Case 39 Halley v.

Printwell (Pierce the Corporate Viel)

BMPI commissioned Printwell for the printing of the magazine that BMPI published and sold.

BMPI placed with Printwell several orders on credit, evidenced by invoices and delivery receipts

Printwell sued BMPI for the collection... of the unpaid balance.

The defendants filed a consolidated answer,[6]averring that they all had paid their subscriptions in
full; that BMPI had a separate personality from those of its stockholders

To prove payment of their subscriptions, the defendant stockholders submitted in evidence BMPI
official receipt

RTC rendered a decision in favor of Printwell, rejecting the allegation of payment in full of the
subscriptions in view of an irregularity in the issuance of the ORs and observing that the defendants
had used BMPI's corporate personality to evade payment... and create injustice

Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell

CA affirmed the RTC, holding that the defendants' resort to the corporate personality would create
an injustice because Printwell would thereby be at a loss against whom it would assert the right to
collect

The CA declared that the inconsistency in the issuance of the ORs rendered the claim of full
payment of the subscriptions to the capital stock unworthy of consideration; and held that the veil of
corporate fiction could be pierced when it was used as a shield to perpetrate a... fraud or to confuse
legitimate issues.

Issues & Rulings

1. Did the RTC decision violate the constitutional requirement that a judgment or final order of a
court should state clearly and distinctly the facts and the law on which it is based?

No. It is to be observed in this connection that a trial or appellate judge may occasionally view a
party’s memorandum or brief as worthy of due consideration either entirely or partly.

2. Was the piercing of the veil of corporate fiction proper?

Yes... because the CA found her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was transacted and incurred
 3. Was the Trust fund doctrine properly applied, despite the petitioner claiming that she had
already fully paid her subscriptions to the capital stock of BMPI

Yes, We clarify that the trust fund doctrine is not limited to reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts.

Case 40 Turner vs. Lorenzo Shipping Corp. (the filing of the action was
premature since the corporation did not have Unrestricted Retained Earnings)

FACTS

The spouses Turners are stockholders of Lorenzo Shipping Corp.

When the Corp decided to amend its Articles to remove the stockholders’ pre-emptive rights to
newly-issued shares of stock,

The Turners voted against it.

Turners demanded the Corp to buy them out based on BOOK VALUE

There was a disagreement in the valuation of the shares. So an appraisal committee was formed
pursuant to the Corp. Code.

The latter favored the Turners. So the Turners demanded payment.

The Corp refused on the ground that the stockholders’ appraisal rights could only be paid when the
corporation had UNRESTRICTED RETAINED EARNINGS

Turners filed to recover the value of their shareholdings plus damages against Lorenzo Shipping
Corp.

RTC favored the Turners. RTC issued writ of execution.

Respondent filed for certiorari before CA, assailing the RTC order.

CA favored Lorenzo Shipping, Hence, this petition.

ISSUES & RULINGS

1. Did the RTC gravely abuse its discretion when it issued the writ of execution?
- Yes, the RTC gravely abused its discretion when it issued the writ of execution because the
petitioners had no cause of action at the time the original action was filed

- Since appraisal rights can only be paid when the corporation had UNRESTRICTED RETAINED
EARNINGS (URE) to cover the fair value of the shares, the filing of the action was premature.

Important Facts

- A stockholder who dissents from certain corporate actions has the right to demand payment
of the fair value of his or her shares.
o This right, known as the right of appraisal

How appraisal is exercised?

- The appraisal right is exercised by any stockholder who has voted against the proposed
corporate action by making a written demand on the corporation within 30 days after the date
on which the vote was taken for the payment of the fair value of his shares
o The failure to make the demand within the period is deemed a waiver of the appraisal
right.
- If the withdrawing stockholder and the corporation cannot agree on the fair value of the
shares within a period of 60 days from the date the stockholders approved the corporate
action, the fair value shall be determined and appraised by three disinterested persons
o The findings and award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is made
o Upon payment by the corporation of the agreed or awarded price, the stockholder
shall forthwith transfer his or her shares to the corporation.
- All rights accruing to the withdrawing stockholder’s shares, including voting and dividend
rights, shall be suspended from the time of demand for the payment of the fair value of the
shares
- Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon
that such shares are dissenting shares.

o If the certificates are consequently cancelled, the rights of the transferor as a

dissenting stockholder under this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend distributions that would have
accrued on such shares shall be paid to the transferee.
Trust Fund Doctrine

- Supports the requirement of unrestricted retained earnings to fund the payment of the shares
of stocks of the withdrawing stockholders.

- Under the doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.

