ill-gotten and whether there is evidence of
dissipation of assets to warrant the voting by the PCGG of sequestered shares. As to the
latter issue, the Sandiganbayan held in the affirmative in this wise:
x x x [T]he propriety and legality of allowing the PCGG to cause the holding of a
stockholders' meeting of the ETPI for the purpose of electing a new Board of
Directors or effecting changes in the policy, program and practices of said
corporation (except for the specified purpose of amending the right of first refusal
clause in ETPI's Articles of Incorporation and By Laws) and impliedly to vote the
sequestered shares of stocks has been upheld by the Supreme Court in the case
of "PCGG vs. SEC, PCGG vs. Sandiganbayan, et al.", G.R. No. 82188,
promulgated June 30, 1988 x x x.49 (Emphasis supplied)
The Sandiganbayan proceeded to quote the following pronouncement of this Court
in PCGG v. SEC:
But while We find the Sandiganbayan to have acted properly in enjoining the
PCGG from holding the stockholders meeting for the specified purpose of
amending the "right of first refusal" clause in ETPI's Articles of Incorporation and
By-Laws, We find the general injunction imposed by it on the PCGG to desist
and refrain from calling a stockholders meeting for the purpose of electing a new
Board of Directors of effecting substantial changes in the policy, program or
practice of the corporation to be too broad as to taint said order with grave abuse
of discretion. Said order completely ties the hands of the PCGG, rendering it
virtually helpless in the exercise of its power of conserving and preserving the
assets of the corporation. Indeed, of what use is the PCGG if it cannot even do
this? x x x.50 (italics and underscoring supplied)
The Sandiganbayan, however, misread this Court's ruling in the said SEC case. One of the
issues raised therein was whether the Sandiganbayan committed grave abuse of discretion
in enjoining the PCGG from calling and holding stockholders meetings and voting the
sequestered ETPI shares for the purpose of deleting the "right of first refusal" clause in
ETPI's articles of incorporation. In its therein assailed Order, the Sandiganbayan
temporarily restrained the PCGG "from calling and/or holding stockholders meetings and
voting the sequestered shares thereat for the purpose of amending the articles or by-laws
of ETPI, or otherwise effecting substantial changes in policy, programs or practices of said
corporation."
Clearly, the temporary restraining order was too broad. The Sandiganbayan should have
limited itself to restraining the calling and holding of the stockholders meeting and voting
the shares for the sole purpose of amending the "right of first refusal" clause. It was thus
necessary for this Court to make the underscored ruling above. No declaration therein was
made that in all instances the PCGG may vote the sequestered shares to effect substantial
changes in ETPI policy, programs or practices. In lifting the injunction on that aspect, this
Court merely recognized "that situations may arise wherein only through an act of strict
ownership can the PCGG be able to prevent the dissipation of the assets of the
sequestered corporation or business."51
Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion in
the SEC case that the BAN Group was guilty of dissipation and that, consequently, the
PCGG was entitled to vote the sequestered shares, this Court would not have bothered, in
its Resolution of May 7, 1996, to direct said court to decide whether the PCGG has the right
to vote in the stockholders meeting for the purpose of increasing ETPI's authorized capital
stock.52
This Court notes that, like in Africa's motion to hold a stockholders meeting (to elect a
board of directors), the Sandiganbayan, in the PCGG's petition to hold a stockholders
meeting (to amend the articles of incorporation to increase the authorized capital stock),
again failed to apply the two-tiered test. On such determination hinges the validity of the
votes cast by the PCGG in the stockholders meeting of March 17, 1997. This lapse by the
Sandiganbayan leaves this Court with no other choice but to remand these questions to it
for proper determination.
IN SUM, this Court rules that:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to
amend the Articles of Incorporation for the purpose of increasing the authorized capital
stock unless there is a prima facie evidence showing that said shares are ill-gotten and
there is an imminent danger of dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for determining which persons
have the right to vote in the stockholders meeting for the election of the ETPI Board of
Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and his
controlled corporations under the Compromise Agreement, provided that the shares are
first registered in the name of the PCGG. The PCGG may not register the transfer of the
Malacañang and the Nieto shares in the ETPI Stock and Transfer Book; however, it may
vote the same as conservator provided that the PCGG satisfies the two-tiered test devised
by the Court in Cojuangco v. Calpo, supra.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated in
the ETPI Articles of Incorporation substantially contemporaneous to, but not before, the
election of the ETPI Board of Directors.
(5) Members of the Sandiganbayan shall not participate in the stockholders meeting for the
election of the ETPI Board of Directors. Neither shall a Clerk of Court be appointed to call
such meeting and issue notices thereof. The Sandiganbayan shall appoint, or the parties
may agree to constitute, a committee of competent and impartial persons to call, send
notices and preside at the meeting for the election of the ETPI Board of Directors; and
(6) This Court has no jurisdiction over the motion to cite the PCGG and "its accomplices" in
contempt and to nullify the stockholders meeting of March 17, 1997.
WHEREFORE, this Court Resolved to REFER the petitions at bar to the Sandiganbayan
for reception of evidence to determine whether there is a prima facie evidence showing
that the sequestered shares in question are ill-gotten and there is an imminent danger of
dissipation to entitle the PCGG to vote them in a stockholders meeting to elect the ETPI
Board of Directors and to amend the ETPI Articles of Incorporation for the sole purpose of
increasing the authorized capital stock of ETPI.
The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt of
this Resolution and in conformity herewith.
The motion to cite the PCGG and its "accomplices" and to nullify the ETPI Stockholders
Meeting of March 17, 1997 filed by Victor Africa is DENIED for lack of jurisdiction.
SO ORDERED.
CASE 36
G.R. No. 51765 March 3, 1997
REPUBLIC PLANTERS BANK, petitioner,
vs.
HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal,
Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT
CORPORATION and ADALIA F. ROBES, respondents.

HERMOSISIMA, JR., J.:
This is a petition for certiorari seeking the annulment of the Decision1 of the then Court of
First Instance of Rizal2 for having been rendered in grave abuse of discretion. Private
respondents Robes-Francisco Realty and Development Corporation (hereafter, "the
Corporation") and Adalia F. Robes filed in the court a quo, an action for specific
performance to compel petitioner to redeem 800 preferred shares of stock with a face value
of P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend owing them
under the terms and conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents; hence, this instant
petition.
Herein parties debate only legal issues, no issues of fact having been raised by them in the
court a quo. For ready reference, however, the following narration of pertinent transactions
and events is in order:
On September 18, 1961, private respondent Corporation secured a loan from petitioner in
the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks
were issued to private respondent Corporation, through its officers then, private respondent
Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender
totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount
partially in the form of money and partially in the form of stock certificates numbered 3204
and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each,
for a total of P8,000.00. Said stock certificates were in the name of private respondent
Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in
favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after two (2) years from the date of issue at
the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against petitioner and filed a
Complaint anchored on private respondents' alleged rights to collect dividends under the
preferred shares in question and to have petitioner redeem the same under the terms and
conditions of the stock certificates. Private respondents attached to their complaint, a letter-
demand dated January 5, 1979 which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss3 private respondents' Complaint on the following
grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2)
that the action was unenforceable under substantive law; and (3) that the action was barred
by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16,
1979.4 Petitioner then filed its Answer on May 2, 1979. 5 Thereafter, the trial court gave the
parties ten (10) days from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for resolution.6
On September 7, 1979, the trial court rendered the herein assailed decision in favor of
private respondents. In ordering petitioner to pay private respondents the face value of the
stock certificates as redemption price, plus 1% quarterly interest thereon until full payment,
the trial court ruled:
 There being no issue of fact raised by either of the parties who filed
their respective memoranda delineating their respective contentions, a
judgment on the pleadings, conformably with an earlier order of the
Court, appears to be in order.
From a further perusal of the pleadings, it appears that the provision of
the stock certificates in question to the effect that the plaintiffs shall
have the right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating, clearly and unequivocably [sic] indicates
that the same are "interest bearing stocks" which are stocks issued by
a corporation under an agreement to pay a certain rate of interest
thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled
to the payment thereof as a matter of right without necessity of a prior
declaration of dividend.
On the question of the redemption by the defendant of said preferred
shares of stock, the very wordings of the terms and conditions in said
stock certificates clearly allows the same.
To allow the herein defendant not to redeem said preferred shares of
stock and/or pay the interest due thereon despite the clear import of
said provisions by the mere invocation of alleged Central Bank
Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law
itself.
Moreover, the herein defendant is considered in estoppel from taking
shelter behind a General Banking Act provision to the effect that it
cannot buy its own shares of stocks considering that the very terms
and conditions in said stock certificates allowing their redemption are
its own handiwork.
As to the claim by the defendant that plaintiffs' cause of action is
barred by prescription, suffice it to state that the running of the
prescriptive period was considered interrupted by the written
extrajudicial demands made by the plaintiffs from the defendant.7
Aggrieved by the decision of the trial court, petitioner elevated the case before us
essentially on pure questions of law. Petitioner's statement of the issues that it submits for
us to adjudicate upon, is as follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT
ADALIA F. ROBES THE AMOUNT OF P8213.69 AS INTERESTS
FROM 1961 TO 1979 ON HER PREFERRED SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR
P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL
BANK TO PETITIONER TO DESIST FROM REDEEMING ITS
PREFERRED SHARES AND FROM PAYING DIVIDENDS
THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE
COMPLAINT DOES NOT STATE A CAUSE OF ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM
OF RESPONDENT ADALIA F. ROBES IS BARRED BY
PRESCRIPTION OR LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to provide an overview
on the nature of preferred shares and the redemption thereof, considering that these issues
lie at the heart of the dispute.
A preferred share of stock, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to induce
persons to subscribe for shares of a corporation.9 Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1) preferred shares as to
assets; and (2) preferred shares as to dividends. The former is a share which gives the
holder thereof preference in the distribution of the assets of the corporation in case of
liquidation; 10 the latter is a share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are paid to the holders of
common stock. 11 There is no guaranty, however, that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract between the petitioner and
the private respondents was entered into, it was provided that "no corporation shall make or
declare any dividend except from the surplus profits arising from its business, or distribute
its capital stock or property other than actual profits among its members or stockholders
until after the payment of its debts and the termination of its existence by limitation or lawful
dissolution." 12 Similarly, the present Corporation Code 13 provides that the board of
directors of a stock corporation may declare dividends only out of unrestricted retained
earnings. 14 The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may be a more precise term,
in place of "surplus profits arising from its business" in the former law. Thus, the declaration
of dividends is dependent upon the availability of surplus profit or unrestricted retained
earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do
not give them a lien upon the property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the latter. Dividends are
thus payable only when there are profits earned by the corporation and as a general rule,
even if there are existing profits, the board of directors has the discretion to determine
whether or not dividends are to be declared. 15 Shareholders, both common and preferred,
are considered risk takers who invest capital in the business and who can look only to what
is left after corporate debts and liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred, which by their terms
are redeemable at a fixed date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price.17 A redemption by the corporation of its
stock is, in a sense, a repurchase of it for cancellation. 18 The present Code allows
redemption of shares even if there are no unrestricted retained earnings on the books of
the corporation. This is a new provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current retained
earnings. 19 However, while redeemable shares may be redeemed regardless of the
existence of unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover debts and liabilities
inclusive of capital stock. Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the corporation to meet
its debts as they mature. 20
We come now to the merits of the case. The petitioner argues that it cannot be compelled
to redeem the preferred shares issued to the private respondent. We agree. Respondent
judge, in ruling that petitioner must redeem the shares in question, stated that:
On the question of the redemption by the defendant of said preferred
shares of stock, the very wordings of the terms and conditions in said
stock certificates clearly allows the same. 21
What respondent judge failed to recognize was that while the stock certificate
does allow redemption, the option to do so was clearly vested in the petitioner
bank. The redemption therefore is clearly the type known as "optional". Thus,
except as otherwise provided in the stock certificate, the redemption rests
entirely with the corporation and the stockholder is without right to either compel
or refuse the redemption of its stock. 22 Furthermore, the terms and conditions set
forth therein use the word "may". It is a settled doctrine in statutory construction
that the word "may" denotes discretion, and cannot be construed as having a
 mandatory effect. We fail to see how respondent judge can ignore what, in his
words, are the "very wordings of the terms and conditions in said stock
certificates" and construe what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency, 23 and that such finding resulted in a directive, issued on January 31, 1973 by
then Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of the
Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors. 24 Redemption of preferred shares was prohibited for a just and
valid reason. The directive issued by the Central Bank Governor was obviously meant to
preserve the status quo, and to prevent the financial ruin of a banking institution that would
have resulted in adverse repercussions, not only to its depositors and creditors, but also to
the banking industry as a whole. The directive, in limiting the exercise of a right granted by
law to a corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the obligation of
contracts. It has, however, been settled that the Constitutional guaranty of non-impairment
of obligations of contract is limited by the exercise of the police power of the state, the
reason being that public welfare is superior to private rights. 25
The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of One Per Centum (1%) cumulative
and participating, it "clearly and unequivocably (sic) indicates that the same are "interest
bearing stocks" or stocks issued by a corporation under an agreement to pay a certain rate
of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the
payment thereof as a matter of right without necessity of a prior declaration of
dividend." 26 There is no legal basis for this observation. Both Sec. 16 of the Corporation
Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock
dividend without the approval of stockholders, representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the purpose.
These provisions underscore the fact that payment of dividends to a stockholder is not a
matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which
the corporation agrees absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of interest as dividends
from net earnings or surplus only. 27 Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to pay the corresponding dividends,
committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring
both the terms and conditions specified in the stock certificate, as well as the clear mandate
of the law.
Anent the issue of prescription, this Court so holds that the claim of private respondent is
already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides
that a right of action that is founded upon a written contract prescribes in ten (10) years.
The letter-demand made by the private respondents to the petitioner was made only on
January 5, 1979, or almost eighteen years after receipt of the written contract in the form of
the stock certificate. As noted earlier, this letter-demand, significantly, was not formally
offered in evidence, nor were any other evidence of demand presented. Therefore, we
conclude that the only time the private respondents saw it fit to assert their rights, if any, to
the preferred shares of stock, was after the lapse of almost eighteen years. The same
clearly indicates that the right of the private respondents to any relief under the law has
already prescribed. Moreover, the claim of the private respondents is also barred by laches.
Laches has been defined as the failure or neglect, for an unreasonable length of time, to do
that which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a presumption
that the party entitled to assert it either has abandoned it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock certificate clearly indicate
that redemption of the preferred shares may be made at any time after the lapse of two
years from the date of issue, private respondents should have taken it upon themselves,
after the lapse of the said period, to inquire from the petitioner the reason why the said
shares have not been redeemed. As it is, not only two years had lapsed, as agreed upon,
but an additional sixteen years passed before the private respondents saw it fit to demand
their right. The petitioner, at the time it issued said preferred shares to the private
respondents in 1961, could not have known that it would be suffering from chronic reserve
deficiency twelve years later. Had the private respondents been vigilant in asserting their
rights, the redemption could have been effected at a time when the petitioner bank was not
suffering from any financial crisis.
WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the
petitioner is dismissed.
Costs against the private respondents.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Padilla, J., concurs in the result.

