USA College of Law

Case Name Strategic Alliance Development Corp. Vs. Radstock Securities Limited, 607 SCRA 413
Topic Corporation Law
Case No. | Date G.R. No. 178158 and 180428; December 4, 2009
Ponente
The Corporation Code defines a sale or disposition of substantially all assets and property of a
corporation as one by which the corporation "would be rendered incapable of continuing the business or
Doctrine accomplishing the purpose for which it was incorporated" - any sale or disposition short of this will not
need stockholder ratification, and may be pursued by the majority vote of the Board of Directors .

RELEVANT FACTS
● Construction Development Corporation of the Philippines (CDCP) was incorporated in 1966. It was granted a
franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways and Metro
Manila Expressway.
● CDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from Marubeni Corporation of
Japan (Marubeni). A CDCP official issued letters of guarantee for the loans although there was no CDCP
Board Resolution authorizing the issuance of such letters of guarantee. CDCP Mining secured the Marubeni
loans when CDCP and CDCP Mining were still privately owned and managed.
● In 1983, CDCP’s name was changed to Philippine National Construction Corporation (PNCC) in order to
reflect that the Government already owned 90.3% of PNCC and only 9.70% is under private ownership.
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid.
● On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC Board) passed Board
Resolutions admitting PNCC’s liability to Marubeni. Previously, for two decades the PNCC Board consistently
refused to admit any liability for the Marubeni loans.
● In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a foreign
corporation. Radstock immediately sent a notice and demand letter to PNCC.
● PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay Radstock
the reduced amount of P6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP Mining’s debt
allegedly totaling P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its reduced obligation,
PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock all its rights and
interests" to the listed real properties of PNCC; (2) issue to Radstock or its assignee common shares of the
capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC;
and (3) assign to Radstock or its assignee 50% of PNCC’s 6% share, for the next 27 years, in the gross toll
revenues of the Manila North Tollways Corporation.
● Strategic Alliance Development Corporation (STRADEC) moved for reconsideration. STRADEC alleged that it
has a claim against PNCC as a bidder of the National Government’s shares, receivables, securities and
interests in PNCC.

ISSUE: W/N the Compromise Agreement between PNCC and Radstock is valid in relation to the Constitution,
existing laws, and public policy
RULING: No. The Compromise Agreement is contrary to the Constitution, existing laws and public policy.

PNCC’s toll fees are public funds. PNCC cannot use public funds like toll fees that indisputably form part of the
General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for
a public purpose. The toll fees are merely held in trust by PNCC for the National Government, which is the owner
of the toll fees. Considering that there is no appropriation law passed by Congress for the compromise amount,
the Compromise Agreement is void for being contrary to law, specifically Section 29(1), Article VI of the
Constitution. And since the payment pertains to CDCP Mining’s private debt to Radstock, the Compromise
Agreement is also void for being contrary to the fundamental public policy that government funds or property
shall be spent or used solely for public purposes.

Radstock is not qualified to own land in the Philippines. Consequently, Radstock is also disqualified to own the
rights to ownership of lands in the Philippines. Otherwise, there will be a blatant circumvention of the
Constitution, which prohibits a foreign private corporation from owning land in the Philippines. In addition,
Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself. It is
basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the
rights to the ownership, are to be transferred to the assignee or buyer. The third party assignee under the
Compromise Agreement who will be designated by Radstock can only acquire rights duplicating those which its
assignor is entitled by law to exercise. Thus, the assignee can acquire ownership of the land only if its assignor
owns the land. Clearly, the assignment by PNCC of the real properties to a nominee to be designated by Radstock
is a circumvention of the Constitutional prohibition against a private foreign corporation owning lands in the
Philippines. The said circumvention renders the Compromise Agreement void.

RULING
 USA College of Law

Notes:

The act of the PNCC Board in issuing Board Resolution expressly admitting liability for the Marubeni loans
demonstrates the PNCC Boards gross and willful disregard of the requisite care and diligence in managing the affairs
of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders. This
reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary
duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the
Corporation Code, which provides:

SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.