Unrestricted retained earnings

- The respondent had indisputably no unrestricted retained earnings in its books at the time
the petitioners proved that the respondent’s legal obligation to pay the value of the
petitioners’ shares did not yet arise.

- Thus, the CA did not err in holding that the petitioners had no cause of action, and in ruling
that the RTC did not validly render the partial summary judgment.

Cause of Action

- A cause of action is the act or omission by which a party violates a right of another.

- Elements of cause of action

o (a) the existence of a legal right in favor of the plaintiff;

o (b) a correlative legal duty of the defendant to respect such right; and

o (c) an act or omission by such defendant in violation of the right of the plaintiff with a
resulting injury or damage to the plaintiff for which the latter may maintain an action
for the recovery of relief from the defendant

- Although the first two elements may exist, a cause of action arises only upon the occurrence
of the last element, giving the plaintiff the right to maintain an action in court for recovery of
damages or other appropriate relief

- an action commenced before the cause of action has accrued is prematurely brought
and should be dismissed.

- Unless the plaintiff has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition or accrual of
one while the action is pending
 - The RTC was guilty of an error of jurisdiction, for it exceeded its jurisdiction by taking
cognizance of the complaint that was not based on an existing cause of action.

Case 41 Mobilia Products Inc. vs. Umezawa (Crimes cognizable by the SEC as
well as the regular courts may be proceeded independently and
simultaneously with each other.)

FACTS

Umezawa, then the President and General Manager of MPI, organized another company
without knowledge of the Board of Directors of MPI.

The said company would be engaged in the same businessas Mobilia where Umezawa stole
products from MPI.

Public prosecutor filed criminal complaints against Umezawa

The trial court asserted that the controversy involving the criminal cases was between
Umezawa and the other stockholders of MPI.

It also held that the SEC, not the trial court, had jurisdiction over intra-corporate controversies.

CA affirmed the ruling of the RTC that the dispute between Umezawa and the other
stockholders and officers over the implementation of the MPI’s standard procedure is intra-
corporate in nature; hence, within the exclusive jurisdiction of the SEC.

The petitioner MPI filed the instant petition for review on certiorari.

ISSUE
 1. whether or not the petition for certiorari of the People of the Philippines in the CA assailing
the January 29, 1999 Joint Order of the trial court was time-barred;

No. We agree with the ruling of the CA that the petition for certiorari filed by the petitioner People
of the Philippines with the CA was filed beyond the 60-day period.

Even then, the Court still holds that the CA erred in dismissing the petition of the People of the
Philippines simply because the public prosecutor erred in not himself filing a motion for
reconsideration of the joint order of the trial court, on his perception that by being present during
the hearing of the motion for reconsideration of petitioner MPI, he thereby adopted the said
motion as that of the State is not estopped by the mistakes of its officers and employees.

2. whether the RTC has jurisdiction over the crimes charged in the said Informations;

Yes. The alleged fraudulent acts of respondent Umezawa in this case constitute the element of
abuse of confidence, deceit or fraudulent means, and damage the Revised Penal Code on estafa. 43

- "It should be obvious that not every conflict between a corporation and its stockholders
involves corporate matters that only the SEC can resolve in the exercise of its adjudicatory or
quasi-judicial powers."

- The better policy in determining which body has jurisdiction over a case would be to consider
not only the relationship of the parties but also the nature of the questions raised in the
subject of the controversy

3. whether the Informations sufficiently charge the felonies of qualified theft and estafa
- Yes. all the elements of the offense of qualified theft are present in the allegations in the
information which are sufficient to bind Umezawa.

- a fraudulent act may give rise to liability for violation of the rules and regulations
of the SEC cognizable by the SEC itself,
- As well as criminal liability for violation of the Revised Penal Code cognizable by
the regular courts, both charges to be filed and proceeded independently, and
may be simultaneously with the other.

Section 16, Rule 110 of the Rules of Criminal Procedure, the offended party may
intervene in the criminal action personally or by counsel, who will then act as private
prosecutor for the protection of his interests and in the interest of the speedy and
inexpensive administration of justice.
Case law has it that in order to determine the jurisdiction of the court in criminal cases,
the complaint or Information must be examined for the purpose of ascertaining whether
or not the facts set out therein and the prescribed period provided for by law are within
the jurisdiction of the court, and where the said Information or complaint is filed.

Properties registered in the name of the corporation are owned by it as an entity

separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation.