CASE 37
G.R. No. 174353 September 10, 2014
NESTOR CHING and ANDREW WELLINGTON, Petitioners,
vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU,
HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R.
SUAREZ, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
review of the Decision1 dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No.
81441, which affirmed the Order2 dated July 8, 2003 of the Regional Trial Court (RTC),
Branch 72 of Olongapo City in Civil Case No. 03-001 dismissing the Complaint filed by
herein petitioners.
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a
Complaint3 with the RTC of Olongapo City on behalf of the members of Subic Bay Golf and
Country Club, Inc. (SBGCCI) against the said country club and its Board of Directors and
officers under the provisions of Presidential Decree No. 902-A in relation to Section 5.2 of
the Securities Regulation Code. The Subic Bay Golfers and Shareholders Incorporated
(SBGSI), a corporation composed of shareholders of the defendant corporation, was also
named as plaintiff. The officers impleaded as defendants were the following: (1)
itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias Jack
Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu Tsung
Tzu. The case was docketed as Civil Case No. 03-001. The complaint alleged that the
defendant corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to
them the Articles of Incorporation which contained the following provision:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends
shall be declared in their favor. Shareholders shall be entitled only to a pro-rata share of the
assets of the Club at the time of its dissolution or liquidation.4
However, on June 27, 1996, an amendment to the Articles of Incorporation was approved
by the Securities and Exchange Commission (SEC), wherein the above provision was
changed as follows:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends
shall be declared in their favor. In accordance with the Lease and Development Agreement
by and between Subic Bay Metropolitan Authority and The Universal International Group of
Taiwan, where the golf courseand clubhouse component thereof was assigned to the Club,
the shareholders shall not have proprietary rights or interests over the properties of the
Club.5 x x x. (Emphasis supplied.)
Petitioners claimed in the Complaint that defendant corporation did not disclose to them the
above amendment which allegedly makes the shares non-proprietary, as it takes away the
rightof the shareholders to participate in the pro-rata distribution of the assets of the
corporation after its dissolution. According to petitioners, this is in fraud of the stockholders
who only discovered the amendment when they filed a case for injunction to restrain the
corporation from suspending their rights to use all the facilities of the club. Furthermore,
petitioners alleged that the Board of Directors and officers of the corporation did not call
any stockholders’ meeting from the time of the incorporation, in violation of Section 50 of
the Corporation Code and the By-Laws of the corporation. Neither did the defendant
directors and officers furnish the stockholders with the financial statements of the
corporation nor the financial report of the operation of the corporation in violation of Section
75 of the Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI
presented to the SEC an amendment to the By-Laws of the corporation suspending the
voting rights of the shareholders except for the five founders’ shares. Said amendment was
allegedly passed without any stockholders’ meeting or notices to the stockholders in
violation of Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the management of
the corporation allegedly committed by the Board of Directors and officers of the
corporation, particularly:
a. The Board of Directors and the officers of the corporation did not indicate in its
financial report for the year 1999 the amount of ₱235,584,000.00 collected from
the subscription of 409 shareholders who paid U.S.$22,000.00 for one (1) share
of stock at the then prevailing rate of ₱26.18 to a dollar. The stockholders were
not informed how these funds were spent or its whereabouts.
b. The Corporation has been collecting green fees from the patrons of the golf
course at an average sum of ₱1,600.00 per eighteen (18) holes but the income is
not reported in their yearly report. The yearly report for the year 1999 contains
the report of the Independent Public Accountant who stated that the company
was incorporated on April 1, 1996 but has not yet started its regular business
operation. The golf course has been in operation since 1997 and as such has
collected green fees from non-members and foreigners who played golf in the
club. There is no financial report as to the income derived from these sources.
c. There is reliable information that the Defendant Corporation has not paid its
rentals to the Subic Bay Metropolitan Authority which up to the present is
estimated to be not less than one (1) million U.S. Dollars. Furthermore, the
electric billings of the corporation [have] not been paid which amounts also to
several millions of pesos.
d. That the Supreme Court sustained the pre-termination of its contract with the
SBMA and presently the club is operating without any valid contract with SBMA.
The defendant was ordered by the Supreme Court to yield the possession, the
operation and the management of the golf course to SBMA. Up to now the
defendants [have] defied this Order.
e. That the value of the shares of stock of the corporation has drastically declined
from its issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos,
(₱200,000.00) Philippine Currency. The shareholders [have] lost in terms
ofinvestment the sum estimated to be more than two hundred thousand
pesos.This loss is due to the fact that the Club is mismanaged and the golf
course is poorly maintained. Other amenities of the Club has (sic) not yet been
constructed and are not existing despite the lapse of morethan five (5) years from
the time the stocks were offered for sale to the public. The cause of the decrease
in value of the sharesof stocks is the fraudulent mismanagement of the club.6
Alleging that the stockholders suffered damages as a result of the fraudulent
mismanagement of the corporation, petitioners prayed in their Complaint for the following:
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary
restraining order be issued enjoining the defendants from acting as Officers and Board of
Directors of the Corporation. After hearing[,] a writ of preliminary injunction be issued
enjoining defendants to act as Board of Directors and Officers of the Corporation. In the
meantime a Receiver be appointed by the Court to act as such until a duly constituted
Board of Directors and Officers of the Corporation be elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred
Thousand Pesos each representing the decrease in value of their shares of stocks plus the
sum of ₱100,000.00 as legal expense and attorney’s fees, as well as appearance fee of
₱4,000.00 per hearing.7
In their Answer, respondents specifically denied the allegations of the Complaint and
essentially averred that:
(a) The subscriptions of the 409 shareholders were paid to Universal
International Group Development Corporation (UIGDC), the majority shareholder
of SBGCCI, from whom plaintiffs and other shareholders bought their shares;8
(b) Contrary to the allegations in the Complaint, said subscriptions were reflected
inSBGCCI’s balance sheets for the fiscal years 1998 and 1999;9
(c) Plaintiffs were never presented the original Articles of Incorporation of
SBGCCI since their shares were purchased after the amendment of the Articles
of Incorporation and such amendment was publicly known to all members prior
and subsequent to the said amendment;10
(d) Shareholders’ meetingshad been held and the corporate acts complained of
were approved at shareholders’ meetings;11
(e) Financial statements of SBGCCI had always been presented to shareholders
justifiably requesting copies;12
(f) Green fees collected were reported in SBGCCI’s audited financial
statements;13
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI
continued to operate under a valid contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in
fact the value of members’ shares have increased.15
Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply
with the requisites for filing a derivative suit and an action for receivership; and (c) to justify
their prayer for injunctive relief since the Complaint may be considered a nuisance or
harassment suit under Section 1(b), Rule1 of the Interim Rules of Procedure for Intra-
Corporate Controversies.16 Thus, they prayed for the dismissal of the Complaint.
On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the
action is a derivative suit, explaining thus:
The Court finds that this case is intended not only for the benefit of the two petitioners. This
is apparentfrom the caption of the case which reads Nestor Ching, Andrew Wellington and
the Subic Bay Golfers and Shareholders, Inc., for and in behalf of all its members as
petitioners. This is also shown in the allegations of the petition[.] x x x.
On the bases of these allegations of the petition, the Court finds that the case is a
derivative suit. Being a derivative suit in accordance with Rule 8 of the Interim Rules, the
stockholders and members may bring an action in the name of the corporation or
association provided that he (the minority stockholder) exerted all reasonable efforts and
allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies
available under the articles of incorporation, by-laws or rules governing the corporation or
partnership to obtain the reliefs he desires. An examination of the petition does not show
any allegation that the petitioners applied for redress to the Board of Directors of
respondent corporation there being no demand, oralor written on the respondents to
address their complaints. Neither did the petitioners appl[y] for redress to the stockholders
of the respondent corporation and ma[k]e an effort to obtain action by the stockholders as a
whole. Petitioners should have asked the Board of Directors of the respondent corporation
and/or its stockholders to hold a meeting for the taking up of the petitioners’ rights in this
petition.17
The RTC held that petitioners failed to exhaust their remedies within the respondent
corporation itself. The RTC further observed that petitioners Ching and Wellington were not
authorized by their co-petitioner Subic Bay Golfers and Shareholders Inc. to filethe
Complaint, and therefore had no personality to file the same on behalf ofthe said
shareholders’ corporation. According to the RTC, the shareholdings of petitioners
comprised of two shares out of the 409 alleged outstanding shares or 0.24% is an
indication that the action is a nuisance or harassment suit which may be dismissed either
motu proprio or upon motion in accordance with Section 1(b) of the Interim Rules of
Procedure for Intra-Corporate Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was
docketed as CA-G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered
the assailed Decision affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the
Complaint they filed with the RTC was not a derivative suit. They claim that they filed the
suit in their own right as stockholders against the officers and Board of Directors of the
corporation under Section 5(a) of Presidential DecreeNo. 902-A, which provides:
Sec. 5. In addition tothe 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 stockholders, partners, members of associations or organizations registered
with the Commission.
According to petitioners, the above provision (which should be read in relation to Section
5.2 of the Securities Regulation Code which transfers jurisdiction over such cases to the
RTC) allows any stockholder to file a complaint against the Board of Directors for
employing devices or schemes amounting to fraud and misrepresentation which is
detrimental to the interest of the public and/or the stockholders.
In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative
suit, it should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to
exhaust remedies within the corporation. Petitioners cite Republic Bank v.
Cuaderno19 wherein the Court allowed the derivative suit even without the exhaustion of
said remedies as it was futile to do so since the Board ofDirectors were all members of the
same family. Petitioners also point out that in Cuadernothis Court held that the fact that
therein petitioners had only one share of stock does not justify the denial of the relief
prayed for.
To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate
remedies on petitioners’ part, they claim that they filed in Court a case for Injunction
docketed as Civil Case No. 103-0-01, to restrain the corporation from suspending their
rights to use all the facilities of the club, on the ground that the club cannot collect
membership fees until they have completed the amenities as advertised when the shares of
stock were sold to them. They allegedly asked the Club to produce the minutes of the
meeting of the Board of Directors allowing the amendments of the Articles of Incorporation
and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a
harassment ornuisance suit before the presentation of evidence. They claim that the
evidence they were supposed to present will show that the members of the Board of
Directors are not qualified managers of a golf course.
We find the petition unmeritorious.
At the outset, it should be noted thatthe Complaint in question appears to have been filed
only by the two petitioners, namely Nestor Ching and Andrew Wellington, who each own
one stock in the respondent corporation SBGCCI. While the caption of the Complaint also
names the "Subic Bay Golfers and Shareholders Inc. for and in behalf of all its members,"
petitioners did not attach any authorization from said alleged corporation or its members to
file the Complaint. Thus, the Complaint is deemed filed only by petitioners and not by
SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the
doctrine that the nature of an action, as well as which court or body has jurisdiction over it,
isdetermined based on the allegations contained in the complaint of the plaintiff,
irrespective of whether or not the plaintiff is entitled to recover upon all or some of the
claims asserted therein.20
We have also held that the body rather than the title of the complaint determines the nature
of an action.21
In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative
suit, anindividual suit, and a representative or class suit:
A derivative suit must be differentiated from individual and representative or class suits,
thus:
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of
directors or other persons may be classified intoindividual suits, class suits, and derivative
suits. Where a stockholder or member is denied the right of inspection, his suit would be
individual because the wrong is done to him personally and not to the other stockholders or
the corporation. Where the wrong is done to a group of stockholders, as where preferred
stockholders’ rights are violated, a class or representative suitwill be proper for the
protection of all stockholders belonging to the same group. But where the acts complained
of constitute a wrong to the corporation itself, the cause of action belongs to the corporation
and not to the individual stockholder or member. Although in most every case of wrong to
the corporation, each stockholder is necessarily affected because the value of his interest
therein would be impaired, this fact of itself is not sufficient to give him an individual cause
of action since the corporation is a person distinct and separate from him, and can and
should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be
violated, but there would be multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore,there is the difficulty of determining the amount of damages that
should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has no redress
because the former are vested by law with the right to decide whether or notthe corporation
should sue, and they will never be willing to sue themselves. The corporation would thus be
helpless to seek remedy. Because of the frequent occurrence of such a situation, the
common law gradually recognized the right of a stockholder to sue on behalf of a
corporation in what eventually became known as a "derivative suit." It has been proven to
be an effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever officials
of the corporation refuse to sue orare the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the nominal party, with
the corporation as the party in interest."
xxxx
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one
hand, and individual and class suits, on the other, are mutually exclusive, viz.:
"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for
the benefit of the corporation and its whole body of shareholders when injury is caused to
the corporation that may not otherwise be redressed because of failureof the corporation to
act. Thus, ‘the action is derivative, i.e., in the corporate right, if the gravamen of the
complaint is injury to the corporation, or to the whole body of its stock and property without
any severance or distribution among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is
one] filed by the shareholder individually (or on behalf of a classof shareholders to which he
or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he two actions are
mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders
(direct action) *651 or the corporation(derivative action)." x x x.
Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the
other shareholder of the corporation negligently managed the business, resulting in its total
failure. x x x. The appellate court concluded that the plaintiff could not maintain the suit as a
direct action: "Because the gravamen of the complaint is injury to the whole body of its
stockholders, it was for the corporation to institute and maintain a remedial action. x x x. A
derivative action would have been appropriate if its responsible officials had refused or
failed to act." x x x. The court wenton to note that the damages shown at trial were the loss
of corporate profits. x x x. Since "[s]hareholders own neither the property nor the earnings
of the corporation," any damages that the plaintiff alleged that resulted from such loss of
corporate profits "were incidental to the injury to the corporation." (Citations omitted.)
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as
officers and Board of Directors of the corporation, the appointment of a receiver, and the
prayer for damages in the amount of the decrease in the value of the sharesof stock,
clearly show that the Complaint was filed to curb the alleged mismanagement of SBGCCI.
The causes of action pleaded by petitioners do not accrue to a single shareholder or a
class of shareholders but to the corporation itself.
However, as minority stockholders, petitioners do not have any statutory right to override
the business judgments of SBGCCI’s officers and Board of Directors on the ground of the
latter’s alleged lackof qualification to manage a golf course. Contraryto the arguments of
petitioners, Presidential Decree No. 902-A, which is entitled REORGANIZATION OF THE
SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND
PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE
OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of action
against waste and diversion by the Board of Directors, but merely identifies the jurisdiction
of the SEC over actionsalready authorized by law or jurisprudence. It is settled that a
stockholder’s right to institute a derivative suit is not based on any express provisionof the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.23
At this point, we should take note that while there were allegations in the Complaint of fraud
in their subscription agreements, such as the misrepresentation of the Articles of
Incorporation, petitioners do not pray for the rescission of their subscription or seekto avail
of their appraisal rights. Instead, they ask that defendants be enjoined from managing the
corporation and to pay damages for their mismanagement. Petitioners’ only possible cause
of action as minority stockholders against the actions of the Board of Directors is the
common law right to file a derivative suit. The legal standing of minority stockholders to
bring derivative suits is not a statutory right, there being no provision in the Corporation
Code or related statutes authorizing the same, but is instead a product of jurisprudence
based on equity. However, a derivative suit cannot prosper without first complying with the
legal requisites for its institution.24
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate
Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and fourth
requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not
have been dismissed on the ground that it is a nuisance or harassment suit. Although the
shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares
or 0.24%, the Court has held that it is enough that a member or a minority of stockholders
file a derivative suit for and in behalf of a corporation.25
With regard, however, to the second requisite, we find that petitioners failed to state with
particularity in the Complaint that they had exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, and laws or rules governing
the corporation to obtain the relief they desire. The Complaint contained no allegation
whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if petitioners
thought it was futile to exhaust intra-corporate remedies, they should have stated the same
in the Complaint and specified the reasons for such opinion. Failure to do so allows the
RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules.
The requirement of this allegation in the Complaint is not a useless formality which may be
disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan26:
The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies are simple and do not leave room for statutory construction. The
second paragraph thereof requires that the stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies availableunder the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires; and to allege such fact with particularityin the complaint. The obvious
intent behind the rule is to make the derivative suit the final recourse of the stockholder,
after all other remedies to obtain the relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the Regional Trial Court
(RTC) of Olongapo City dismissing the Complaint filed thereon by herein petitioners is
AFFIRMED.
SO ORDERED.
TERESITA J.LEONARDO-DE CASTRO**
Acting Chairperson, Associate Justice