On the last issue, we find and so hold that the Informations state all the essential
elements of estafa and qualified theft. It was adequately alleged that respondent
Umezawa, being the President and General Manager of petitioner MPI, stole and

Case 42 GRACE CHRISTIAN HIGH SCHOOL v. Lim (Death of Members, Vacancy

in the Board)

In this case, there was a meeting held by the petitioners. The chairman held that there
was no quorum since there were only 7 out of 15 regular members who attended the
meeting. Four members were then voted to replace the four deceased members.

The SEC Hearing Officer declared the meeting null and void and held that the basis in
determining the quorum in a meeting of members should be their number specified in
the articles of incorporation and not just by the living members.

The SEC En Banc denied the appeal of petitioners and sustained the Hearing Officers
decision.

The CA also denied the petition because the Verification and Certification of Non-Forum
Shopping was only signed by Atty. Padilla despite having no Special Power of Attorney
authorizing him to sign for the rest of the petitioners.

Issues & Rulings:

1. Whether the CA erred in denying the Petition below, on the basis of a defective
Verification and Certification.
- No, the court ruled that the procedural lapse may be excused.
Important Facts:

- 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.

2. Whether dead members should still be counted in the determination of the

quorum, for purposes of conducting the annual members' meeting.
- No, Section 52 of the Corporation Code states that the majority of 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.

3. The Right to Vote in Stock Corporations

- The right to vote is inherent in and incidental to the ownership of corporate
stocks.
- 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. 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 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. 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.

4. The right to vote in Non-stock Corporations

- In nonstock corporations, the voting rights attach to membership. 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. 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.

5. Effect of the Death of a Member or Shareholder

- Under the By-Laws of GCHS, membership in the corporation shall, among others,
be terminated by the death of the member. 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.
- 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 members present, was valid.

6. Vacancy in the Board of Trustees

- 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.
- 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.
- 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.
 - 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.

Case 43 PCGG v. COCOFED (PCGG shall vote the Sequestered Shares of Stock)

In this case, PCGG issued and implemented numerous sequestrations, freeze orders,
provisional takeovers, of allegedly ill-gotten companies, assets and properties, real or
personal.

Among the properties sequestered by the Commission were the shares of stock in the
UCPB.

The PCGG instituted an action for reconveyance, reversion, accounting, restitution and
damages in the Sandiganbayan.

Upon the Motion of Respondent, the Sandiganbayan issued a Resolution lifting the
sequestration of the subject UPCB shares due to the failure of PCGG to implead
respondents as parties-defendants.

Another motion of the respondent caused the court to order the holding of elections for
the Board of Directors of UCPB. But later ordered to proceed with the election and
allowed the sequestered shares to be voted by their registered owners.

Respondent filed a Class Action Omnibus Motion asking the court to enjoin the PCGG
from voting the UPCB shares of stock.

The Sandiganbayan issued the order authorizing the respondents to vote.

Issue &Rulings

1. Who May Vote the Sequestered Shares of Stock?

 - This Court holds that the government should be allowed to continue voting those
shares inasmuch as they were purchased with coconut levy funds — funds that
are prima facie public in character or, at the very least, are “clearly affected with
public interest.
- This Court believes that the government should be allowed to vote the
questioned shares, because they belong to it as the prima facie beneficial and
true owner.

Important Facts

- At the outset, it is necessary to restate the general rule that the registered
owner of the shares of a corporation exercises the right and the privilege of
voting.
- This principle applies even to shares that are sequestered by the government,
over which the PCGG as a mere conservator cannot, as a general rule, exercise
acts of dominion. On the other hand, it is authorized to vote these sequestered
shares registered in the names of private persons and acquired with allegedly ill-
gotten wealth, if it is able to satisfy the two-tiered test.
- Two-tiered test
o (1) Is there prima facie evidence showing that the said shares are ill-
gotten and thus belong to the State?
o (2) Is there an imminent danger of dissipation, thus necessitating their
continued sequestration and voting by the PCGG, while the main issue is
pending with the Sandiganbayan?

- Two “public character” exceptions

o 1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and
o (2) Where the capitalization or shares that were acquired with public
funds somehow landed in private hands.
- 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.
 o 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.
- 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 these
were purchased with public funds, 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
o (1) originally government shares, or
o (2) purchased with public funds or those affected with public interest,
then the two-tiered test does not apply. Rather, the public character
exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is,
the government shall vote the shares.
- In the present case before the Court, it is not disputed that the money used to
purchase the sequestered UCPB shares came from the Coconut Consumer
Stabilization Fund (CCSF), otherwise known as the coconut levy funds.
o “The coconut levy funds being ˜clearly affected with public interest, it
follows that the corporations formed and organized from those funds, and
all assets acquired therefrom should also be regarded as ˜clearly affected
with public interest.’
- In the present case, the sequestered UCPB shares are confirmed to have been
acquired with coco levies, not with alleged ill-gotten wealth. Hence, by parity of
reasoning, the right to vote them is not subject to the “two-tiered test but to
the public character of their acquisition, which per Antiporda v. Sandiganbayan
cited earlier, must first be determined.

- As stated at the beginning, voting is an act of dominion that should be exercised

by the share owner. One of the recognized rights of an owner is the right to vote
at meetings of the corporation. The right to vote is classified as the right to
control. 76 Voting rights may be for the purpose of, among others, electing or
 removing directors, amending a charter, or making or amending bylaws. 77
Because the subject UCPB shares were acquired with government funds, the
government becomes their prima facie beneficial and true owner.

Case 44 Puno v. Puno Enterprises (illegitimate child who claims to be an heir

to a decedent's estate cannot be adjudicated in an ordinary civil action)

In this case, petitioner claims to be the heir of the deceased Carlos Puno and
initiated a complaint for specific performance against respondent.
He claimed entitlement of the rights and privileges as stockholder of respondent.

Respondent filed a motion to dismiss on the ground that petitioner do not have
the legal personality to sue due to the error on his birth certificate.

Petitioner then submitted the corrected birth certificate and the court set the
case for pre-trial.

RTC ruled in favor of petitioner. CA reversed. Hence this petition.

Issue & Rulings

1. Whether Petitioner IS ENTITLED TO THE RELIEFS DEMANDED HE BEING THE
HEIR OF THE LATE CARLOS PUNO, ONE OF THE INCORPORATORS [OF]
RESPONDENT CORPORATION.
- No, 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.

Important Facts:
- 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.
o There was no evidence that Carlos L. Puno acknowledged petitioner as his
son.
o 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.
- Sections 74 and 75 of the Corporation Code enumerate the persons who are
entitled to the inspection of corporate books.
o Sec. 74. Books to be kept; stock transfer agent. — .... 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.
o 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.
 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. Such
right rests upon the stockholder's underlying ownership of the
corporation's assets and property.
- 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.
o 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.
o 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.
- Until a settlement and division of the estate is effected, the stocks of the
decedent are held by the administrator or executor.
o 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.
o 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.
- 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.
o 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.
o 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.
Case 45 GSIS v. CA (The SEC does not have jurisdiction over the election case)

Meralco held an annual stockholders meeting where they designated Vitug to act as
corporate secretary due to the resignation of the former corporate secretary.

GSIS thereafter filed a complaint with the RTC seeking the nullification of the proxies
during the proceeding.

A Cease and Desist Order (CDO) was then issued and signed by SEC Commissioner to
restrain the use of said proxies during the annual meeting.

Nevertheless, Meralco continued the meeting despite the foregoing.

The SEC then issued Show Cause Order against respondent.

However, the CA held that the complaint of GSIS be dismissed for lack of jurisdiction,
forum shopping, and splitting of actions.

Issues & Rulings

1. Can SEC seek the reversal of the court’s decision; seek the recognition of the
jurisdiction of the SEC over the petition of GSIS, and the validity of the CDO and
SCO?
- No, the SEC Commissioner Marquez and Guevarra, are not real parties-in-
interest to the dispute and thus bereft of capacity to file the petition.
Important Facts

- Section 1 of Rule 45, which governs appeals by certiorari, the right to file the
appeal is restricted to "a party”, meaning that only the real parties-in-interest
who litigated the petition for certiorari before the Court of Appeals are entitled to
appeal the same under Rule 45.
o The SEC and its two officers may have been designated as respondents in
the petition for certiorari filed with the Court of Appeals, but under Section
5 of Rule 65 they are not entitled to be classified as real parties-in-
interest. Under the provision, the judge, court, quasi-judicial agency,
tribunal, corporation, board, officer or person to whom grave abuse of
discretion is imputed (the SEC and its two officers in this case) are
denominated only as public respondents.
o Their involvement in the instant petition is not as original party-litigants,
but as the quasi-judicial agency and officers exercising the adjudicative
functions over the dispute between the two contending factions within
Meralco. From the onset, neither the SEC nor Martinez or Guevarra has
been considered as a real party-in-interest.

2. Whether the SEC has jurisdiction over the petition filed by GSIS against private
respondents.
- No, the regular courts have the jurisdiction to election-related controversies.
o Section 5 (c) of Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-related
controversies is specifically confined to "controversies in the election or
appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations.