CASE 38
G.R. No. 177549 June 18, 2009
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,
vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf
of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which
seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073 of
the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents’ motion, the
Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its
Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court
(RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the
Decision5 dated 10 November 2004 of the RTC which dismissed respondents’ Complaint in
SRC Case No. 022-CEB. Herein petitioners’ Motion for Reconsideration of the Resolution
dated 18 July 2006 was denied by the appellate court in the other assailed Resolution
dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu
(Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S.
Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald
Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc.
(Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware
and industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for
Accounting, Inspection of Corporate Books and Damages through Embezzlement and
Falsification of Corporate Records and Accounts6 before the RTC of Cebu. The said
Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of
Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of
the Complaint was stated in the attached Affidavit executed by respondent Joseph.
According to respondents,7 Winchester, Inc. was established and incorporated on 12
September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares
of stock worth ₱100,000.00.8 Petitioner Anthony paid for the said shares of stock with
respondent Joseph’s money, thus, making the former a mere trustee of the shares for the
latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in
Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S.
Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of
stock in Winchester, Inc., still in petitioner Anthony’s name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its
incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the
corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500
shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners
Rosita and Jason.12
Respondents further averred that although respondent Joseph appeared as the Secretary
and Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled
and ran the said corporation as if it were their own family business. Petitioner Rosita
handled the money market placements of the corporation to the exclusion of respondent
Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also
misappropriating the funds and properties of Winchester, Inc. by understating the sales,
charging their personal and family expenses to the said corporation, and withdrawing
stocks for their personal use without paying for the same. Respondents attached to the
Complaint various receipts13 to prove the personal and family expenses charged by
petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200
shares of stock in petitioner Anthony’s name. Respondents also prayed that petitioners be
ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch
Clerk of Court of the RTC for respondents’ inspection; (2) render an accounting of all the
funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and
family expenses which petitioners charged to Winchester, Inc., as well as the properties of
the corporation which petitioners withheld without payment; and (4) pay respondents’
attorney’s fees and litigation expenses. In the meantime, respondents sought the
appointment of a Management Committee and the freezing of all corporate funds by the
trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory
Counterclaim,14 attached to which was petitioner Anthony’s Affidavit.15 Petitioners
vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent
Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthony’s name. For
the incorporation of Winchester, Inc., petitioner Anthony contributed ₱25,000.00 paid-up
capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the
said amount being paid out of petitioner Anthony’s personal savings and petitioners
Anthony and Rosita’s conjugal funds. Winchester, Inc. was being co-managed by
petitioners and respondents, and the attached receipts, allegedly evidencing petitioners’
use of corporate funds for personal and family expenses, were in fact signed and approved
by respondent Joseph.
By way of special and affirmative defenses, petitioners contended in their Answer with
Compulsory Counterclaim that respondents had no cause of action against them.
Respondents’ Complaint was purely intended for harassment. It should be dismissed under
Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent
before its filing. First, there was no allegation in respondents’ Complaint that earnest efforts
were exerted to settle the dispute between the parties. Second, since respondents’
Complaint purportedly constituted a derivative suit, it noticeably failed to allege that
respondents exerted effort to exhaust all available remedies in the Articles of Incorporation
and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that
respondents’ Complaint was also for inspection of corporate books, it lacked the allegation
that respondents made a previous demand upon petitioners to inspect the corporate books
but petitioners refused. Prayed for by petitioners, in addition to the dismissal of
respondents’ Complaint, was payment of moral and exemplary damages, attorney’s fees,
litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a Management
Committee was commenced. Respondent Joseph submitted therein, as his direct
testimony, the same Affidavit that he executed, which was attached to the respondents’
Complaint. On 4 November 2002, respondent Joseph was cross-examined by the counsel
for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in
order for petitioners to adduce evidence in support of their opposition to the application for
the appointment of a Management Committee.17
During the hearing on 29 November 2002, the parties manifested before the RTC that there
was an ongoing mediation between them, and so the hearing on the appointment of a
Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division
of the stocks in trade,18 the real properties, and the other assets of Winchester, Inc. In
partial implementation of the afore-mentioned amicable settlement, the stocks in trade and
real properties in the name of Winchester, Inc. were equally distributed among petitioners
and respondents. As a result, the stockholders and members of the Board of Directors of
Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution19 dissolving the
corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of
their amicable settlement with respondents. Respondents, however, made their own
manifestation before the RTC that they were repudiating said settlement, in view of the
failure of the parties thereto to divide the remaining assets of Winchester, Inc.
Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.22
On 26 August 2004, instead of holding a formal pre-trial conference and resuming the
hearing on the application for the appointment of a Management Committee, petitioners
and respondents agreed that the RTC may already render a judgment based on the
pleadings. In accordance with the agreement of the parties, the RTC issued, on even date,
an Order23 which stated:
ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties
manifested, agreed and suggested that a judgment may be rendered by the Court in this
case based on the pleadings, affidavits, and other evidences on record, or to be submitted
by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate
Controversies. The suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty (20) days from notice
hereof. Thereafter, the instant case will be deemed submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge
Petitioners and respondents duly filed their respective Memoranda,24 discussing the
arguments already set forth in the pleadings they had previously submitted to the RTC.
Respondents, though, attached to their Memorandum a Supplemental Affidavit25 of
respondent Joseph, containing assertions that refuted the allegations in petitioner
Anthony’s Affidavit, which was earlier submitted with petitioners’ Answer with Compulsory
Counterclaim. Respondents also appended to their Memorandum additional documentary
evidence,26 consisting of original and duplicate cash invoices and cash disbursement
receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were
understating sales and charging their personal expenses to the corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC
Case No. 022-CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby
renders judgment in this case DISMISSING the complaint filed by the [herein respondents].
The Court also hereby dismisses the [herein petitioners’] counterclaim because it has not
been indubitably shown that the filing by the [respondents] of the latter’s complaint was
done in bad faith and with malice.27
The RTC declared that respondents failed to show that they had complied with the
essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
As to respondents’ prayer for the inspection of corporate books and records, the RTC
adjudged that they had likewise failed to comply with the requisites entitling them to the
same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies requires that the complaint for inspection of corporate books or records must
state that:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate
orders or records and/or to be furnished with financial statements under Sections
74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons
given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
The RTC further noted that respondent Joseph was the corporate secretary of Winchester,
Inc. and, as such, he was supposed to be the custodian of the corporate books and
records; therefore, a court order for respondents’ inspection of the same was no longer
necessary. The RTC similarly denied respondents’ demand for accounting as it was clear
that Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph
himself described the audit firm as competent and independent, and believed that the
audited financial statements the said audit firm prepared were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated, the
RTC thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a
Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No.
00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10
December 2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together with the
applicable laws and jurisprudence, WE see no reason or justification for granting the
present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into consideration all the
pleadings and evidence of the parties except the supplemental affidavit of [herein
respondent] Joseph and its corresponding annexes appended in [respondents’]
memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the
complaint for its failure to comply with the mandatory provisions of the Interim Rules of
Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8,
Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. – The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx
RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. – x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires.
xxxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of these Rules, the
complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiff’s right of inspection of
corporate orders or records and/or to be furnished with financial statements
under Section 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to be furnished with
financial statements made by the plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff and the
reasons given for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not complied with the
above quoted provisions. [Respondents] should be mindful that in filing their complaint
which, as admitted by them, is a derivative suit, should have first exhausted all available
remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules
governing the corporation. The contention of [respondent Joseph] that he had indeed made
several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not
tantamount to exhaustion of remedies. What the law requires is to bring the grievance to
the Board of Directors or Stockholders for the latter to take the opportunity to settle
whatever problem in its regular meeting or special meeting called for that purpose which
[respondents] failed to do. x x x The requirements laid down by the Interim Rules of
Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed
with by any stockholder of a corporation before filing a derivative suit.28 (Emphasis ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent
Joseph’s Supplemental Affidavit and other additional evidence, which respondents
belatedly submitted with their Memorandum to the said trial court. The appellate court
ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental affidavit of
[respondent] Joseph and its annexes appended to their memorandum should have been
taken into consideration by the Court a quo to support the reliefs prayed [for] in their
complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic)
inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial conference
conducted on August 26, 2004, the parties through their respective counsels had come up
with an agreement that the lower court would render judgment based on the pleadings and
evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim
Rules of Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the
court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may order the
parties to file simultaneously their respective memoranda within a non-extendible period of
twenty (20) days from receipt of the order. Thereafter, the court shall render judgment,
either full or otherwise, not later than ninety (90) days from the expiration of the period to
file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were submitted only
upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial
briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted
pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence, and
shall show affirmatively that the affiant is competent to testify on the matters stated therein.
The affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the
appropriate pleading; Provided, however, that affidavits, documentary and other evidence
not so submitted may be attached to the pre-trial brief required under these Rules.
Affidavits and other evidence not so submitted shall not be admitted in evidence, except in
the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes
falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the party making an
allegation in a civil case has the burden of proving it by preponderance of evidence."
Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That is,
appellants must adduce evidence that has greater weight or is more convincing that (sic)
which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal
of the complaint but the [respondents] themselves for their lackadaisical attitude in setting
forth and appending their defences belatedly. To admit them would be a denial of due
process for the opposite party which this Court cannot allow.29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the
assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu
City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost
against the [herein respondents].30
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion
for Reconsideration and Motion to Set for Oral Arguments the Motion for
Reconsideration,31 invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies before
filing the present action; and
(2) [The] Honorable Court erred in holding that the supplemental affidavit and its
annexes is (sic) inadmissible because the rules and the lower court expressly
allowed the submission of the same in its order dated August 26, 2004 x x x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents’ Motion to
Set for Oral Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that
transpired during the oral arguments, which took place on 30 March 2006. Counsels for the
parties manifested before the appellate court that they were submitting respondents’ Motion
for Reconsideration for resolution. Justice Magpale, however, still called on the parties to
talk about the possible settlement of the case considering their familial relationship.
Independent of the resolution of respondents’ Motion for Reconsideration, the parties were
agreeable to pursue a settlement for the dissolution of the corporation, which they had
actually already started.
In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit,
within 10 days from notice, their intended amicable settlement, since the same would
undeniably affect the resolution of respondents’ pending Motion for Reconsideration. If the
said period should lapse without the parties submitting an amicable settlement, then they
were directed by the appellate court to file within 10 days thereafter their position papers
instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position
Paper,36 stating that the parties did not reach an amicable settlement. Respondents
informed the appellate court that prior to the filing with the Securities and Exchange
Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already
divided the stocks in trade and the real assets of the corporation among themselves.
Respondents posited, though, that the afore-mentioned distribution of the assets of
Winchester, Inc. among the parties was null and void, as it violated the last paragraph of
Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of
capital stock and as otherwise allowed by the Corporation Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of
all its debts and liabilities." At the same time, however, respondents brought to the attention
of the Court of Appeals that the parties did eventually file with the SEC a petition for
dissolution of Winchester, Inc., which the SEC approved.37
Respondents no longer discussed in their Position Paper the grounds they previously
invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15
February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead
argued that the RTC Decision in question was null and void as it did not clearly state the
facts and the law on which it was based. Respondents sought the remand of the case to
the RTC for further proceedings on their derivative suit and completion of the dissolution of
Winchester, Inc., including the legalization of the prior partial distribution among the parties
of the assets of said corporation.
Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents
of attempting to incorporate extraneous matters into the latter’s Motion for Reconsideration.
Petitioners pointed out that the issue before the Court of Appeals was not the dissolution
and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not
necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting
respondents’ Motion for Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis-à-vis the issues raised by
the [herein respondents’] motion for reconsideration and in view of the formal dissolution of
the corporation which leaves unresolved up to the present the settlement of the properties
and assets which are now in danger of dissipation due to the unending litigation, this Court
finds the need to remand the instant case to the lower court (commercial court) as the
proper forum for the adjudication, disposition, conveyance and distribution of said
properties and assets between and amongst its stockholders as final settlement pursuant to
Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided
for under the same proviso. This is in accord with the pronouncement of the Supreme Court
in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and
which WE quote, viz:
"the corporation continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to settle
and close its affairs, culminating in the disposition and distribution of its remaining assets. It
may, during the three-year term, appoint a trustee or a receiver who may act beyond that
period. The termination of the life of a juridical entity does not by itself cause the extinction
or diminution of the rights and liabilities of such entity x x x nor those of its owners and
creditors. If the three-year extended life has expired without a trustee or receiver having
been expressly designated by the corporation within that period, the board of directors (or
trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete
the corporate liquidation. Still in the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not only the shareholders but likewise
the creditors of the corporation, acting for and in its behalf, might make proper
representation with the Securities and Exchange Commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of
the corporate concerns."
In the absence of a trustee or board of director in the case at bar for purposes above
mentioned, the lower court under Republic Act No. [8799] (otherwise known as the
Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer
of Cases from the Securities and Exchange Commission to the Regional Trial Courts)
which took effect on October 1, 2001, is the proper forum for working out the final
settlement of the corporate concern.39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The
order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED
to the lower court to take the necessary proceedings in resolving with deliberate dispatch
any and all corporate concerns towards final settlement.40
Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was
denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE
CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL
AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT
JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE
ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE
[RESPONDENTS’] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE]
REASON CITED WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT
VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42
The crux of petitioners’ contention is that the Court of Appeals committed grievous error in
reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters,
which had not been previously raised in respondents’ Complaint before the RTC, or in their
Petition for Review and Motion for Reconsideration before the appellate court; i.e., the
adjudication, disposition, conveyance, and distribution of the properties and assets of
Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of
the parties. The fact that the parties were able to agree before the Court of Appeals to
submit for resolution respondents’ Motion for Reconsideration of the 15 February 2006
Decision of the same court, independently of any intended settlement between the parties
as regards the dissolution of the corporation and distribution of its assets, only proves the
distinction and independence of these matters from one another. Petitioners also contend
that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting
respondents’ Motion for Reconsideration, failed to clearly and distinctly state the facts and
the law on which it was based. Remanding the case to the RTC, petitioners maintain, will
violate the very essence of the summary nature of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation,
and revert the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a
derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to
compel petitioners to account for and reimburse to the said corporation the corporate
assets and funds which the latter allegedly misappropriated for their personal benefit.
During the pendency of the proceedings before the court a quo, the parties were able to
reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc.
among themselves. This amicable settlement was already partially implemented by the
parties, when respondents repudiated the same, for which reason the RTC proceeded with
the case on its merits. On 10 November 2004, the RTC promulgated its Decision
dismissing respondents’ Complaint for failure to comply with essential pre-requisites before
they could avail themselves of the remedies under the Interim Rules of Procedure
Governing Intra-Corporate Controversies; and for inadequate substantiation of
respondents’ allegations in said Complaint after consideration of the pleadings and
evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the
findings of the RTC that respondents did not abide by the requirements for a derivative suit,
nor were they able to prove their case by a preponderance of evidence. Respondents filed
a Motion for Reconsideration of said judgment of the appellate court, insisting that they
were able to meet all the conditions for filing a derivative suit. Pending resolution of
respondents’ Motion for Reconsideration, the Court of Appeals urged the parties to again
strive to reach an amicable settlement of their dispute, but the parties were unable to do so.
The parties were not able to submit to the appellate court, within the given period, any
amicable settlement; and filed, instead, their Position Papers. This effectively meant that
the parties opted to submit respondents’ Motion for Reconsideration of the 15 February
2006 Decision of the Court of Appeals, and petitioners’ opposition to the same, for
resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents’ allegation in their Position Paper that the parties
subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of
Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the
corporate concerns between the parties regarding Winchester, Inc. could be resolved
towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court of
Appeals converted the derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein he holds stocks in order to
protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue,
or are the ones to be sued, or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest.
A derivative action is a suit by a shareholder to enforce a corporate cause of action. The
corporation is a necessary party to the suit. And the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation has a defense to
an action against it and is not asserting it, a stockholder may intervene and defend on
behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the
Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative
suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M.
No. 00-11-03-SC promulgated on 21 November 2000.
In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is
specifically governed by Section 122 of the Corporation Code, which reads:
SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal interest
vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the process
of settling the affairs of said corporation, which consists of adjusting the debts and claims,
that is, of collecting all that is due the corporation, the settlement and adjustment of claims
against it and the payment of its just debts.44 More particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all assets, the payment of
all its creditors, and the distribution of the remaining assets, if any among the stockholders
thereof in accordance with their contracts, or if there be no special contract, on the basis of
their respective interests. The manner of liquidation or winding up may be provided for in
the corporate by-laws and this would prevail unless it is inconsistent with law.45
It may be undertaken by the corporation itself, through its Board of Directors; or by trustees
to whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the
SEC upon its decree dissolving the corporation.46lawphil.net
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation
proceedings. They are neither part of each other nor the necessary consequence of the
other. There is totally no justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of
Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they
agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said
corporation, it must be pointed out that respondents themselves repudiated said amicable
settlement before the RTC, even after the same had been partially implemented; and
moved that their case be set for pre-trial. Attempts to again amicably settle the dispute
between the parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final
settlement of corporate concerns" was solely grounded on respondents’ allegation in its
Position Paper that the parties had already filed before the SEC, and the SEC approved,
the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute
lack of evidence on record to prove said allegation. Respondents failed to submit copies of
such petition for dissolution of Winchester, Inc. and the SEC Certification approving the
same. It is a basic rule in evidence that each party must prove his affirmative allegation.
Since it was respondents who alleged the voluntary dissolution of Winchester, Inc.,
respondents must, therefore, prove it.47 This respondents failed to do.
Even assuming arguendo that the parties did submit a petition for the dissolution of
Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still
without jurisdiction to order the final settlement by the RTC of the remaining corporate
concerns. It must be remembered that the Complaint filed by respondents before the RTC
essentially prayed for the accounting and reimbursement by petitioners of the corporate
funds and assets which they purportedly misappropriated for their personal use; surrender
by the petitioners of the corporate books for the inspection of respondents; and payment by
petitioners to respondents of damages. There was nothing in respondents’ Complaint which
sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution
of Winchester, Inc. could not have resulted in the conversion of respondents’ derivative suit
to a proceeding for the liquidation of said corporation, but only in the dismissal of the
derivative suit based on either compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court
of Appeals already went beyond the issues raised in respondents’ Motion for
Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February
2006 Decision, the dismissal by the RTC of respondents’ Complaint due to respondents’
failure to comply with the requirements for a derivative suit and submit evidence to support
their allegations, the Court of Appeals unduly concentrated on respondents’
unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously
ordered the remand of the case to the RTC for proceedings so vitally different from that
originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits of
respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of
Appeals, for the sake of finally putting an end to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently
exhausted all remedies before filing the derivative suit; and (2) respondent Joseph’s
Supplemental Affidavit and its annexes should have been taken into consideration, since
the submission thereof was allowed by the rules of procedure, as well as by the RTC in its
Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies before
filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of
Appeals in its Decision dated 16 February 2006.1avvphi1
The Court has recognized that a stockholder’s right to institute a derivative suit is not based
on any express provision of the Corporation Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws make corporate directors or officers liable
for damages suffered by the corporation and its stockholders for violation of their fiduciary
duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is otherwise without
redress. In effect, the suit is an action for specific performance of an obligation owed by the
corporation to the stockholders to assist its rights of action when the corporation has been
put in default by the wrongful refusal of the directors or management to make suitable
measures for its protection. The basis of a stockholder’s suit is always one in equity.
However, it cannot prosper without first complying with the legal requisites for its
institution.48
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies lays down the following requirements which a stockholder must comply with
in filing a derivative suit:
Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
A perusal of respondents’ Complaint before the RTC would reveal that the same did not
allege with particularity that respondents exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing
Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in
respondent Joseph’s Affidavit, which was attached to respondents’ Complaint. Respondent
Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner
Anthony to settle their differences, but the latter would not listen. Respondents additionally
claimed that taking further remedies within the corporation would have been idle ceremony,
considering that Winchester, Inc. was a family corporation and it was impossible to expect
petitioners to take action against themselves who were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies are simple and do not leave room for statutory construction. The
second paragraph thereof requires that the stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires; and to allege such fact with particularity in the complaint. The obvious
intent behind the rule is to make the derivative suit the final recourse of the stockholder,
after all other remedies to obtain the relief sought had failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to
exhaust all remedies available." Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents unsuccessfully availed
themselves of. And the Court is not prepared to conclude that the articles of incorporation
and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves
from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient,
compared to the seriousness of respondents’ accusations of fraud, misappropriation, and
falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a
family corporation should not in any way exempt respondents from complying with the clear
requirements and formalities of the rules for filing a derivative suit. There is nothing in the
pertinent laws or rules supporting the distinction between, and the difference in the
requirements for, family corporations vis-à-vis other types of corporations, in the institution
by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1,
Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the
respondents’ Complaint failed to allege, explicitly or otherwise, the fact that there were no
appraisal rights available for the acts of petitioners complained of, as well as a categorical
statement that the suit was not a nuisance or a harassment suit.
As to respondents’ second ground in their Motion for Reconsideration, the Court agrees
with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent
Joseph’s Supplemental Affidavit and additional evidence were inadmissible since they were
only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear
that:
Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal
knowledge, shall set forth such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the matters stated therein. The
affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the
appropriate pleading, Provided, however, that affidavits, documentary and other evidence
not so submitted may be attached to the pre-trial brief required under these Rules.
Affidavits and other evidence not so submitted shall not be admitted in evidence, except in
the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should attach the affidavits of
witnesses and other documentary evidence to the appropriate pleading, which generally
should mean the complaint for the plaintiff and the answer for the respondent. Affidavits
and documentary evidence not so submitted must already be attached to the respective
pre-trial briefs of the parties. That the parties should have already identified and submitted
to the trial court the affidavits of their witnesses and documentary evidence by the time of
pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies require that the following matters should already
be set forth in the parties’ pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for
availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof,
whichever comes later, the court shall issue and serve an order immediately setting the
case for pre-trial conference, and directing the parties to submit their respective pre-trial
briefs. The parties shall file with the court and furnish each other copies of their respective
pre-trial brief in such manner as to ensure its receipt by the court and the other party at
least five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;
xxxx
(7) Names of witnesses to be presented and the summary of their testimony as contained
in their affidavits supporting their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or otherwise and their respective
purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies,49 it is the duty of the court to ensure during the pre-trial
conference that the parties consider in detail, among other things, objections to the
admissibility of testimonial, documentary, and other evidence, as well as objections to the
form or substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be
attached to a party’s pre-trial brief, at the very last instance, so that the opposite party is
given the opportunity to object to the form and substance, or the admissibility thereof. This
is, of course, to prevent unfair surprises and/or to avoid the granting of any undue
advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC,
even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other evidence
submitted by the parties, a judgment may be rendered, the court may order the parties to
file simultaneously their respective memoranda within a non-extendible period of twenty
(20) days from receipt of the order. Thereafter, the court shall render judgment, either full or
otherwise, not later than ninety (90) days from the expiration of the period to file the
memoranda.
Even then, the afore-quoted provision still requires, before the court makes a determination
that it can render judgment before pre-trial, that the parties had submitted their pre-trial
briefs and the court took into consideration the pleadings, affidavits and other evidence
submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-
trial, do not depart from or constitute an exception to the requisite that affidavits of
witnesses and documentary evidence should be submitted, at the latest, with the parties’
pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies parties are required to file their
memoranda simultaneously, the same would mean that a party would no longer have any
opportunity to dispute or rebut any new affidavit or evidence attached by the other party to
its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul
the former party’s constitutional right to due process.
In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the
additional documentary evidence, appended by respondents only to their Memorandum
submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in
its 15 February 2006 Decision for having been belatedly submitted. Respondents neither
alleged nor proved that the documents in question fall under any of the three exceptions to
the requirement that affidavits and documentary evidence should be attached to the
appropriate pleading or pre-trial brief of the party, which is particularly recognized under
Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of
Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April
2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET
ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby
AFFIRMED. No costs.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice

CASE 39
[ GR Nos. 202647-50, Mar 09, 2016 ]
CORAZON H. RICAFORT v. ISAIAS P. DICDICAN +
DECISION

REYES, J.:
Before this Court are two joint petitions: (i) G.R. Nos. 202647-50, for certiorari and
prohibition under Rule 65 seeking to set aside the Resolution[1] dated June 13, 2012 of the
Court of Appeals (CA) Special 14 7 Division in four consolidated petitions before it, namely,
CA-G.R. SP Nos. 122782, 122784, 122853, and 122854, which granted the application for
Writ of Preliminary Injunction (WPI) of the Nationwide Development Corporation
(NADECOR), Roberto R. Romulo (Romulo), Conrado T. Calalang (Calalang), Alfredo I.
Ayala (Ayala), John Engle (Engle), Leocadio Nitorreda (Nitorreda) and Luis Manuel L.
Gatmaitan (Gatmaitan) (private respondents);[2] and (ii) GR. Nos. 205921-24, for review
on certiorari under Rule 45 of the Rules of Court from the CA Special 14th Division's
consolidated Decision[3] dated February 18, 2013 in CA-G.R. SP Nos. 122782, 122784,
122853, and 122854, which nullified and set aside the Order[4] dated December 21, 2011 of
the Regional Trial Court (RTC) of Pasig City, Branch 159, in SEC Case No. 11-164, and
made permanent the WPI it issued on June 13, 2012.[5]

Antecedent Facts
The NADECOR is a domestic company which was first registered with the Securities and
Exchange Commission (SEC) on September 6, 1956. It is the holder of a Mining Production
Sharing Agreement (MPSA), MPSA 009-92-XI, with the Department of Environment and
Natural Resources (DENR), which covers the King-king Gold and Copper Project (King-
king Project), a 1,656-hectare gold and copper mining concession in Barangay King-king,
Municipality of Pantukan, Province of Compostela Valley in Mindanao. The King-king
Project is the second largest copper and gold mine in the country with proven copper
deposits of 5.4 billion pounds and gold deposits of 10.3 million troy ounces.[6]

Pursuant to Section 1, Article I of NADECOR's Amended By-Laws,[7] its regular annual

stockholders' meeting (ASM) was held on August 15, 2011 to elect its Board of Directors for
Fiscal Year (FY) 2011-2012. The meeting was held in the Turf Room of the Manila Polo
Club, South Forbes Park, Makati City. In his Affidavit[8] dated November 21, 2011,
Gatmaitan, NADECOR Corporate Secretary, attested to the presence of a quorum
representing 94.81% of NADECOR's outstanding shares of stock, and the election of new
set of its Board of Directors, namely, Calalang, Jose G. Ricafort (JG Ricafort), Jose P. De
Jesus (De Jesus), Romulo, Ayala, Victor P. Lazatin (Lazatin), Ethelwoldo E. Fernandez
(Fernandez), Nitorreda and Engle.[9]

But on October 20, 2011, more than two months after the ASM, Corazon H. Ricafort
(Corazon), wife of JG Ricafort, along with their children, Jose Manuel H. Ricafort (Jose
Manuel), Marie Grace H. Ricafort (Marie Grace) (petitioners), and Maria Teresa Flora R.
Santos (Maria Teresa) (plaintiffs), claiming to be stockholders of record, filed a complaint
before the RTC to declare null and void "the 15 August 2011 [ASM] of NADECOfRJ,
including all proceedings taken thereat, all the consequences thereof, and all acts carried
out pursuant thereto,"[10] against NADECOR itself, the newly-elected members of its Board
of Directors, and Gatmaitan (defendants). The plaintiffs alleged, among others, that "they
had no knowledge or prior notice of, and were thus unable to attend, participate in, and
vote at, the said [ASM]"[11] since they received the notice of the ASM only on August 16,
2011, or one day late, in violation of the three-day notice provided in NADECOR's By-Laws;
that due to lack of notice, they failed to attend the said ASM and to exercise their right as
stocldiolders to participate in the management and control of NADECOR. They further
noted that the notice announced a time and venue different from those set forth in the By-
Laws.[12]

Gatmaitan filed his Answer with Application for Hearing on Affirmative Defenses dated
November 18, 2011;[13] Calalang, Romulo, Ayala, Engle and Nitorreda filed their Answer
with Compulsory Counterclaim dated November 21, 2011;[14] and NADECOR filed its
Answer dated November 23, 2011.[15] The defendants sought the dismissal of SEC Case
No. 11-164 on the following grounds: that the complaint involved an election contest, since
in effect it sought to nullify the election of the Board of Directors of NADECOR for FY2011-
2012, and under Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies (Interim Rules),[16] it should have been filed within 15 days from
the date of the election; that the complaint is not only barred by prescription for having been
filed more than two months after the ASM complained of, but the plaintiffs have no cause of
action because they were duly served with notice of the said meeting, as shown in the
affidavit dated October 13, 2011 of the NADECOR messenger, Mario S. San Juan (San
Juan), who mailed the notices on August 11, 2011 at the Ortigas Post Office to all
stockholders of record of NADECOR, four days prior to the scheduled ASM; that a valid
ASM was held on August 15, 2011, the third Monday of August 2011, at which the required
quorum was present and successfully conducted business; that the plaintiffs although
physically absent were in fact represented by their proxy, JG Ricafort, by virtue of
irrevocable proxies which they executed; that JG Ricafort attended and signed the
attendance sheet as the plaintiffs' proxy and participated in the ASM for himself as well as
in the plaintiffs' behalf; that the true and beneficial owner of the shares of stock issued in
the plaintiffs' names is JG Ricafort, not the plaintiffs, as shown in the Nominee Agreements
which they executed; that aided by the irrevocable proxies and Nominee Agreements, JG
Ricafort won election to the NADECOR Board.

In its now assailed Order dated December 21, 2011, the RTC ruled that the petitioners
were not validly served with notice of the ASM as required in the Amended By-Laws, and
moreover, that their complaint did not involve an election contest, and thus, was not subject
to the 15-day prescriptive period for filing an election protest under Section 3, Rule 6 of the
Interim Rules.[17] The trial court explained:

Contrary to defendants' claims, none of the [petitioners] is claiming any elective office in
NADECOR. Neither are they questioning the manner and validity of the elections, and
qualifications of the candidates for directorship. [Petitioners'] prayer is clear that they seek
to have the August 15, 2011 [ASM] declared null and void due to fatal defects committed
prior to said meeting. The nullification of the proceedings, including the elections is not only
incidental or the logical consequence of a declaration of nullity of the [ASM].

The complaint, not being an election contest, need not comply with the requirements stated
in Rule 6, Section 3 of the Interim Rules.[18]

The RTC thus declared as "void and of no force and effect" the assailed ASM, nullified all
acts performed by the new Board of Directors elected thereat, and ordered the holding
within 30 days of another ASM for FY2011-2012, to wit:

IN VIEW OF THE FOREGOING, this Court GRANTS, as it hereby GRANTS, the relief

prayed for in the complaint, and [DENIES] all compulsory counterclaims for lack of merit.
Consequently, [NADECOR's] 2011 [ASM] held on August 15, 2011 is hereby declared
NULL and VOID, including ALL matters taken up during said [ASM]. Any other acts,
decisions, deeds, incidents, matters taken up arising from and subsequent to the 2011
[ASM] are hereby likewise declared VOID and OF NO FORCE and EFFECT.

Defendant NADECOR is hereby directed to: (a) issue a new notice to all stockholders for
the conduct of an [ASM] corresponding to the year 2011 since the [ASM] held on August
15, 2011 was declared VOID, ensuring their receipt within three (3) days from the intended
date of the annual meeting and (b) hold the [ASM] within thirty (30) days from receipt of this
Order.

No pronouncements as to cost.

SO ORDERED.[19]

The RTC refused to apply the case of Yujuico v. Quiambao[20] invoked by the defendants on
the issue of whether SEC Case No. 11-164 involves an election contest. It reasoned that
the petitioners did not seek to annul the election of NADECOR's Board of Directors for
FY2011-2012, but rather to void all the proceedings had at the August 15, 2011 ASM, and
to call for the holding of a new stockholders' meeting, whereas in Yujuico the complaint
specifically sought to nullify the results of the election for the new members of the Board of
Directors.[21]

As for the irrevocable proxies executed by the plaintiffs in favor of JG Ricafort, the trial
court held that the proxies were not valid as they were really only intended as "comfort
documents to give [JG Ricafort] control of NADECOR,"[22] and moreover, the proxies must
be deemed to have been amended by the Special Power of Attorney[23] (SPA) which the
plaintiffs executed on April 27, 2010 in favor of JG Ricafort pertaining to NADECOR's
ongoing negotiations with Russel Mining and Minerals, Inc. and St. Augustine Mining Ltd.[24]

The RTC Order dated December 21, 2011 elicited the filing in the CA of four separate
petitions for certiorari by the private respondents against the plaintiffs, with application for
temporary restraining order (TRO) and/or a WPI, to wit:

a. CA-G.R. SP No. 122782 dated January 5, 2012 filed by Romulo.[25] The case was
raffled to the Special 15th Division,26 with Associate Justice Jane Aurora C.
Lantion (Justice Lantion) as the ponente, and Associate Justices Isaias P.
Dicdican (Justice Dicdican) and Angelita A. Gacutan (Justice Gacutan) as
members.

b. CA-G.R. SP No. 122784 dated January 5, 2012 filed by Calalang, Ayala, Engle
and Nitorreda (Calalang group).[27] The case was raffled to the 11th Division.

c. CA-G.R. SP No. 122853 dated January 6, 2012 filed by NADECOR.[28] The case

was raffled to the 6th Division.

d. CA-G.R. SP No. 122854 dated January 6, 2012 filed by Gatmaitan.[29] The case

was raffled to the 9th Division.

On January 16, 2012, the CA Special 15th Division denied the application for TRO and WPI
in CA-G.R. SP No. 122782.[30] But on the same day, the CA 11th Division issued a TRO in
CA-G.R. SP No. 122784,[31] after finding that the three conditions for the issuance of an
injunctive relief were present, namely: (a) the prima facie existence of the right of the
Calalang group sought to be protected; (b) the act sought to be enjoined is violative of that
right; and (c) there is an urgent and paramount necessity for the writ to prevent serious
damage to NADECOR.[32] The 11th Division's order reads:

WHEREFORE, in view of the foregoing, pending the determination by this Court of the
merits of the Petition, the Court GRANTS [Calalang group's] prayer for the issuance of a
[TRO], to prevent the implementation and execution of the assailed Order dated December
21, 2011 of the [RTC], Branch 159, Pasig City.

The TRO is conditioned upon the filing by the [Calalang group] of the bond in the amount
of ONE HUNDRED THOUSAND (P100,000.00) PESOS each, which shall answer for
whatever damages that [plaintiffs] may incur in the event that the Court finds [Calalang
group] not entitled to the injunctive relief issued. The TRO shall be effective for sixty (60)
days upon posting of the required bond unless earlier lifted or dissolved by the Court.

During the effectivity of the TRO, the Board of Directors elected and serving before the
August 15, 2011 Stockholders['] Meeting shall discharge their functions as Directors in
a hold-over capacity in order to prevent any hiatus and so as not to unduly prejudice the
corporation.

[Plaintiffs] are REQUIRED to submit their Comment to [Calalang group's] petition and why
a WPI should not be issued within TEN (10) days from notice, and [Calalang group], their
Reply thereon, within FIVE (5) days from receipt of the said Comment.

SO ORDERED.[33] (Underlining ours and emphasis in the original)

Thus, the CA 11th Division directed not only the Board of Directors elected on August 15,
2011 (New Board) to cease its functions until CA-G.R. SP No. 122784 has been resolved
on the merits, but it also ordered the immediately preceding Board (Old Board), whose
term had expired on August 15, 2011, to act as "hold-over" Board for the duration of the
TRO, "to prevent any hiatus and so as not to unduly prejudice the corporation."[34]

On February 8, 2012, the CA Special 15th Division ordered the consolidation of the four CA
petitions;[35] on February 24, 2012, the CA 9th Division consolidated CA-G.R. SP No.
122854 with CA-G.R. SP No. 122782;[36] on March 9, 2012, the CA 10th Division (formerly
11th Division) approved the consolidation of CA-G.R. SP No. 122784 with CA-G.R. SP No.
122782.[37] In its now assailed Resolution dated June 13, 2012, the CA Special 14th Division
(formerly Special 15th Division) included CA-G.R. SP No. 122853 in its caption, implying
that the CA 611 Division had acceded to its consolidation with the three other petitions.

The petitioners filed a Comment Ad Cautelam dated February 17, 2012 to the petition in
CA-G.R. SP No. 122784.[38] Thereafter, the Calalang group filed three urgent motions to
resolve their application for WPI, dated March 8, 2012,[39] May 21, 2012[40] and June 6,
2012.[41]

On June 6, 2012, before the CA could resolve the Calalang group's application for
WPI, Deogracias G. Contreras, Jr. (Contreras), acting as Corporate Secretary of the Old
Board, issued a notice of special stockholders' meeting (SSM) on June 13, 2012 at 12:30
p.m. at the Jollibee Centre Building in Pasig City. The notice was published on June 7,
2012 in The Philippine Star[42] Not long after the announcement, the CA issued the now
assailed WPI, also on June 13, 2012.

As published, among the agenda of the June 13, 2012 SSM were:

Ratification of the rescission by the Old Board of NADECOR's memoranda of

(a) understanding (MOUs) with St. Augustine Gold and Copper Ltd. and St.
Augustine Mining, Ltd., (St. Augustine group), both dated April 27, 2010;
(b) Ratification of the subscription by a new investor, Queensberry Mining and
Development Corporation (Queensberry), controlled by the group of former
 Senator Manuel Villar (Villar Group), to 25% of NADECOR's capital stock for PI.8
Billion, a price which the petitioners' claim is 60 times the book value of
NADECOR's shares (of the said price Queensberry had paid P335 Million as of
September 13, 2012[43]); the Old Board approved the subscription on May 25,
2012;[44] and
(c) Election of Directors.

The Calalang group filed a Supplement to Third Urgent Motion to Resolve with
Manifestation[45] dated June 7, 2012, wherein they contended that the rescission by the Old
Board of NADECOR's MOUs with the St. Augustine group would result in grave and
irreparable damage to NADECOR since, according to them, only the St. Augustine Group
has the financial and technical capability to develop the King-king Project, with the reminder
that NADECOR's MPSA over King-king Project is its only valuable corporate asset.

On June 13, 2012 at 12:30 p.m., the SSM called by the Old Board took place as scheduled,
presided by Calalang. But while the meeting was in progress, Calalang's counsel received
a facsimile of the assailed Resolution dated June 13, 2012 of the CA Special 14th Division
granting the Calalang group's application for WPI. Whereupon, on motion by his counsel,
Calalang declared the SSM adjourned, but he was overruled by the stockholders
representing 64% of the outstanding shares, counting the Queensberry shares. In protest,
Calalang and his minority group walked out of the meeting, but the meeting continued after
De Jesus, NADECOR's President, was designated to preside over the meeting. A new set
of directors (Third Board) was elected, and the rescission of NADECOR's MOUs with the
St. Augustine group and the 25% subscription of Queensberry were ratified by the
assembly.[46]

The fallo of the CA Resolution dated June 13, 2012 reads:

WHEREFORE, premises considered, the application for a [WPI] is GRANTED. Let a [WP1]
be issued enjoining the implementation of the Order dated December 21, 2011 of the [RTC]
of Pasig City, Branch 159 and allowing the Board of Directors elected during the August 15,
2011 [ASM] to continue to act as Board of Directors of NADECOR.

Likewise, the parties, including the hold-over Board of Directors elected and acting before
the August 15, 2011 [ASM] are enjoined and prohibited from acting as hold-over board and
from scheduling and holding any stockholders' meeting, including the scheduled June 13,
2012 stockholders' meeting. Any effects of said June 13, 2012 stockholders' meeting,
including the ratification of the rescission of all MOUs dated April 27, 2010 and Related
Transaction Agreements between NADECOR and [St. Augustine group], the election of any
new Board of Directors and their acting as such thereafter and the sale and ratification of
the sale of Unissued Certificates of Shares of NADECOR constituting 25% of its authorized
capital stock to Queensberry are also hereby enjoined.

[Private respondents] are thus mandated to post a bond of Five Hundred Thousand Pesos
(P500,000.00) to answer for any damages which may result by virtue of the [WPI].

SO ORDERED.[47]

The assailed resolution was penned by Associate Justice Ramon Bato, Jr. (Justice Bato),
acting Senior Member of the CA Special 14th Division, vice Justice Lantion to whom CA-
G.R. SP No. 122782 had been initially assigned, but who was on a 15-day leave beginning
on June 1, 2012.[48] It enjoined the holding of the June 13, 2012 SSM and suspended the
effects of all actions taken thereat, specifically the ratification of the rescission of the MOUs
and Related Transaction Agreements with the St. Augustine group to develop the King-king
Project, the election of a new Board of Directors and their acting as such, and the
ratification of Queensberry's 25% subscription to NADECOR's capital stock. The CA also
allowed the New Board "to continue to act as Board of Directors of NADECOR,"[49] thereby
reversing the CA 11th Division in CA-G.R. SP No. 122784.

The CA Special 14th Division justified its issuance of a WPI by citing new and subsequent
matters which it said could not have been contemplated in the RTC Order dated December
21, 2011, such as the rescission of NADECOR's MOUs with the St. Augustine group, and
the sale of 25% of NADECOR's capital stock to Queensberry. It determined that as
stockholders and members of the New Board, the petitioners have a right in esse to
preserve the only valuable property of NADECOR, its MPSA over the King-King Project,
that the action of the Old Board of calling the June 13, 2012 SSM violated the TRO issued
by the CA 11th Division, and that the special agenda taken at the said meeting could
adversely affect the future viability of NADECOR.[50]

The CA also acknowledged that the MOUs with the St. Augustine group reflected
NADECOR's determination that the former had the technical and financial capabilities to
put the King-king Project into production, and thus, the rescission thereof might result in.
the recall by the DENR of the MPSA, to NADECOR's irreparable injury.[51] Moreover, the
June 13, 2012 SSM would render moot and academic the four consolidated CA petitions,
since a "third" Board which would be elected thereat could effectively supplant the New
Board while the validity of the latter's election was pending resolution.