Important Facts
 - Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5 (c) does not extend to every potential subject that
may be voted on by shareholders, but only to the election of directors or
trustees, in which stockholders are authorized to participate under Section 24 of
the Corporation Code.
- The question is whether or not the cause of action of GSIS before the SEC is
intimately tied to an election controversy.
o To answer that, we need to properly ascertain the scope of the power of
trial courts to resolve controversies in corporate elections.
- When proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election controversy within
the original and exclusive jurisdiction of the trial courts.
- The proxy challenge raised by GSIS relates to the election of the directors of
Meralco.

3. Whether the CDO and SCO issued by the SEC are valid?
- No, the lack of jurisdiction of the SEC over the subject matter of GSIS's petition
necessarily invalidates the CDO and SDO issued by that body.

Important Facts

- The CDO extended by the SEC fails to provide the needed reasonable clarity of
the rationale behind its issuance.
- The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together
may leave the impression that it is grounded on all three provisions, and that
may very well have been the intention of the SEC.
o It is legally impermissible for the SEC to have utilized both Section 53.3
and Section 64 as basis for the CDO at the same time. The CDO under
Section 53.3 is premised on distinctly different requisites than the CDO
under Section 64.
o This lack of clarity is to the obvious prejudice of the respondent, and is in
clear defiance of the constitutional right to due process of law. Indeed, the
 veritable mélange that the assailed CDO is, with its jumbled mixture of
premises and conclusions, the antithesis of due process.
- To make matters worse for the SEC, the fact that the CDO was signed, much
less apparently deliberated upon, by only by one commissioner likewise renders
the order fatally infirm.

Case 46 J.G. Summit Holdings v. CA (a person may purchase shares in a

landholding corporation even if the latter will exceed the allowed foreign
equity)

The National Investment and Development Corporation (NIDC), a government

corporation, entered into a joint venture agreement (JVA) with Kawasaki

Under the JVA, the NIDC and KAWASAKI will contribute P330 million for the
capitalization of PHILSECO in the proportion of 60%-40% respectively.

One of its salient features is the grant to the parties of the right of first refusal should
either of them decide to sell, assign or transfer its interest in the joint venture.

In the interest of national economy, it was decided that PHILSECO should be privatized
by selling 87.67% of its total outstanding capital stock to private entities.

Even so, because of the right to top by 5% percent the highest bid, it was able to top
JG Summits bid.

JG Summit protested, contending that PHILSECO, as a shipyard is a public utility and,

hence, must observe the 60%-40% Filipino-foreign capitalization. By buying 87.67% of
PHILSECOs capital stock at bidding, Kawasaki/PHI in effect now owns more than 40%
of the stock.

Petitioner filed a Petition for Mandamus with SC, and the petition was referred to the CA

CA dismissed the petition because it was not the proper remedy to question the
constitutionality or legality of the right of first refusal and the right to top that was
exercised by KAWASAKI/PHI, and that the matter must be brought by the proper party
in the proper forum at the proper time and threshed out in a full blown trial.

Petitioner filed MR, which was denied. Petitioner filed with SC petition for certiorari
alleging GAOD on the part of CA. SC ruled that (1) PHILSECO is a public utility and that
(2) the right to top granted to Kawasaki was illegal, among others.

On a MR by the respondents,

the SC ruled that that (PHILSECO) is not a public utility, as by nature, a shipyard is not
a public utility4 and that no law declares a shipyard to be a public utility;

that there is nothing in the 1977 (JVA) preventing (KAWASAKI) from acquiring more
than 40% of PHILSECO’s total capitalization; and the right to top granted to KAWASAKI
in exchange for its right of first refusal did not violate the principles of competitive
bidding.

Issues & Ruling

1. Whether there are sufficient bases to elevate the case at bar to the Court en
banc

No. We emphasize that a decision or resolution of a Division is that of the Supreme

Court and the Court en banc is not an appellate court to which decisions or resolutions
of a Division may be appealed.

Important Facts

- We reject petitioner's argument that the present case may be considered under
the Supreme among en banc cases those involving a novel question of law and
those where a doctrine or principle laid down by the court en banc or in division
may be modified or reversed.
o The right to top was merely a condition or a reservation made in the
bidding rule which was fully disclosed to all bidding parties.

2. May the right of first refusal or the right to top be exercised by the consortium
which is not the proper party granted such right under either the JVA?
- Yes. The fact that the losing bidder, Keppel Consortium, has joined PHILYARDS
in the latter's effort to raise ₱2.131 billion necessary in exercising the right to top
is not contrary to law, public policy or public morals.
- There is nothing in the ASBR that bars the losing bidders from joining either the
winning bidder (should the right to top is not exercised) or KAWASAKI/PHI
(should it exercise its right to top as it did), to raise the purchase price.
- The petitioner did not allege, nor was it shown by competent evidence, that the
participation of the losing bidders in the public bidding was done with fraudulent
intent. Absent any proof of fraud, the formation by [PHILYARDS] of a consortium
is legitimate in a free enterprise system.
- The appellate court is thus correct in holding the petitioner estopped from
questioning the validity of the transfer of the National Government's shares in
PHILSECO to respondent.