On June 15, 2012, the Third Board issued a resolution calling for the next ASM on August
22, 2012.[52]

Meanwhile, the petitioners received a copy of the assailed CA Resolution on June 14,
2012;[53] on June 14, 2012, the CA directed all the parties to the four certiorari petitions to
simultaneously submit their Memoranda on the merits within 15 days;[54] the petitioners filed
their Memorandum Ad Cautelam dated July 5, 2012, Romulo filed his Memorandum dated
July 11, 2012, and the Calalang group filed their Memorandum dated July 17, 2012.[55]

The petitioners filed its motion for reconsideration dated June 21, 2012 of the CA
Resolution[56] dated June 13, 2012 contending that it is void ab initio because (a) the CA
Special 14th Division had no jurisdiction to issue the WPI because its Resolution was
penned by Justice Bato, a mere acting Senior Member vice the regular ponente, Justice
Lantion, to whom the consolidated CA petitions had been raffled;[57] (b) the Calalang
group's "Third Urgent Motion to Resolve" and "Supplement to Third Urgent Motion to
Resolve" in CA-G.R. SP No. 122784, which the CA Special 14th Division acted upon,
were unverified and contained "new matters and subsequent events";[58] and (c) the
Calalang group's application for a WPI was granted without notice and hearing as required
under Section 5, Rule 58 of the Rules of Court.[59]

The petitioners further alleged that the Calalang group failed to post a timely injunction
bond of P500,000.00;[60] that the Resolution dated June 13, 2012 had become moot and
academic because the acts it sought to enjoin were already fait accompli, namely, (a) the
holding of the June 13, 2012 SSM, wherein 67% of the outstanding shares was present
and voted, (b) the rescission of the MOUs with the St. Augustine group, and (c) the
issuance of 25% shares of stock to Queensberry; that the CA resolution disrupted the
status quo ordered by the CA 11th Division since it did not merely maintain the status quo
ante litem motam, but in fact it created new relationships between the parties by ordering
the New Board to replace the Old Board, notwithstanding that the members of the latter
had not been impleaded in the CA petitions and therefore were not bound thereby; that the
powers of the Old Board included not merely the maintenance of the status quo, but all
powers which a regular Board might exercise; that there was no showing of irreparable
injury to the Calalang group, whereas the acts of the Old Board involved business judgment
intended to preserve and protect NADECOR against the contractual violations of the St.
Augustine group, such as its self-dealing with affiliates, bloated and fraudulent project
expenses, non-payment of project expenses, and non-infusion of committed capital totalling
US$96.7 Million, not only US$32 Million, to justify their 60% interest in King-king Project;
[61]
 that after St. Augustine group threatened to pull out, the Old Board sought a new partner
to obtain the much-needed capital infusion; that Queensberry was willing to pay P1.8 Billion
for a mere 25%, not 60%, interest in NADECOR, for a price premium equal to 60 times the
par value of its shares, whereas the Calalang group offered only 20 times above the par
value;[62] and finally, that the Calalang group is guilty of forum shopping.[63]

On July 20, 2012, the CA Special 14th Division resolved to hold in abeyance further actions
on the pending incidents until the Committee on Internal Rules of the CA (IRCA) had made
its recommendation on whether Justice Bato should retain and resolve the
consolidated certiorari petitions, or whether they should be returned to the original ponente,
Justice Lantion.[64] On December 18, 2012, the Committee on IRCA recommended that the
cases "should remain consolidated with the special division that issued a [WPI] regardless
of the fact that [Justice] Bato acted thereat merely as a substitute for [Justice]
Lantion."[65] The recommendation was approved by Presiding Justice Andres Reyes in his
Memorandum dated January 11, 2013.[66] On February 7, 2013, the CA dismissed[67] the
petitioners' motion for inhibition against Justices Dicdican, Bato and Eduardo B. Peralta, Jr.
(Justice Peralta) (respondent Justices).

Meanwhile, on July 23, 2012, the petitioners filed a Manifestation of Withdrawal of Motion
for Reconsideration,[68] without giving an explanation.

G.R. Nos. 202647-50

On August 1, 2012, the petitioners filed before this Court the herein first joint petition
for certiorari, G.R. Nos. 202647-50, with prayer for issuance of a TRO. It reiterated the
grounds invoked in their aforesaid withdrawn motion for reconsideration. To justify their
petition, they pointed out that the WPI of the CA remained in force and the CA Special
14th Division had not relinquished control of the CA petitions, and thus it could still
undertake further actions; and, they were without remedy a quo since action on their motion
for reconsideration would still have been suspended in light of the CA's Order dated July
20, 2012.[69]

On September 26, 2012, the petitioners filed a Manifestation and Motion,[70] wherein they
revealed that on August 22, 2012 at 12:30 p.m., an ASM, called by the Third Board, was
held at NADECOR's head office at the Jollibee Centre in Pasig City, attended by
stockholders representing 62.67%, or 7,496,090,800 shares, of the outstanding shares of
11,961,403,333, counting Queensberry's 3,000,000,000 shares.[71] Controlled by the
petitioners' group, the assembly elected a new set of Board of Directors (Fourth Board),
composed of JG Ricafort, De Jesus, Lazatin, Fernandez, Maria Nalen Rosero-Galang
(Galang), Antonio A. Henson (Flenson), Angel S. Ong (Ong), Teodorico C. Taguinod
(Taguinod), and Marc Paolo A. Villar (Marc Paolo). Elected as corporate officers were JG
Ricafort as Chairman, De Jesus as President, Henson as Treasurer, Contreras as
Corporate Secretary, and Lemuel M. Santos as Assistant Corporate Secretary. At 1:38
p.m., the Fourth Board filed a General Information Sheet with the SEC to report the above
ASM results.[72] Thus, the petitioners moved for the dismissal of their petition for having
become moot and academic, on the ground that the RTC's Order dated December 21,
2011 in SEC Case No. 11-164 had been overtaken by a supervening event, the holding of
the August 22, 2012 ASM and the election of the Fourth Board.[73]

But the Calalang group in their Comment/Opposition with Counter Manifestation and

Opposition[74] dated October 19, 2012 also disclosed that the New Board had sent notices
on August 15, 2012, signed by Cynthia Corazon G. Roxas (Roxas) as Corporate Secretary,
calling for the holding of the regular ASM on August 22, 2012; that the said meeting was
successfully held on August 22, 2012 at 12:30 p.m. at Last Chukker, Manila Polo Club,
McKinley Road, Forbes Park, Makati City; that during the said meeting, new directors were
elected, namely, Romulo, Calalang, Ayala, Engle, Nitorreda, Juan Kevin Belmonte, Peter
Mutuc, Benjamin C. Sevilla (Sevilla), and Maria Veronica Calalang; that NADECOR's new
corporate officers were Romulo as Chairman, Calalang as President, Nitorreda as Chief
Operating Officer and General Counsel, Sevilla as Chief Financial Officer, Raymond IT.
Ricafort (Raymond) as Treasurer, and Roxas as Corporate Secretary; that a General
Information Sheet[75] was filed with the SEC on September 21, 2012 disclosing the above
actions of the stockholders and the newly-elected Board.[76] Thus, the Calalang group
contended that the August 22, 2012 ASM called by the Third Board was void for being in
violation of the WPI of the CA Special 14th Division, which recognized the authority of the
New Board to continue to act as NADECOR's lawful Board of Directors.

Administrative Case versus
Members of the CA Special 14th Division

On July 9, 2012, Fernandez, Henson, and Ong filed with this Court an
administrative case against herein respondent Justices, docketed as A.M. OCA IPI No. 12-
201-CA-J. They alleged that the respondent Justices were guilty of grave misconduct,
conduct detrimental to the service, gross ignorance of the law, gross incompetence, and
manifest partiality, as follows: (i) they issued the above WPI without notice and hearing as
required in Section 5, Rule 58 of the Rules of Court, upon an unverified "Third Motion to
Resolve" and upon a "Supplement to the Third Urgent Motion to Resolve" in CA-G.R. SP
No. 122784 which contained new factual matters; (ii) it was irregular for Justice Bato, as
mere acting member, to have penned the resolution granting the WPI since the
consolidated CA petitions had not been re-raffled to him; (iii) granting that the WPI was a
matter of extreme urgency, Section 5 of Rule VI of the IRCA authorizes the two remaining
regular Division members, Justices Dicdican and Peralta, not Justice Bato, to act on the
application; (iv) the WPI did not just preserve the status quo, but in fact disposed of the
petitions on the merits.[77]

On February 19, 2013, the Court dismissed the administrative case, holding as valid the
WPI penned by Justice Bato and concurred in by Justices Dicdican and Peralta.[78]

Coincidentally, on February 18, 2013, the CA Special 14th Division issued its now assailed
Decision[79] nullifying the RTC's Order dated December 21, 2011 in SEC Case No. 11-164
and making the WPI it issued in CA-GR. SP Nos. 122782, 122784, 122853, and 122854,
permanent. The fallo thereof reads:

WHEREFORE, the petitions are GRANTED and the RTC Order dated December 21, 2011
is NULLIFIED and SET ASIDE. The [ASM] of NADECOR held on August 15, 2011 is
hereby declared valid and the Board of Directors and Officers elected thereat are declared
lawfully elected. Any and all acts of the Board of Directors elected during the August 15,
2011 NADECOR [ASM] are declared VALID. All acts performed pursuant to the assailed
Order dated December 21, 2011 in SEC Case No. 11-164 are likewise
declared NULL and VOID.

Likewise, the [WPI] dated June 13, 2012 is made PERMANENT.

SO ORDERED[80]

Meanwhile, on July 18, 2012 the Court resolved to dismiss G.R. Nos. 202218-21, entitled
"Jose G. Ricafort, et al. v. CA [Special 14th Division], et al." for certiorari and prohibition,
filed by JG Ricafort, De Jesus, Marc Paolo, and Galang to question the validity of the WPI
issued by the CA Special 14th Division, because they were not parties to any of the
consolidated petitions in the CA, and thus had no personality to assail the CA's injunctive
writ.[81]
Also on July 18, 2012, the Court dismissed G.R. Nos. 202257-60, entitled "Ethelwoldo E.
Fernandez, et al. v. Court of Appeals (Special 14th Division), et al." also assailing the WPI,
since therein petitioners were also strangers to the consolidated CA petitions.[82] Fernandez
and Henson were members of the Old Board of NADECOR, elected in August 2010, while
Ong was among those elected to NADECOR's Third Board on June 13, 2012; therein
petitioners were also elected to the Fourth Board of NADECOR on August 22, 2012.

G.R. Nos. 205921-24

On April 12, 2013, the petitioners filed their second joint petition, docketed as G.R. Nos.
205921-24,[83] raising substantially the same issues in G.R. Nos. 202647-50 and praying
that the CA Special 14th Division's decision be set aside. On July 31, 2013, the Court
consolidated G.R. Nos. 205921-24 with GR. Nos. 202647-50.[84]

On December 20, 2013, Gatmaitan filed his Comment,[85] followed on January 6, 2014 by

the Comment[86] of Calalang group.

Meanwhile, on November 29, 2013, the petitioners, through Contreras acting as Corporate
Secretary, represented by law firm of Zamora Poblador Vasquez & Bretana, filed allegedly
in behalf of NADECOR a "Consolidated Comment"[87] praying that the CA Special
14th Division's WPI dated June 13, 2012 and Decision dated February 18, 2013 be set
aside, and that the RTC's Order dated December 21, 2011 be reinstated. Thus, NADECOR
through Contreras argued for the validity of the June 13, 2012 SSM called by the Old
Board, and that the WPI had become functus officio for having been mooted not just once
but thrice: first, since the WPI was served after the successful holding of the June 13, 2012
SSM, then second and third, by the holding of the ASM on August 22, 2012 and on August
19, 2013.

The petitioners also manifested that the August 22, 2012 ASM was attended by
stockholders representing 62.67% interest, counting the Queensberry's 3,000,000,000
shares; that the members of the Third Board were re-elected, namely, JG Ricafort, De
Jesus, Lazatin, Fernandez, Galang, Henson, Ong, Taguinod, and Marc Paolo; and also,
that elected at the August 19, 2013 ASM were JG Ricafort, De Jesus, Henson, Lazatin,
Fernandez, Taguinod, Ong, Ruy Y. Moreno and Contreras.[88]

On December 12, 2013, the petitioners, again through the firm of Zamora Poblador
Vasquez & Bretana, filed a "Supplemental Petition"[89] wherein they maintained that nothing
in the June 13, 2012 WPI specifically enjoined the stockliolders who attended the August
22, 2012 ASM called by the Third Board, nor the holding of the said ASM, and thus, the
Fourth Board had superseded the New Board. Incidentally, in the August 19, 2013 ASM,
JG Ricafort appeared to also be representing the shares of the Queensberry.[90]

The petitioners then informed this Court of supervening events which have allegedly added
new confusion concerning the respective rights of the parties, and further delay in the
settlement of their claims. Thus, they now urge this Court to resolve G.R. Nos. 202647-50
and G.R. Nos. 205921-24 on the merits, notwithstanding their earlier insistence that the
June 13, 2012, August 22, 2012 and August 19, 2013 ASMs have mooted the CA s WPI.

The petitioners narrated that people in the employ of the Calalang group, invoking the WPI
and the CA decision, had broken into the King-king Project's warehouse and taken custody
of core mine samples which they surrendered to the Mines and Geosciences Bureau
(MGB);[91] that sometime in June 2013, with the aid of armed men, they forcibly carted away
various items and equipment of the mine worth PI.7 Million;[92] that the Calalang group had
demanded the turnover of corporate records, such as the Stock and Transfer Book and
certain corporate documents;[93] that the Calalang group fraudulently procured a spurious
Stock and Transfer Book;[94] that the Calalang group held a bogus stockholders' meeting on
August 19, 2013 and filed a false General Information Sheet with the SEC;[95] that the
Calalang group announced to media additional subscription by the St. Augustine group;
[96]
 that on August 25, 2013, five security men of the Calalang group killed a watchman and
wounded another from the petitioners' group;[97] that on October 17, 2013, the Calalang
group was able to withdraw P225,000,050.00 from King-king Project's bank account
maintained with Metrobank;[98] that on November 4, 2013, the Calalang group held a SSM
to ratify the rescission of the transfer of NADECOR's MPSA to King-king Project, and to
ratify its authority to transfer the MPSA to another entity and to enforce its project
agreement with St. Augustine group;[99] that on November 27, 2013, the MGB-Region XI
announced the suspension of the processing of NADECOR's Declaration of Mining Project
Feasibility (DMPF) of King-king Project due to the present intra-corporate dispute, and even
threatened to recommend the cancellation of MPSA No. 009-92-XI due to NADECOR's
inability to start production after 21 years, to the great disadvantage of the Government.[100]

On January 20, 2014, the private respondents, except NADECOR, filed a Motion to
Expunge the petitioners' Supplemental Petition on the ground that the same was filed
without leave of court.[101]

On January 30, 2014, the law firm of Molo Sia Velasco Dy Tuazon Ty & Coloma, claiming
to represent the Board of Directors of NADECOR elected pursuant to the CA Decision
dated February 18, 2013, which made permanent the WPI it issued on June 13, 2012, filed
a Motion to Withdraw[102] the Consolidated Comment filed by the law firm of Zamora
Poblador Vasquez & Bretana, through Contreras, for lack of authority from NADECOR's
legitimate Board of Directors.

On March 31, 2014, the petitioners, also through Zamora Poblador Vasquez & Bretana,
filed their Consolidated Reply[103] to the Calalang group's Comment[104] dated January 6,
2014 and Gatmaitan's Comment[105] filed on December 20, 2012. Among others, they tried
to point out that at the August 15, 2011 ASM, the Calalang group was in the minority with
47.40% interest in NADECOR; that laiowing that they would lose in the next stockholders'
meeting to be called under the RTC Order dated December 21, 2011 in SEC Case No. 11-
164, they filed the four petitions in the CA to annul the said order;[106] that the private
respondents belatedly posted a bond for P500,000.00 required under the WPI but the bond
did not bear the approval of the CA, and thus, the WPI is a mere scrap of paper;[107] that the
WPI granted in advance the ultimate reliefs sought in the CA petitions;[108] that SEC Case
No. 11-164 is not an election contest but a general intra-corporate case falling under Rule
1, Section l(a)(2) of the Interim Rules; and that the supposed principal-nominee relationship
between the petitioners and JG Ricafort is immaterial because under Section 6 of the
Corporation Code, they were not furnished a notice as stockholders of record.[109]

On May 27, 2014, Romulo and the Calalang group filed their Comment[110] to the
Supplemental Petition of the petitioners. Chiefly, they argued that the June 13, 2012 SSM
and August 22, 2012 and August 19, 2013 ASMs are null and void for being in violation of
the WPI, which was immediately executory and later made permanent by the CA Decision
on February 18, 2013; that the acts of the Calalang group are authorized under the WPI
and the CA decision; that the petitioners' group initiated the shooting incident on August 24,
2013; that the MGB-Region XI suspended the processing of NADECOR's DMPF not due to
fraud or mischief committed by the Calalang group but in view of the present intra-
corporate dispute; that JG Ricafort attended the August 15, 2011 ASM both as beneficial
owner and as proxy of the petitioners; that the Calalang group comprised the majority of the
stockholders at the August 15, 2011 ASM with 50.03% of the shares; that SEC Case No.
11-164 involves an election contest which was barred by prescription and therefore should
have been dismissed outright by the RTC; that all indispensable parties were duly
impleaded in the CA petitions; and that the participation of Justice Bato in the CA petitions
conformed to Section 2(C), Rule VI of the 2009 IRC A.
 Ruling of the Court

The Court finds no merit in the petitions.

SEC Case No. 11-164 is time-barred

because it involves an election
contest and therefore is subject
to the 15-day prescription period.

Claiming to be stockholders of record who were denied due notice of NADECOR's August
15, 2011 ASM, the petitioners filed the Complaint[111] in SEC Case No. 11-164 purportedly
to void and nullify "the August 15, 2011 [ASM] of NADECO[R], including all proceedings
taken thereat, all the consequences thereof, and all acts carried out pursuant thereto."[112] In
justifying its Order dated December 21, 2011 declaring that the complaint had not
prescribed since it did not involve an election contest, the RTC adverted to the fact that
none of the petitioners was claiming an elective office in NADECOR, or questioning the
manner and validity of the election of the New Board, or the qualifications of the candidates
for directors.

But the real motive of the petitioners could not have escaped the trial court's notice, being
readily discernible from a perusal of the Second Cause of Action of their complaint, which
reads:

15. One of the cardinal rights of a stockholder is the right to participate in the control and
management of the corporation. This right is exercised through his vote. The right to vote is
a right inherent in and incidental to the ownership of corporate stock, and as such is a
property right. The stockholder cannot be deprived of the right to vote his stock nor may the
right be essentially impaired, either by the legislature or by the corporation, without his
consent, though amending the charter, or the by-laws.

16. The right to choose the persons who will direct, manage and operate the corporation is
significant because it is the primary way in which a stockholder can have a voice in the
management of corporate affair x x x. The right to choose these persons is exercised
through the voting process. This right is enshrined in Article I, Section 6 of NADECO[R]'s
amended by-laws, which provides that "(a)t all meetings of the Stockholders, each
Stockholder shall be entitled to one vote for each share of stock owned by
him."[113] (Citation omitted)

The fallo of the trial court's Order[114] dated December 21, 2011 appears to be carefully
worded as to avoid seeming to direct the holding of a new election of the members of the
Board of Directors of NADECOR for FY2011-2012, and thus be consistent with its ruling
that SEC Case No. 11-164 is not an election contest. The trial court reasoned:

Contrary to defendants' claims, none of the plaintiffs is claiming any elective office in
NADECOR. Neither are they questioning the manner and validity of the elections, and
qualifications of the candidates for directorship. Plaintiffs['] prayer is clear that they seek to
have the August 15, 2011 [ASM] declared null and void due to fatal defects committed prior
to said meeting. The nullification of proceedings, including the elections is not only
incidental or the logical consequence of a declaration of nullity of the [ASM].

The complaint, not being an election contest, need not comply with the requirements stated
in Rule 6, Section 3 of the Interim Rules.[115]
Yet, there can be no denying that by (a) asserting their "right to choose the persons who
will direct, manage and operate the corporation is significant because it is the primary way
in which a stockholder can have a voice in the management of corporate
affairs,"[116] because they said they had been unlawfully deprived thereof due to late
notification of the aforesaid meeting, and (b) by praying for the voiding of the August 15,
2011 ASM, and for "other just and equitable reliefs,"[117] the petitioners were really seeking
the holding of a new election for members of the Board of Directors of NADECOR for
FY2011-2012. As the CA noted, by seeking to nullify the August 15, 2011 ASM of
NADECOR, "including all proceedings taken thereat, all the consequences thereof, and all
acts carried out pursuant thereto"[118] the petitioners were clearly challenging the validity of
the election of the new Board of Directors. As the NADECOR's Amended By-Laws itself
expressly provides, the purpose of the ASM is "for the election of Directors and for the
transaction of general business of its office."[119]

Indeed, to nullify the August 15, 2011 ASM would have had no practical effect except to
void the election of the Board of Directors.[120] And no doubt, this was the trial court's
understanding of the petitioners' intent when it voided the August 15, 2011 ASM and all
matters taken up thereat. Thus, by declaring as void all "acts, decisions, deeds, incidents,
matters taken up arising from and subsequent to the 2011 [ASM],"[121] things which could
only be performed by the newly-elected Board, and then by directing the issuance of a
three-day notice for the holding of a new ASM corresponding to FY2011-2012, the trial
court clearly understood that a new election should be held for Board of Directors of
NADECOR for FY2011-2012, notwithstanding its express ruling that SEC Case No. 11-164
did not involve an election contest and therefore the 15-day prescriptive period to file the
petitioners' complaint did not apply.

But more importantly, the defendants did not fail to point out to the trial court, as the
appellate court has made copiously clear in its decision, that contrary to the petitioners'
feigned lament that they were unlawfully deprived of their right as stockholders to
participate in the ASM due to late notice, they were in fact represented by JG Ricafort
under an irrevocable proxy which they executed on April 26, 2010. The defendants further
noted that the petitioners even shared the same address as JG Ricafort, who is the
husband of petitioner Corazon, and the father of petitioners Jose Manuel and Marie Grace.
Thus, the defendants insisted that the petitioners deliberately misled the trial court by
pretending to be ignorant of the August 15, 2011 ASM.

Equally significantly, it has never been plausibly debunked that the real and beneficial
owner of the shares in their names is JG Ricafort himself, as shown in the Nominee
Agreements[122] which they executed back in 2007; hence, the petitioners' non-participation
at the hearings in the RTC. The claimed violation of the petitioners' right as owners to vote
their shares in the assailed assembly is thus exposed as a complete fabrication. As the
private respondents pointed out in their Comment to the petitioners' Supplemental Petition,
JG Ricafort appeared at the RTC hearing on December 2, 2011 and spoke for the
petitioners, notwithstanding that he was in fact one of the defendants named in the
complaint, being a member of the New Board whom the petitioners wanted ousted.[123]

As subsequent events since the filing of SEC Case No. 11-164 now amply show, the
complaint is traced to a tenacious struggle between two contending groups of stockholders
of NADECOR, the petitioners' group and the Calalang group, for control of the fabled riches
of the King-king Project. The petitioners' group wanted to rescind NADECOR's MOUs with
the St. Augustine group and to bring in a new investor, the Villar group, which the Calalang
group strongly opposed. It is not for this Court to say which of the contending stockholders'
blocs is justified in the direction they want NADECOR to take, but the Calalang group now
blames the petitioners for exposing the NADECOR's all too precious MPSA to the threat of
cancellation by the DENR by filing SEC Case No. 11-164. Undoubtedly, the complaint was
a clear attempt by, or on behalf of, the petitioners' group to oust the New Board for
FY2011-2012. In fact, the petitioners are even represented by the very same law firm which
the petitioners' group has employed.

Under Sections 1 to 3 of Rule 6 of the Interim Rules, SEC Case No. 11-164 should have
been dismissed for having been filed beyond the 15-day prescriptive period allowed for an
election protest. In substance, the main issues therein are on all fours with Yujuico,
[124]
 wherein the Court expressly ruled that where one of the reliefs sought in the complaint
is to nullify the election of the Board of Directors at the ASM, the complaint involves an
election contest. Both cases put in issue the validity of the ASM and, expressly in Yujuico
and indirectly below, the election of the members of the Board of Directors. The ostensible
difference is that in SEC Case No. 11-164 the petitioners invoked lack of notice of the
August 15, 2011 ASM, while in Yujuico the ground invoked was improper venue.

In Yujuico, the Articles of Incorporation of the Strategic Alliance Development Corporation

(STRADEC), a domestic corporation engaged in financial and investment advisory services
were amended on July 27, 1998 to change its principal office from Pasig City to
Bayambang, Pangasinan. On March 1, 2004, STRADEC held its ASM in its former Pasig
City office as indicated in the notices it sent to the stockholders. Alderito Z. Yujuico
(Yujuico), Bonifacio C. Sumbilla (Bonifacio) and Dolney S. Sumbilla (petitioners therein)
were elected as members of the Board of Directors, along with Cesar T. Quiambao, Jose
M. Magno III and Ma. Christina Ferreros (respondents therein). Yujuico became Chairman
and President, while Bonifacio was elected Treasurer.[125]

On August 16, 2004, five months after the ASM, the respondents therein filed with the RTC
of San Carlos City, Pangasinan a complaint praying that: (1) the March 1, 2004 election be
nullified on the ground of improper venue, pursuant to Section 51 of the Corporation
Code; (2) all ensuing transactions conducted by the elected directors be likewise nullified;
and (3) a SSM be held anew. On September 2, 2004, the complaint was amended to
include a prayer for issuance of a TRO and/or WPI to enjoin petitioners therein from
discharging their functions as directors and officers of STRADEC. On September 22, 2004,
they filed a supplemental complaint to direct the surrender of the original and reconstituted
Stock and Transfer Book and other corporate documents of STRADEC, and to nullify the
reconstituted Stock and Transfer Book and all transactions of the corporation.[126]

The petitioners therein sought to dismiss the complaint for, among others: (a) lack of cause
of action; (b) being barred by prescription since it was filed beyond the 15-day prescriptive
period provided by Section 2, Rule 6 of the Interim Rules under Republic Act No. 8799; and
(c) the respondents therein waived their right to object to the venue since they attended
and participated in the March 1, 2004 ASM and election without any protest.[127]

On November 25, 2004, the RTC granted the respondents' application for preliminary
injunction and ordered (1) the holding of a SSM on December 10, 2004 in the principal
office of the corporation in Bayambang, Pangasinan, and (2) the turnover by Bonifacio to
the court of the duplicate key to STRADEC's safety deposit box in Export Industry Bank,
Shaw Boulevard, Pasig City where the original Stock and Transfer Book of STRADEC was
deposited.[128]

On petition for certiorari by the petitioners therein, the CA sustained the RTC Order dated
November 25, 2004. Their motion for reconsideration was denied.[129] On petition for review
on certiorari, the Court held that the complaint below involved an election contest as
defined in Sections 1 and 2, Rule 6 of the Interim Rules, since one of the reliefs sought by
therein respondents was the nullification of the election of the Board of Directors and
corporate officers at the March 1, 2004 ASM.[130] Sections 1 and 2, Rule 6 of the Interim
Rules provide:

SEC. 1. Cases covered. - The provisions of this rule shall apply to election contests in
stock and non-stock corporations.
SEC. 2. Definition. - An election contest refers to any controversy or dispute involving title
or claim to any elective office in a stock or non-stock corporation, the validation of proxies,
the manner and validity of elections, and the qualifications of candidates, including the
proclamation of winners, to the office of director, trustee or other officer directly elected by
the stockholders in a close corporation or by members of a non-stock corporation where
the articles of incorporation or by-laws so provide. (Emphasis ours)

Since the action questioning the validity of the March 1, 2004 stockholders' election was
filed by respondents therein well beyond the 15-day prescriptive period in Section 3, Rule 6
of the Interim Rules, the Court set aside the RTC Order dated November 25, 2004, nullified
the SSM and election held on December 10, 2004 in Bayambang, Pangasinan, and
restored the last actual peaceable uncontested status of the parties prior to the filing of Civil
(SEC) Case No. U-14.[131]

The petitioners have no cause of

action because they were duly
represented at the August 15, 2011
ASM by their proxy, JG Ricafort.

As found by the CA, the petitioners did participate in the stockholders' meeting through
their authorized representative and proxy, JG Ricafort. In his Affidavit[132] dated November
21, 2011, Gatmaitan, NADECOR Corporate Secretary, categorically declared under oath
that JG Ricafort held a valid irrevocable proxy from the petitioners to attend and vote their
shares at all meetings of the stockholders, and that JG Ricafort signed the attendance
sheet for and in behalf of the plaintiffs as shown by his signatures in the rows in the said
attendance sheet for the names of the plaintiffs who had appointed him as his proxy.[133]

During the stockholders' registration for the August 15, 2011 ASM, no one questioned JG
Ricafort's Irrevocable Proxy[134] dated April 26, 2010 as attorney and proxy for the
petitioners. His irrevocable proxy reads:

IRREVOCABLE PROXY

KNOW ALL MEN BY THESE PRESENTS:

That the undersigned parties, shareholders of [NADECOR] (hereinafter referred to as the

"Company"), hereby irrevocably constitute and appoint [JG RICAFORT], acting through
its representatives, as the attorney and proxy of the undersigned, to attend and represent
the undersigned at [any and all meetings of the shareholders of the Company], and
for and on behalf of the undersigned, to vote upon any and all matters to be taken up
at said meeting, according to the number of share(s) of stock of the Company of
which the undersigned are the lawful record and beneficial owners, and which they
would be entitled to vote if personally present, hereby ratifying and confirming all that
said attorney and proxy shall do in the premises, and giving and granting unto said attorney
and proxy full power of substitution and revocation.

This proxy shall continue in force for the maximum term allowed under Philippine law,
unless revoked earlier by the undersigned."

Dated this 26th day of April, 2010.

(signed) (signed)
Corazon H. Ricafort Jose Manuel H. Ricafort
(signed) (signed)
Juan Carlos H. Ricafort Marie Grace H. Ricafort
 (signed) (signed)
Ma. Theresa Flora Santos Raymond H. Ricafort[135]

(Emphasis ours)

The CA also cited the Affidavit[136] dated November 21, 2011 of Atty. Timothy Joseph M.
Mendoza (Atty. Mendoza), who together with Atty. Armina Dielle R. Kapunan assisted
Gatmaitan in taking the attendance at the August 15, 2011 ASM. Atty. Mendoza declared
under oath as follows:

The plaintiffs in SEC Case No. 11-164 are claiming that they were not properly
Q12: notified of the [ASM] held on 15 August 2011. What can you say, if any, regarding
this claim of plaintiffs?
Based on the records, plaintiffs were given notices of the meeting through
registered mail sent at least four days prior to the meeting in accordance with the
requirements of the Amended By-Laws. Besides, the Amended By-laws already
A12:
provides that annual meetings of NADECOR shall be held on the third Monday of
August in each year. The date of the meeting, 15 August 2011, was the third
Monday of August 2011.
Were the plaintiffs in SEC Case No. 11-164, x x x present or represented in the
Q13:
said meeting?
They were represented during the subject meeting by [JG Ricafort], one of the
A13:
defendants in SEC Case No. 11-164.
How do you know that the plaintiffs in SEC Case No. 11-164 were represented by
Q14:
[JG Ricafort] in the meeting?
Together with Atty. Armina Dielle R. Kapunan, I was responsible for taking
attendance at the stockholders' meeting in order to assist Atty. Gatmaitan, as
corporate secretary and secretary of the said meeting, to determine whether
stockholders holding at least a majority of NADECOR's issued and outstanding
capital stock were present for quorum purposes. Atty. Kapunan and I manned the
designated registration area in front of the entrance to the venue of the meeting.
When [JG Ricafort] arrived at the subject meeting, he approached our table and I
asked him to register his attendance at the meeting and sign the attendance sheet
A14: we had prepared for this purpose. He asked me where he can sign in the
attendance sheet. I showed him where he should sign his name and asked him
whether he was also attending as proxy for those NADECOR shares whose
registered owners had appointed him as proxy through an irrevocable proxy,
which includes the NADECOR shares owned by all of the plaintiffs in SEC Case
No. 11-164. [JG Ricafort] said yes and in fact, he signed the attendance sheet for
and on behalf of the plaintiffs as shown by his signature in the spaces or rows in
the said attendance sheet for the names of the plaintiffs who had appointed him
as proxy.
If I show you a copy of the attendance sheet which you said was signed by [JG
Q15:
Ricafort], would you be able to identify the same?
A15: Yes.
I am showing to you a copy of an attendance sheet for the NADECOR
Q16: stockholders' meeting on 15 August 2011, what relation, if any, does this have to
the attendance sheet you just mentioned.
A16: It is the same document.
In the spaces or rows in the attendance sheet for the names of the plaintiffs, there
Q17: are signatures appearing beside the printed name Jose G. Ricafort, whose
signatures are these?
A17: These are all the signatures of [JG Ricafort].
Q18: Why do you know that these are the signatures of [JG Ricafort]?
  I saw him sign the attendance sheet. Also, I am familiar with his signature
A18: because I have seen it before and also because I have acted on the same
 signature before.
What is your basis for saying that [JG Ricafort] can represent the shares held by
Q19:
the plaintiffs in SEC Case No. 11-164?
We have on our file as the Corporate Secretary of NADECOR an Irrevocable
Proxy signed by the plaintiffs in SEC Case No. 11-164 together with Messrs. Jose
Carlos H. Ricafort and Raymo[n]d H. Ricafort, which constituted and appointed
[JG Ricafort] as their attorney and proxy to attend and represent them at any and
all meetings of the shareholders of NADECOR, and to vote upon any and all
matters to be taken up at said meeting for and on their behalf. We also have
A19:
copies of the respective Nominee Agreements of each of the plaintiffs where each
plaintiff confirmed and acknowledged his/her status as nominee for [JG Ricafort]
for the purpose of holding legal title to the shares owned by [JG Ricafort] in
NADECOR. Further, in previous meetings with [JG Ricafort] involving other
NADECOR matters, [JG Ricafort] had repeatedly said that those shares are really
owned by him and that he controls the voting for such shares.[137]

JG Ricafort's proxy authority was "to attend and represent the [petitioners] at [any and all
meetings of the shareholders of the Company], and for and on behalf of the [petitioners], to
vote upon any and all matters to be taken up at said meeting, according to the number of
share (s) of stock of the Company of which the [petitioners] are the lawful record and
beneficial owners, and which they would be entitled to vote if personally present."[138] Thus,
the CA concluded, there is no doubt that JG Ricafort was duly constituted by the petitioners
as their proxy to attend "any and all" stockholders' meetings.

But the RTC saw it differently, and held that the SPA[139] which the petitioners executed in
favor of JG Ricafort on April 27, 2010, a day after the Irrevocable Proxy, "amended and
limited the authority conferred [by the petitioners] on [JG Ricafort] in the Irrevocable
Proxies to matters and issues affecting on-going negotiations with Russel Mining and
Minerals, Inc. and St. Augustine Mining, Ltd."[140] It agreed with the petitioners that they
never really intended "to name, appoint and constitute [JG Ricafort] as their proxy,"[141] but
"[tjhese documents were merely executed as comfort documents to give [JG Ricafort]
control of NADECOR."[142] According to the RTC, "[a] careful perusal of the provisions of
both the Irrevocable Proxies and the [SPA] lends credence to [petitioners']
assertion."[143] Yet, as the CA pointed out, the RTC failed to mention what these provisions
are which amended and limited the applicability of the Irrevocable Proxies only to matters
and issues affecting on-going negotiations with Russel Mining and Minerals, Inc. and St.
Augustine Mining, Ltd.[144]

On the other hand, the Irrevocable Proxy expressly authorized JG Ricafort to participate
and vote "upon any and all matters to be taken up at [the stockholders'] meeting, according
to the number ofshare(s) of stock of the Company of which the [petitioners] are the lawful
record and beneficial owners, and which they would be entitled to vote if personally
present."[145] Moreover, the CA noted that under the SPA, JG Ricafort was even authorized
to appoint a "proxy to vote upon the shares of stock owned by the Shareholders or standing
in its name in the books of the [NADECOR], at any meeting of the shareholders of
[NADECOR], whether regular or special."[146] Thus, not only did the SPA acknowledge JG
Ricafort's proxy authority from the petitioners, it even expanded his authority to include
naming another person as proxy of the petitioners.[147]

Equally significantly, the petitioners do not deny that they each executed a Nominee
Agreement[148] dated June 4, 2007 wherein they acknowledged that JG Ricafort is the true
and beneficial owner of the shares of stock in their names. Each of the nominee
agreements uniformly provide:

The undersigned x x x (hereinafter referred to as the "Nominee") hereby confirms and

acknowledges her status as nominee for [JG Ricafort] (hereinafter referred to as the
"Principal") x x x. The relationship of the Principal and the Nominee with respect to the
Shares is governed by the following terms and conditions:

1. The Nominee holds the legal title to the Shares for and in behalf of Principal who
is the beneficial owner thereof. Any and all payments made by the Nominee on the
Shares, including but not limited to the subscription payment therefor, were funded by, and
made on behalf and for the benefit of the Principal.