3. Whether KAWASAKI had a valid right of first refusal over PHILSECO shares under
the JVA considering that PHILSECO owned land until the time of the bidding and
KAWASAKI already held 40% of PHILSECO’s equity.
- Yes. First of all, the right of first refusal is a property right of PHILSECO
shareholders, KAWASAKI and NIDC, under the terms of their JVA
- The agreement of co-shareholders to mutually grant this right to each
other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino
corporations.
- In fact, it can even be said that if the foreign shareholdings of a
landholding corporation exceeds 40%, it is not the foreign stockholders’
ownership of the shares which is adversely affected but the capacity of
the corporation to own land – that is, the corporation becomes disqualified to
own land.
- No law disqualifies a person from purchasing shares in a landholding
corporation even if the latter will exceed the allowed foreign equity,
what the law disqualifies is the corporation from owning land
- This is not so in the case at bar where the mutual right of first refusal in favor of
NIDC and KAWASAKI does not amount to a virtual transfer of land to a non-
 Filipino. In fact, the case at bar involves a right of first refusal over shares of
stock while the Lui She case involves an option to buy the land itself.

Case 47 PHILIPPINE ASSOCIATED SMELTING AND REFINING

CORPORATION, Petitioner, v. PABLITO O. LIM, MANUEL A. AGCAOILI, AND
CONSUELO M. PADILLA, Respondents.

In this case, respondents were former senior officers and presently shareholders of
petitioner PASAR.

PASAR filed an Amended Petition for Injunction and Damages with prayer for
Preliminary Injunction and/or Temporary Restraining Order to restrain respondents
from demanding inspection of its confidential and inexistent records.

The RTC issued an Order granting PASAR's prayer for a writ of preliminary injunction.

Aggrieved, respondents filed before the Court of Appeals a Petition for

Certiorari questioning the propriety of the writ of preliminary injunction.

The Court of Appeals held that there was no basis to issue an injunctive writ.

Issue & Ruling

1. Should the respondents be prevented by injunction from exercising their right to

inspect?
- No. The Corporation Code provides that a stockholder has the right to inspect
the records of all business transactions of the corporation and the minutes of any
meeting at reasonable hours on business days.
- For an action for injunction to prosper, the applicant must show the existence of
a right, as well as the actual or threatened violation of this right

Important Facts
- The right to inspect under Section 74 of the Corporation Code is subject to
certain limitations.
o However, these limitations are expressly provided as defenses in actions.
o Section 74. Thus, this Court has held that a corporation's objections
to the right to inspect must be raised as a defense
 the person demanding to examine and copy excerpts from the
corporation's records and minutes has not improperly used any
information secured through any previous examination of the
records of such corporation
 The demand is made in good faith or for a legitimate purpose.
- If a stockholder demands the inspection of corporate books, the corporation
could refuse to heed to such demand.

o the latter could then go to court and enforce their rights

o It is then that the corporation could set up its defenses and the reasons
for the denial of such right.
o Thus, the proper remedy available for the enforcement of the right of
inspection is undoubtedly the writ of mandamus to be filed by the
stockholders and not a petition for injunction filed by the corporation.

- The clear provision in Section 74 of the Corporation Code is sufficient

authority to conclude that an action for injunction and, consequently, a
writ of preliminary injunction filed by a corporation is generally
unavailable to prevent stockholders from exercising their right to
inspection. Specifically, stockholders cannot be prevented from gaining
access to the (a) records of all business transactions of the corporation;
and (b) minutes of any meeting of stockholders or the board of
directors, including their various committees and subcommittees.

- Corporations may raise their objections to the right of inspection through

affirmative defense in an ordinary civil action for specific performance or
damages, or through a comment (if one is required) in a petition for mandamus.
 o The corporation or defendant or respondent still carries the burden of
proving (a) that the stockholder has improperly used information before;
(b) lack of good faith; or (c) lack of legitimate purpose.
o Good faith and a legitimate purpose are presumed. It is the duty of the
corporation to allege and prove with sufficient evidence the facts that give
rise to a claim of bad faith as to the existence of an illegitimate purpose

- The confidentiality of business transactions is not a magical incantation that will

defeat the request of a stockholder to inspect the records. Although it is true that
the business is entitled to the protection of its trade secrets and other intellectual
property rights, facts must be pleaded to convince the court that a specific
stockholder's request for inspection, under certain conditions, would violate the
corporation's own legal right.