2. All dividends, whether cash, stock or property, all future shares from the exercise of
stock rights or preemptive rights and other fruits or proceeds accruing to or on the Shares
or from any disposition thereof shall be for the account, funding, expense or benefit of the
Principal, and accordingly, the Nominee shall deliver the same to the Principal or to
whoever the latter may designate, x x x

xxxx

5. In case the Principal decides at any time to transfer the Shares or any portion thereof to
its own name, or to another nominee or to an assignee, the Principal is hereby given full
and irrevocable special power and authority, with right of substitution, to cause the transfer
of the legal title to the Shares to the name of the Principal or to such other nominee or
assignee of the Principal, as the case may be, by conveying such instruction to the
Corporate Secretary of the Corporation, x x x

xxxx

8. The Corporate Secretary of the Corporation is hereby given full special power and
authority to do all acts and deeds necessary to effect the transfer in the books of the
Corporation of the Shares from the name of the Nominee to the name of the Principal,
another nominee, or the assignee of the Principal, as the case may be.

9. The Nominee shall not in any manner mortgage, assign, or otherwise encumber her
legal rights, title and interests in and to the Shares without the prior written instructions of
the Principal.

10. The Principal may assign any and all of its rights, title and interests in and to the Shares
and/or this Nominee Agreement in favor of any person upon prior written notice to the
Nominee.[149] (Emphasis ours)

As Nominees, the petitioners expressly acknowledged that they held "the legal title to the
Shares for and in behalf of Principal [JG Ricafort] who is the beneficial owner thereof" and
that "[a]ny and all payments made by the Nominee on the Shares, including but not limited
to the subscription payment therefor, were funded by, and made on behalf and for the
benefit of the Principal [JG Ricafort]."[150] Thus, the petitioners misled the trial court into
thinking that they had an inherent right to vote as an incident of their ownership of
corporate stock, although they always knew that JG Ricafort was the real and beneficial
owner and that he himself attended the stockholders' meeting and voted as their "proxy"
the shares in their names.

Raymond, in his Affidavit[151] dated November 18, 2011, confirmed the execution by the
petitioners of the Nominee Agreements; that his father JG Ricafort retained beneficial
ownership of the shares as well as the custody of the certificates of stock; that the
petitioners all knew about the Annual General Meeting (AGM) of NADECOR that was
scheduled on August 15, 2011;"[152] and, even that his mother Corazon never attended any
stockholders' meetings of NADECOR:
1. I am one of the six children of [JG Ricafort] and [Corazon], and my siblings are [Jose
Manuel], Juan Carlos H. Ricafort, Victor Dennis H. Ricafort, [Marie Grace] and [Maria
Teresa] (a family of 8);

2. My father, [JG Ricafort], is and has been a Director of [NADECOR] for more than 20
years and was more recently the president of NADECOR within the period covering
January 1, 2011 to August 31, 2011;

3. Sometime in June 2007, my father had asked all of us, myself, my mother and all my
sisters and brothers, except for Victor Dennis H. Ricafort, to execute Nominee Agreements
covering shares that he assigned in favor of the various members of the family, copies of
which are attached hereto as Annexes "A" to "D";

4. In essence, the Nominee Agreements specifically state that my father, as the "Principal",
retains beneficial ownership of the shares and custody of the certificates of stock;

5. My father, [JG Ricafort], also required all the family members who are nominees, to sign
irrevocable proxies from time to time, providing him the authority to vote the NADECOR
shares in the names of the various members of our family and these proxies authorized my
father to attend meetings and vote the shares of NADECOR on behalf of the family
members who were the registered shareholders of NADECOR;

6. None of the shares that are in the name of my mother and/or in the name of my brothers
and/or sisters have been paid for by the respective named shareholder and all these are
beneficially owned by my father, [JG Ricafort];

7. My mother has never attended a stockholders' meeting of NADECOR but has always
been represented by my father in all of the shareholders' meetings attended by my father
since shares of NADECOR were placed in the name of my mother as Nominee;

8. My sisters [Marie Grace] and [Maria Teresa], and my mother, [Corazon], all knew about
the Annual General Meeting (AGM) of NADECOR that was scheduled on August 15, 2011
[.][153]

Thus, JG Ricafort being the real and beneficial owner of the petitioners' shares, lack of
notice to them is inconsequential because he attended and represented them at the August
15, 2011 ASM. It defies reason, too, that he could not have informed his wife and children,
who live in the same house with him, of the scheduled ASM.

The petitioners were given due notice

of the August 15, 2011 ASM.

As shown in the Affidavit dated October 13, 2011 of San Juan, NADECOR's messenger, he
mailed the notices for the August 15, 2011 ASM to the petitioners' address at the Ortigas
Post Office on August 11, 2011, four days prior to the ASM. This was confirmed by
Gatmaitan in his Affidavit dated November 21,2011. It must be noted that under Article I,
Section 3 of NADECOR's Amended By-Laws, what is required is the mailing out of notices
by registered mail at least three days before the ASM:

SECTION 3. Notice of Meetings. Written or printed notice of every annual or special

meeting of the stockholders shall be given to each Stockholder entitled to vote at such
meeting, by leaving the same with him or at his residence, or usual place of business, or
by mailing it, postage prepaid, and addressed to him at his address as it appears upon the
books of the Corporation at least three days before such meeting. Notice of every
special meeting shall state the place, day and hour of such meeting and the general nature
of the business proposed to be transacted thereat. Failure to give notice of annual
meeting, or any irregularity in such notice, shall not affect the validity of such annual
meeting or of any proceedings at such meeting (other than proceedings of which
special notice is required by law or by these By-Laws). It shall not be requisite to the validity
of any meeting of Stockholders that notice thereof whether prescribed by law or by these
By-laws, shall have been given to any stockholder who attends in person or by proxy, or to
any Stockholder who in writing executed and filed with the records of the meeting either
before or after the holding thereof, waives such notice. No notice other than verbal
announcement need be given of any adjourned meetings of Stockholders.[154] (Emphasis
ours)

The shorter notice of three days instead of two weeks for stockholders' regular or special
meeting is clearly allowed under Section 50 of the Corporation Code, to wit:

SECTION 50. Regular and Special Meetings of Stockholders or Members. - Regular

meetings of stockholders or members shall be held annually on a date fixed in the by-laws,
or if not so fixed, on any date in April of every year as determined by the board of directors
or trustees: Provided, That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.

Special meetings of stockholders or members shall be held at any time deemed necessary
or as provided in the by-laws: Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members, unless otherwise provided in the by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or

member, x x x.[155] (Emphasis ours)

By failing to file their complaint below seasonably, the petitioners must be deemed to have
waived their right to notice of the August 15, 2011 ASM. Section 50 provides in effect that
failure to give notice of the regular or annual meetings, when the date thereof is fixed in the
by-laws, as in Section 1, Article 1 of the Amended By-Laws of NADECOR,[156] which is "at
twelve thirty P.M., on the THIRD MONDAY OF AUGUST in each year, if not a legal
holiday, and if a legal holiday, then on the first day following which is not a legal
holiday,"[157] will not affect the validity of the ASM or the proceedings therein. Thus, it is
also provided in Section 3, Article 1 of NADECOR's Amended By-Laws that:

Sec. 3. x x x. Failure to give notice of annual meeting, or any irregularity in such

notice, shall not affect the validity of such annual meeting or of any proceedings at such
meeting (other than proceedings of which special notice is required by law or by these By-
laws), x x x.[158] (Italics ours)

The Court concludes that the RTC undoubtedly erred in nullifying NADECOR's August 15,
2011 ASM and in not dismissing SEC Case No. 11-164.

WHEREFORE, the petitions in G.R. Nos. 202647-50 and G.R. Nos. 205921-24
are DISMISSED.

SO ORDERED.

Velasco, Jr., (Chairperson), Peralta, Perez, and Jardeleza, JJ., concur.

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

CASE 41
G.R. No. 168918 March 2, 2009
PEOPLE OF THE PHILIPPINES, Petitioner,
vs.
HERMENEGILDO DUMLAO y CASTILIANO and EMILIO LA'O y
GONZALES, Respondents.
DECISION
CHICO-NAZARIO, J.:
On appeal is the Resolution1 of the Sandiganbayan in Criminal Case No. 16699 dated 14
July 2005 which granted the Motion to Dismiss/Quash of respondent Hermenegildo C.
Dumlao and dismissed the case against him. The Sandiganbayan likewise ordered the
case against respondent Emilio G. La’o archived. The dispositive portion of the resolution
reads:
WHEREFORE, finding the Motion to Dismiss/Quash filed by accused Hermenegildo C.
Dumlao to be meritorious this case as against him is hereby ordered DISMISSED.
The cash bond posted by him is hereby cancelled and accused Dumlao is allowed to
withdraw the same from the Cashier’s Office of this Court.
The hold departure order issued by this Court against herein accused Dumlao is lifted and
set aside.
The Commissioner of the Bureau of Immigration and Deportation is ordered to cancel the
name of accused Hermenegildo C. Dumlao from the Bureau’s Hold Departure List.
This case as against Emilio La’o who is still at large is ordered archived.2
On 19 July 1991, an Amended Information was filed before the Sandiganbayan charging
respondents Dumlao and La’o, Aber P. Canlas, Jacobo C. Clave, Roman A. Cruz, Jr. and
Fabian C. Ver with violation of Section 3(g) of Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and Corrupt Practices Act. The case was docketed as
Criminal Case No. 16699. The accusatory portion of the information reads:
That on or about May 10, 1982, or for sometime prior or subsequent thereto, in Manila,
Philippines, and within the jurisdiction of this Honorable Court, the accused Hermenegildo
C. Dumlao, Aber Canlas, Jacobo C. Clave, Roman A. Cruz, Jr., and Fabian C. Ver, being
then the members of the Board of Trustees of the Government Service Insurance System
(GSIS) which is a government corporation and therefore all public officers, conspiring and
confederating together and mutually helping one another, while in the performance of their
official functions, did then and there willfully, unlawfully and criminally enter into contract of
lease-purchase with Emilio G. La’o, a private person whereby the GSIS agreed to sell to
said Emilio G. La’o, a GSIS acquired property consisting of three parcels of land with an
area of 821 square meters together with a 5-storey building situated at 1203 A. Mabini St.,
Ermita, Manila, known as the Government Counsel Centre for the sum of ₱2,000,000.00
with a down payment of ₱200,000.00 with the balance payable in fifteen years at 12%
interest per annum compounded yearly, with a yearly amortization of ₱264,278.37 including
principal and interest granting Emilio G. La’o the right to sub-lease the ground floor for his
own account during the period of lease, from which he collected yearly rentals in excess of
the yearly amortization which contract is manifestly and grossly disadvantageous to the
government.3
When arraigned on 9 November 2004, respondent Dumlao, with the assistance of
counsel de parte, pleaded "not guilty" to the offense charged.4 As agreed upon by the
prosecution and respondent Dumlao, a Joint Stipulation of Facts and Admission of Exhibits
was submitted to the court on 10 January 2005.5 On the basis thereof, the court issued on
19 January 2005 the following Pre-Trial Order:
PRE-TRIAL ORDER
The Prosecution and Accused Hermenegildo C. Dumlao, as assisted by counsel, submitted
their "JOINT STIPULATION OF FACTS AND ADMISSION OF EXHIBITS" dated December
21, 2004, quoted hereunder:
I. STIPULATION OF FACTS
The Prosecution and Accused Dumlao jointly stipulate on the following:
1. That at the time material to this case, the following were members of the Board
of Trustees of the Government Service Insurance System (GSIS):
a. Hermenegildo C. Dumlao
b. Aber P. Canlas
 c. Jacobo C. Clave
d. Roman A. Cruz
e. Fabian C. Ver
f. Leonilo M. Ocampo and
g. Benjamin C. Morales;
2. That Emilio Gonzales La’o is a private person;
3. That GSIS was the owner of a property consisting of three (3) parcels of land
with an area of 821 square meters, together with a 5-storey building situated as
1203 A. Mabini Street, Ermita, Manila known as the Government Counsel
Centre;
4. That on June 22, 1978, the GSIS entered into a Lease-Purchase Agreement
with the Republic of the Philippines through the Office of the Government
Corporate Counsel (OGCC) involving the property described under paragraph 3
above, for a consideration of ₱1.5 million payable in equal yearly amortizations
for a period of fifteen (15) years with zero interest. The period should commence
after the GSIS shall have renovated the building according to the specification of
the OGCC;
5. That in accordance with the June 22, 1978 Lease-Purchase Agreement, the 5-
storey building was renovated. Thereafter, the OGCC occupied the same;
6. That Ferdinand E. Marcos was, at all-times material hereto, the President of
the Republic of the Philippines;
7. That then President was at all times material hereto, legislating through the
issuance of Presidential Decrees, Executive Orders and the like;
8. That among the three Members of the Board who signed the Minutes only
accused Dumlao was charged in this case;
9. That there are only seven (7) members of the Board of Trustees of the GSIS
present during the board meeting held on April 23, 1982;
10. Exhibit "A" and "1" entitled Agreement was signed by Luis A. Javellana, for
and in behalf of the GSIS, Felipe S. Aldaña, for and [in] behalf of the Republic of
the Philippines thru Government Corporate Counsel, and Emilio Gonzales La’o,
as buyer.
II. DOCUMENTARY EVIDENCE
The Prosecution and Accused Dumlao admitted the authenticity and due execution of the
following documentary evidence:
EXHIBITS   DESCRIPTION

"A" (also Exhibit "1" for accused   The Agreement executed by and among the GSI
Dumlao Republic of the Philippines, through OGCC and a
Emilio Gonzales La’o on May 10, 1982, consistin
pages;

     

"B" (also Exhibit "2" for accused   The pertinent portion, including the signature pag
Dumlao) Minutes of Meeting No. 14 of the GSIS Board of
held on April 23, 1982, specifically containing ite
regarding the approval of the proposed Agreeme
among the GSIS, the Republic of the Philippines
OGCC and accused Emilio Gonzales La’o, cons
pages.
III. RESERVATION
The Prosecution and Accused Dumlao reserve the right to mark and offer in evidence the
documents mentioned in their respective Pre-Trial Briefs, as well as to present the
witnesses listed therein.
IV. ISSUE
Whether or not accused Dumlao is liable for violation of Section 3(g), RA 3019.
WHEREFORE, with the submission by the parties of their Joint Stipulation of Facts, the
pre-trial is deemed terminated. Let the above-mentioned joint stipulation as recited in this
pre-trial order bind the parties, limit the trial to matters not disposed of, and control the
course of the proceedings in this case unless modified by the Court to prevent manifest
injustice.6
On 21 February 2005, respondent Dumlao filed a Motion to Dismiss/Quash on the ground
that the facts charged do not constitute an offense.7 He stated that the prosecution’s main
thrust against him was the alleged approval by the Government Service Insurance System
(GSIS) Board of Trustees -- of which he was a member -- of the Lease-Purchase
Agreement entered into by and among the GSIS, the Office of the Government Corporate
Counsel (OGCC) and respondent La’o. He argued that the allegedly approved Board
Resolution was not in fact approved by the GSIS Board of Trustees, contrary to the
allegations in the information. Since the signatures of Fabian Ver, Roman Cruz, Aber
Canlas and Jacobo Clave did not appear in the minutes of the meeting held on 23 April
1982, he said it was safe to conclude that these people did not participate in the alleged
approval of the Lease-Purchase Agreement. This being the case, he maintained that there
was no quorum of the board to approve the supposed resolution authorizing the sale of the
GSIS property. There being no approval by the majority of the Board of Trustees, there can
be no resolution approving the Lease-Purchase Agreement. The unapproved resolution, he
added, proved his innocence. He further contended that the person to be charged should
be Atty. Luis Javellana, who sold the subject property to respondent La’o without the proper
authority. He likewise wondered why he alone was charged without including the other two
signatories in the minutes of the meeting held on 23 April 1982.
On 14 July 2005, the Sandiganbayan issued the assailed resolution. It ruled:
The Court finds the motion meritorious. The minutes of the meeting held on April 23, 1982
of the Board of Trustees of GSIS shows that the Board failed to approve the Lease-
Purchase Agreement in question. As stipulated upon by both parties out of the seven (7)
members of GSIS Board of Trustees only three (3) members signed the minutes, the others
did not. In order to validly pass a resolution at least a majority of four (4) members of the
Board of Trustees must sign and approve the same.1avvphi1
No amount of evidence can change the fact that Resolution dated April 23, 1982 was not
validly passed by the Board of Trustees of GSIS since it was only signed by three (3)
members of the Board. Thus, it never had the force and effect of a valid resolution and did
not in effect approve the Lease and Purchase Agreement subject matter hereof. Therefore,
the prosecution has no cause of action against herein movant-accused Hermenegildo C.
Dumlao.8
On 2 September 2005, the People of the Philippines, represented by the Office of the
Ombudsman, thru the Office of the Special Prosecutor, filed a petition for certiorari9 under
Rule 45 of the Rules of Court seeking the reversal and setting aside of the Sandiganbayan
Resolution dismissing the case against respondent Dumlao. Petitioner raises the following
issues:
I) WHETHER OR NOT THE COURT A QUO ACTED IN ACCORDANCE WITH LAW AND
JURISPRUDENCE WHEN IT RESOLVED TO DISMISS CRIMINAL CASE NO. 16699 AS
AGAINST RESPONDENT DUMLAO AFTER THE PRE-TRIAL AND BEFORE THE
PETITIONER COULD PRESENT ITS WITNESSES AND FORMALLY OFFER ITS
EXHIBITS.
II) WHETHER OR NOT THE SIGNATURES OF THE MAJORITY OF THE GSIS BOARD
OF TRUSTEES ARE NECESSARY ON THE MINUTES OF MEETING NO. 14 DATED 23
APRIL 1982 TO GIVE FORCE AND EFFECT TO RESOLUTION NO. 326 APPROVING
THE PROPOSED AGREEMENT BY AND AMONG THE GSIS, THE OGCC AND
RESPONDENT EMILIO LA’O.
III) WHETHER OR NOT THE VALIDITY OF THE CONTRACT IS AN ESSENTIAL
ELEMENT OF VIOLATION OF SECTION 3(G), RA 3019.
IV) WHETHER OR NOT THE COURT A QUO ACTED IN ACCORDANCE WITH LAW AND
JURISPRUDENCE WHEN IT RESOLVED TO ARCHIVE THE CASE AGAINST
RESPONDENT LA’O.
On the other hand, respondent Dumlao proffers the following grounds to support the
dismissal of the case against him:
1. TO GIVE DUE COURSE TO THE OMBUDSMAN’S PETITION IS TO PLACE DUMLAO
IN DOUBLE JEOPARDY, IN VIOLATION OF HIS CONSTITUTIONAL RIGHTS;
2. THE SANDIGANBAYAN COULD NOT BE SAID TO HAVE GRAVELY ABUSED ITS
DISCRETION AMOUNTING TO LACK OF JURISDICTION BECAUSE IT MERELY
FOLLOWED THE RULE ON PRE-TRIAL AND DECIDED THE CASE ON THE BASIS OF
THE FACTS STIPULATED IN THE PRE-TRIAL;
3. THE FACTS AS AGREE (SIC) BY THE PROSECUTION AND RESPONDENT DUMLAO
IN THEIR PRE-TRIAL STIPULATION AND AS APPROVED BY THE SANDIGANBAYAN
SHOWED THAT HE DID NOT COMMIT ANY CRIME; AND
4. CONTINUALLY PROSECUTING DUMLAO, TO THE EXCLUSION OF OTHER GSIS
TRUSTEES, UNDER THE CIRCUMSTANCES OBTAINING, CONSTITUTES UNFAIR
DISCRIMINATION AND VIOLATION OF HIS CONSTITUTIONAL RIGHT TO EQUAL
PROTECTION OF THE LAW.10
Petitioner argues it was denied its right to due process when the court a quo dismissed the
case against respondent Dumlao after pre-trial and before it could present its witnesses
and formally offer its exhibits. The court a quo deprived it of the opportunity to prove its
case – that the Resolution dated 23 April 1982 was passed by the GSIS Board of Trustees
and that the Lease-Purchase Agreement was grossly and manifestly disadvantageous to
the government.
Respondent Dumlao was charged, he being one of the members of the GSIS Board of
Trustees who allegedly approved the lease-purchase of the subject GSIS properties
consisting of three parcels of land with an area of 821 square meters, together with a five-
storey building, in favor of respondent La’o, which lease-purchase agreement was deemed
by the Office of the Ombudsman to be grossly disadvantageous to the government.
A review of the Motion to Dismiss/Quash filed by respondent Dumlao reveals that the
ground he invoked was that "the facts charged do not constitute an offense." He contends
that the alleged approved Board Resolution was not approved by the GSIS Board of
Trustees, contrary to the allegation in the information. Since the signatures of four out of
the seven members of the board did not appear in the minutes of the meeting held on 23
April 1982, there was no quorum present or no majority that approved the supposed
resolution. This being the case, he asserts that there was no resolution adopted by the
GSIS Board of Trustees approving the sale of the subject properties to respondent La’o.
The Sandiganbayan, basing its resolution on the Pre-trial Stipulation entered into by the
prosecution and respondent Dumlao, dismissed the case against the latter, since it found
that the GSIS Board of Trustees failed to approve or validly pass the Lease-Purchase
Agreement, because only three out of the seven members of the Board signed the minutes
of the meeting held on 23 April 1982. It explained that, "no amount of evidence can change
the fact that the Resolution dated April 23, 1982 was not validly passed by the Board of
Trustees of GSIS since it was only signed by three members of the Board. Thus, it never
had the force and effect of a valid resolution and did not in effect approve the Lease and
Purchase Agreement subject matter hereof. Therefore, the prosecution has no cause of
action against herein movant-accused Hermenegildo C. Dumlao."
The ground raised by respondent Dumlao in his Motion to Quash/Dismiss is that the facts
charged do not constitute an offense. The fundamental test in determining the sufficiency of
the material averments of an information is whether the facts alleged therein, which are
hypothetically admitted, would establish the essentials elements of the crime defined by
law. Evidence aliunde, or matters extrinsic of the Information, are not be considered.11
The elements of the crime under Section 3(g) of Republic Act No. 3019 are as follows: (1)
that the accused is a public officer; (2) that he entered into a contract or transaction on
behalf of the government; and (3) that such contract or transaction is grossly and manifestly
disadvantageous to the government.12
After examining the information, we find that the facts alleged therein, if hypothetically
admitted, will prove all the elements of Section 3(g) as against respondent Dumlao.
It can be gathered from the resolution of the Sandiganbayan that it did consider the ground
invoked by Dumlao (that the facts charged do not constitute an offense); otherwise, it could
have denied respondent Dumlao’s motion. From the reasoning given by the
Sandiganbayan, it is clear that it dismissed the case because of insufficiency of evidence.
Insufficiency of evidence is not one of the grounds of a Motion to Quash. The grounds, as
enumerated in Section 3, Rule 117 of the Revised Rules of Criminal Procedure, are as
follows:
 (a) That the facts charged do not constitute an offense;
(b) That the court trying the case has no jurisdiction over the offense charged;
(c) That the court trying the case has no jurisdiction over the person of the
accused;
(d) That the officer who filed the information had no authority to do so;
(e) That it does not conform substantially to the prescribed form;
(f) That more than one offense is charged except when a single punishment for
various offenses is prescribed by law;
(g) That the criminal action or liability has been extinguished;
(h) That it contains averments which, if true, would constitute a legal excuse or
justification; and
(i) That the accused has been previously convicted or acquitted of the offense
charged, or the case against him was dismissed or otherwise terminated without
his express consent.
Insufficiency of evidence is a ground for dismissal of an action only after the prosecution
rests its case. Section 23, Rule 119 of the Revised Rules of Criminal Procedure provides:
Sec. 23. Demurrer to evidence. – After the prosecution rests its case, the court may
dismiss the action on the ground of insufficiency of evidence (1) on its own initiative after
giving the prosecution the opportunity to be heard or (2) upon demurrer to evidence filed by
the accused with or without leave of court.
In the case under consideration, the Sandiganbayan dismissed the case against
respondent for insufficiency of evidence, even without giving the prosecution the
opportunity to present its evidence. In so doing, it violated the prosecution’s right to due
process. It deprived the prosecution of its opportunity to prosecute its case and to prove the
accused’s culpability.
It was therefore erroneous for the Sandiganbayan to dismiss the case under the premises.
Not only did it not consider the ground invoked by respondent Dumlao; it even dismissed
the case on a ground not raised by him, and not at the appropriate time. The dismissal was
thus without basis and untimely.
On the second issue raised by petitioner, it maintains that the Sandiganbayan erred in
equating, or confusing, the minutes of the meeting of 23 April 1982 with Resolution No.
326, which allegedly approved the lease-purchase agreement on the GSIS properties,
entered into with respondent La’o. It argues that the Sandiganbayan incorrectly ruled that
the Resolution dated 23 April 1982 regarding the lease-purchase of the GSIS properties
was not approved, because only three out of the seven members of the GSIS Board of
Trustees signed the minutes of the meeting of 23 April 1982.
We agree with petitioner that the Sandiganbayan erred in equating the minutes of the
meeting with the supposed resolution of the GSIS Board of Trustees. A resolution is distinct
and different from the minutes of the meeting. A board resolution is a formal action by a
corporate board of directors or other corporate body authorizing a particular act,
transaction, or appointment.13 It is ordinarily special and limited in its operation, applying
usually to some single specific act or affair of the corporation; or to some specific person,
situation or occasion.14 On the other hand, minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/members or directors/trustees, but also at a
meeting of an executive committee. The minutes are usually kept in a book specially
designed for that purpose, but they may also be kept in the form of memoranda or in any
other manner in which they can be identified as minutes of a meeting.15
The Sandiganbayan concluded that since only three members out of seven signed the
minutes of the meeting of 23 April 1982, the resolution approving the Lease-Purchase
Agreement was not passed by the GSIS Board of Trustees. Such conclusion is erroneous.
The non-signing by the majority of the members of the GSIS Board of Trustees of the said
minutes does not necessarily mean that the supposed resolution was not approved by the
board. The signing of the minutes by all the members of the board is not required. There is
no provision in the Corporation Code of the Philippines16 that requires that the minutes of
the meeting should be signed by all the members of the board.
The proper custodian of the books, minutes and official records of a corporation is usually
the corporate secretary. Being the custodian of corporate records, the corporate secretary
has the duty to record and prepare the minutes of the meeting. The signature of the
corporate secretary gives the minutes of the meeting probative value and credibility.17 In
this case, Antonio Eduardo B. Nachura,18 Deputy Corporate Secretary, recorded, prepared
and certified the correctness of the minutes of the meeting of 23 April 1982; and the same
was confirmed by Leonilo M. Ocampo, Chairman of the GSIS Board of Trustees. Said
minutes contained the statement that the board approved the sale of the properties, subject
matter of this case, to respondent La’o.
The minutes of the meeting of 23 April 1982 were prepared by the Deputy Corporate
Secretary of the GSIS Board of Trustees. Having been made by a public officer, the
minutes carry the presumption of regularity in the performance of his functions and duties.
Moreover, the entries contained in the minutes are prima facie evidence of what actually
took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on
Evidence.19 This being the case, the Sandiganbayan erred in dismissing the case, because
there was evidence, at that time, when it dismissed the case against respondent Dumlao.
The dismissal by the lower court of the case against respondent Dumlao was indeed
premature. It should have given the prosecution the opportunity to fully present its case and
to establish reasonable doubt on the alleged approval by the GSIS Board of Trustees of the
lease-purchase of the GSIS properties.
Petitioner likewise faults the Sandiganbayan for archiving the case against respondent
La’o, arguing that since he had already been arraigned, it should have ordered the
prosecution to adduce evidence against him.
We agree. However, said issue has already been mooted by the death of respondent
La’o.20 The death of an accused prior to final judgment terminates his criminal as well as
civil liability based solely thereon.21 Accordingly, the case against respondent La’o was
dismissed.22
In support of the dismissal of the case against him, respondent Dumlao contends that to
give due course to the Ombudsman’s petition would place him in double jeopardy, in
violation of his constitutional rights. Respondent Dumlao asserts that all the elements of
double jeopardy are present in the case at bar. Citing Heirs of Tito Rillorta v. Firme,23 he
added: "[A]ssuming arguendo that the Sandiganbayan committed an error, whatever error
may have been committed by the Sandiganbayan was merely an error of judgment and not
of jurisdiction. It did not affect the intrinsic validity of the decision. This is the kind of error
that can no longer be rectified on appeal by the prosecution, no matter how obvious the
error may be."
To raise the defense of double jeopardy, three requisites must be present: (1) a first
jeopardy must have attached prior to the second; (2) the first jeopardy must have been
validly terminated; and (3) the second jeopardy must be for the same offense as that in the
first.24 The first jeopardy attaches attaches only (1) upon a valid indictment; (2) before a
competent court; (3) after arraignment; (4) when a valid plea has been entered; and (5)
when the defendant was convicted or acquitted, or the case was dismissed or otherwise
terminated without the express consent of the accused.25
We do not agree. In the instant case, double jeopardy has not yet set in. The first jeopardy
has not yet attached. There is no question that four of the five elements of legal jeopardy
are present. However, we find the last element – valid conviction, acquittal, dismissal or
termination of the case – wanting. As previously discussed, the Sandignabayan violated the
prosecution’s right to due process. The prosecution was deprived of its opportunity to
prosecute its case and to prove the accused’s culpability. The dismissal was made in a
capricious and whimsical manner. The trial court dismissed the case on a ground not
invoked by the respondent. The Sandiganbayan dismissed the case for insufficiency of
evidence, while the ground invoked by the respondent was that the facts charged did not
constitute an offense. The dismissal was clearly premature, because any dismissal based
on insufficiency of evidence may only be made after the prosecution rests its case and not
at any time before then.26 A purely capricious dismissal of an information deprives the State
of a fair opportunity to prosecute and convict. It denies the prosecution a day in court. It is
void and cannot be the basis of double jeopardy.27
The cardinal precept is that where there is a violation of basic constitutional rights, courts
are ousted of their jurisdiction. Where the denial of the fundamental right to due process is
apparent, a decision in disregard of the right is void for lack of jurisdiction.28 In the instant
case, there was no error of judgment but a denial of due process resulting in loss of
jurisdiction. Respondent Dumlao would not be placed in double jeopardy because, from
the very beginning, the Sandiganbayan had acted without jurisdiction. Precisely, any ruling
issued without jurisdiction is, in legal contemplation, necessarily null and void and does not
exist.29 Otherwise put, the dismissal of the case below was invalid for lack of a fundamental
prerequisite, that is, due process. In rendering the judgment of dismissal, the trial court
acted without or in excess of jurisdiction, for a judgment which is void for lack of due
process is equivalent to excess or lack of jurisdiction.30 This being the case, the prosecution
is allowed to appeal because it was not given its day in court.
As heretofore explained, the Sandiganbayan gravely abused its discretion amounting to
lack of jurisdiction when it dismissed the case against respondent Dumlao based only on
the stipulations made by the parties during pre-trial. The erroneous equation of the number
of members who signed the minutes of the meeting with the number of members who
approved the alleged resolution necessarily led to the Sandiganbayan’s faulty conclusion
that there was no evidence showing that the GSIS Board of Trustees approved the alleged
Lease-Purchase Agreement. As we have said, the minutes issued by the Depute Corporate
Secretary were enough, at that time, to set the case for trial and to allow the prosecution to
prove its case and to present all its witnesses and evidence.
Respondent Dumlao claims that the GSIS has not been prejudiced because it still owns the
properties subject matter of this case. This Court cannot rule on this claim, the same being
a factual issue and a defense he is raising. The appreciation of this claim is not proper in
this forum and is better left to the trial court, since the Supreme Court is not a trier of
facts.31
Respondent Dumlao maintains he was charged with conspiring with the other GSIS Board
Members in approving the Lease-Purchase Agreement. However, of the seven members,
two died, two were acquitted and the other two were not charged. He was left alone. He
argues that since a conspiracy requires two or more persons agreeing to commit a crime,
he can no longer be charged because he was left alone to face a charge of conspiracy.
His assumption that he can no longer be charged because he was left alone -- since the
co-conspirators have either died, have been acquitted or were not charged -- is wrong. A
conspiracy is in its nature a joint offense. One person cannot conspire alone. The crime
depends upon the joint act or intent of two or more person. Yet, it does not follow that one
person cannot be convicted of conspiracy. As long as the acquittal or death of a co-
conspirator does not remove the basis of a charge of conspiracy, one defendant may be
found guilty of the offense.32 In the case at bar, the absence or presence of conspiracy is
again factual in nature and involves evidentiary matters. The same is better left ventilated
before the trial court during trial, where the parties can adduce evidence to prove or
disprove its presence.
Lastly, respondent Dumlao submits that his prosecution, to the exclusion of others,
constitutes unfair discrimination and violates his constitutional right to equal protection of
the law. He says that the dismissal of the case against his co-accused Canlas and Clave
were not appealed by the prosecution; and the two government officials who signed the
Lease-Purchase Agreement, and the two other members (Ocampo and Morales) of the
GSIS Board of Trustees who signed the minutes were not charged.
We are not convinced that respondent Dumlao was unfairly discriminated against and his
constitutional right to equal protection violated. It must be remembered that the manner in
which the prosecution of the case is handled is within the sound discretion of the
prosecutor, and the non-inclusion of other guilty persons is irrelevant to the case against
the accused.33 We find that there was no clear and intentional discrimination in charging
respondent Dumlao. A discriminatory purpose is never presumed.34 It must be remembered
that it was not solely respondent who was charged, but also five of the seven board
members. If, indeed, there were discrimination, respondent Dumlao alone could have been
charged. But this was not the case. Further, the fact that the dismissal of the case against
his co-accused Canlas and Clave was not appealed is not sufficient to cry discrimination.
This is likewise true for the non-inclusion of the two government officials who signed the
Lease-Purchase Agreement and the other two board members. Mere speculation,
unsupported by convincing evidence, cannot establish discrimination on the part of the
prosecution and the denial to respondent of the equal protection of the laws.
In Santos v. People,35 citing People v. Dela Piedra,36 the Court explained:
The prosecution of one guilty person while others equally guilty are not prosecuted,
however, is not, by itself, a denial of the equal protection of the laws. Where the official
action purports to be in conformity to the statutory classification, an erroneous or mistaken
performance of the statutory duty, although a violation of the statute, is not without more a
denial of the equal protection of the laws. The unlawful administration by officers of a
statute fair on its face, resulting in its unequal application to those who are entitled to be
treated alike, is not a denial of equal protection unless there is shown to be present in it an
element of intentional or purposeful discrimination. This may appear on the face of the
action taken with respect to a particular class or person, or it may only be shown by
extrinsic evidence showing a discriminatory design over another not to be inferred from the
action itself. But a discriminatory purpose is not presumed, there must be a showing
of "clear and intentional discrimination." Appellant has failed to show that, in charging
appellant in court, that there was a "clear and intentional discrimination" on the part of the
prosecuting officials.
The discretion of who to prosecute depends on the prosecution’s sound assessment
whether the evidence before it can justify a reasonable belief that a person has committed
an offense. The presumption is that the prosecuting officers regularly performed their
duties, and this presumption can be overcome only by proof to the contrary, not by
mere speculation. Indeed, appellant has not presented any evidence to overcome this
presumption. The mere allegation that appellant, a Cebuana, was charged with the
commission of a crime, while a Zamboangueña, the guilty party in appellant’s eyes, was
not, is insufficient to support a conclusion that the prosecution officers denied appellant
equal protection of the laws.
There is also common sense practicality in sustaining appellant’s prosecution.
While all persons accused of crime are to be treated on a basis of equality before the
law, it does not follow that they are to be protected in the commission of crime. It
would be unconscionable, for instance, to excuse a defendant guilty of murder because
others have murdered with impunity. The remedy for unequal enforcement of the law in
such instances does not lie in the exoneration of the guilty at the expense of
society x x x. Protection of the law will be extended to all persons equally in the pursuit of
their lawful occupations, but no person has the right to demand protection of the law in the
commission of a crime.
Likewise, [i]f the failure of prosecutors to enforce the criminal laws as to some persons
should be converted into a defense for others charged with crime, the result would be that
the trial of the district attorney for nonfeasance would become an issue in the trial of many
persons charged with heinous crimes and the enforcement of law would suffer a complete
breakdown. (Emphases ours.)
WHEREFORE, premises considered, the instant petition is GRANTED. The resolution of
the Sandiganbayan in Criminal Case No. 16699 dated 14 July 2005 granting the Motion to
Dismiss/Quash of respondent Hermenegildo C. Dumlao, is hereby REVERSED and SET
ASIDE. The Sandiganbayan is forthwith DIRECTED to set the case for the reception of
evidence for the prosecution.
As to respondent Emilio G. La’o, on account of his demise, the case against him is
DISMISSED.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
Acting Chairperson