Case 48 Dee Ping Wee v. Lee Hiong Wee (Decisions and orders under inter rim
rules shall be immediately executory)

Petitioners were the majority stockholders of Marcel Trading Corporation, Marine

Resources Development Corporation, and Marcel Properties.

Respondents are minority shareholders of these three corporations.

Respondents, through counsel, sought to inspect the record books of the three (3)
corporations

Petitioner Dee Ping Wee replied that he will allow if respondent spouses will also allow
petitioners to inspect the financial records of Rico Philippines Industrial Corporation
(RPIC)

Since respondents were unable to get a favorable reply, they filed three (3) separate
complaints before the RTC
They allege that petitioners violated their rights to gain access to and inspect the
corporate books, records, and financial statements pursuant to Section 74 and 75 of the
Corporation Code.

Petitioners contend that respondents request were ill-motivated, i.e. the requested
reports will be used to fish for evidence that will be used to harass petitioners.

The RTC ruled in favor of respondent and held that the right to inspection of corporate
records under Sections 74 and 75 are inherent in the ownership of shares of a
corporation.

“The exercise of this right may be denied, however, if it is shown that stockholders
have improperly used any information secured through a previous examination or that
the demand is purely speculative or merely to satisfy curiosity.

Petitioners filed before the Court of Appeals a petition for certiorari under Rule 65 of the
Rules of Court alleging that there was no plain, speedy and adequate remedy in the
ordinary course of law and that a decision rendered in an intra-corporate controversy
was immediately executory.

The Court of Appeals ruled in favor of petitioners ratiocinating that respondents failed to
allege their motive, purpose, and reason for inspection.

The Court did not find that the respondents were properly motivated in seeking to
inspect the records of the corporation.

However, it granted respondents’ motion for execution.

Petitioners filed an omnibus motion to dismiss but was denied by the RTC.

Thus petitioners filed before Court of Appeals a Petition for Certiorari and Prohibition
with prayer for issuance of Preliminary Injunction.

The motion was denied.

Petitioners filed before the SC praying for the issuance of a preliminary injunction
and/or temporary restraining order.

Issues & Rulings

1. Whether or not the decision in SP No. 85879 (Marcel Properties, Inc.) and 85880 (Marine
Resources Development Corporation) creates a supervening event which would warrant the
 suspension of execution of the RTC decision granting respondents the rights to inspect
corporate records of Marcel Trading Corporation
- No. A supervening event affects or changes the substance of the judgment and renders the
execution thereof inequitable
- Should such an event occur after a judgment becomes final and executory, which event may
render the execution of the judgment impossible or unjust.
- Doubtless, the RTC Decisions dated June 23, 2004 have since become final and executory.
- Civil cases involving the inspection of corporate books are governed by the rules of
procedure set forth in A.M. No. 01-2-04-SC,55 otherwise known as the Interim Rules of
Procedure for Intra-Corporate Controversies
- Section 4, Rule 157 of the Interim Rules states that All decisions and orders issued under
these Rules shall immediately be executory, except the awards for moral damages,
exemplary damages and attorney’s fees, if any.
o No appeal or petition taken therefrom shall stay the enforcement or implementation
of the decision or order, unless restrained by an appellate court. Interlocutory orders
shall not be subject to appeal.

2. Whether or not petitioners pursued the correct remedy in questioning the RTC Decisions

- The RTC Decisions in Civil Case Nos. Q-04-091, Q-04-092 and Q-04-093 are final orders
that disposed of the whole subject matter or terminated the particular proceedings or action,
leaving nothing to be done but to enforce by execution what has been determined.

- As the RTC was unquestionably acting within its jurisdiction, all errors that it might have
committed in the exercise of such jurisdiction are errors of judgment, which are reviewable
by a timely appeal.

- The petitioners’ erroneous choice of remedy was further aggravated by the fact that the
same was apparently resorted to after they lost the remedy of appeal
Case 49 Spouses Yu v. Yukayguan (a derivative suit is fundamentally distinct
and independent from liquidation proceedings)

Both families are stockholders of Winchester Industrial Supply, Inc.

Respondents Yukayguan filed against petitioners Yu a verified Complaint for Accounting,

Inspection of Corporate Books and Damages through Embezzlement and Falsification of
Corporate Records and Accounts before the RTC

The Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of
Winchester, Inc

The parties were able to reach an amicable settlement wherein they agreed to divide
the assets of Winchester, Inc. among themselves.

But respondents repudiated the same, for which reason the RTC proceeded with the
case on its merits

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

The Court of Appeals, in its Decision dated 15 February 2006, affirmed 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

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 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.
The Court of Appeals converted the derivative suit between the parties into liquidation
proceedings.

Issues & Ruling

1. Was the decision of the Court of Appeals in converting the derivative suit
between the parties into liquidation proceeding proper?
- No. The Court held that 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.

What is a derivative suit?

- 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.
- 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.
- The suing stockholder is regarded as a nominal party, with the corporation as the real party
in interest.
 - 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.
- Jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the
Regional Trial Courts designated by this Court.
What is liquidation?
- 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.
- 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.
- 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

What are the requirements for filing a derivative suit?

- The second paragraph of Section 1, Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies 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.
- 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.

- 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 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.
2. Whether 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.
- No. Respondent Joseph’s Supplemental Affidavit and additional evidence were inadmissible
since they were only appended by respondents to their Memorandum before the RTC.

- 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.

Case 50 Chua v. CA (not every suit filed in behalf of the corporation is a derivative suit)

private respondent Lydia Hao filed a complaint-affidavit charging Francis Chua and his wife, of four
counts of falsification of public documents.

the said accused, being then a private individual, did then and there willfully, unlawfully and
feloniously commit acts of falsification upon a public document, to wit: the said accused prepared,
certified, and falsified the Minutes of the Annual Stockholders meeting of the Board of Directors of
the Siena Realty Corporation

Making or causing it to appear in said Minutes of the Annual Stockholders Meeting that one LYDIA
HAO CHUA was present and has participated in said proceedings, when in truth and in fact, as the
said accused fully well knew that said Lydia C. Hao was never present during the Annual
Stockholders Meeting
and neither has participated in the proceedings thereof to the prejudice of public interest and in
violation of public faith and destruction of truth as therein proclaimed

Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate proceedings and
cannot be made part of a criminal action.

He cites where the court said that an appeal on the civil aspect of a criminal case cannot be treated
as a derivative suit

Petitioner asserts that in this case, the civil aspect of a criminal case cannot be treated as a
derivative suit, considering that Siena Realty Corporation was not the private complainant.

Issues & Rulings

1. Is the criminal complaint in the nature of a derivative suit?

No. In the criminal complaint filed by herein respondent, nowhere is it stated that she is filing the
same in behalf and for the benefit of the corporation. Thus, the criminal complaint including the civil
aspect thereof could not be deemed in the nature of a derivative suit.

- Under Section 3613 of the Corporation Code, a corporation is an injured party, its power to
sue is lodged with its board of directors or trustees

o 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.
o In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest
- However, the board of directors of the corporation in this case did not institute the action
against petitioner.
o Private respondent was the one who instituted the action.
- Private respondent asserts that she filed a derivative suit in behalf of the corporation.
o This assertion is inaccurate.
- Not every suit filed in behalf of the corporation is a derivative suit.
o For a derivative suit to prosper, it is required that the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a
 derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit
o In other words, the corporation must be joined as party because it is its cause of
action that is being litigated and because judgment must be a res adjudicata against
it
(2) Is Siena Realty Corporation a proper petitioner in SCA No. 99-94846?
- Yes. In a string of cases, we consistently ruled that only a party-in-interest or those
aggrieved may file certiorari cases

- In the instant case, we find that the recourse of the complainant to the respondent Court of
Appeals was proper.
- The petition was brought in her own name and in behalf of the Corporation.
- Although, the corporation was not a complainant in the criminal action, the subject of the
falsification was the corporation's project and the falsified documents were corporate
documents.

- Therefore, the corporation is a proper party in the petition for certiorari because the
proceedings in the criminal case directly and adversely affected the corporation.

(3) Should private prosecutors be allowed to actively participate in the trial of Criminal Case?

- Yes. Private respondent did not waive the civil action, nor did she reserve the right to institute it
separately, nor institute the civil action for damages arising from the offense charged. Thus, we find
that the private prosecutors can intervene in the trial of the criminal action.

- Under the Rules, where the civil action for recovery of civil liability is instituted in the criminal action
pursuant to Rule 111, the offended party may intervene by counsel in the prosecution of the offense.

- Rule 111(a) of the Rules of Criminal Procedure provides that, "[w]hen a criminal action is instituted,
the civil action arising from the offense charged shall be deemed instituted with the criminal action
unless the offended party waives the civil action, reserves the right to institute it separately, or
institutes the civil action prior to the criminal action."