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G.R. No.

164182

February 26, 2008

POWER HOMES UNLIMITED CORPORATION, petitioner, vs. SECURITIES AND EXCHANGE COMMISSION AND NOEL MANERO, respondents. DECISION PUNO, C.J.: This petition for review seeks the reversal and setting aside of the July 31, 2003 Decision1 of the Court of Appeals that affirmed the January 26, 2001 Cease and Desist Order (CDO) 2 of public respondent Securities and Exchange Commission (SEC) enjoining petitioner Power Homes Unlimited Corporations (petitioner) officers, directors, agents, representatives and any and all persons claiming and acting under their authority, from further engaging in the sale, offer for sale or distribution of securities; and its June 18, 2004 Resolution 3 which denied petitioners motion for reconsideration. The facts: Petitioner is a domestic corporation duly registered with public respondent SEC on October 13, 2000 under SEC Reg. No. A200016113. Its primary purpose is: To engage in the transaction of promoting, acquiring, managing, leasing, obtaining options on, development, and improvement of real estate properties for subdivision and allied purposes, and in the purchase, sale and/or exchange of said subdivision and properties through network marketing.4 On October 27, 2000, respondent Noel Manero requested public respondent SEC to investigate petitioners business. He claimed that he attended a seminar conducted by petitioner where the latter claimed to sell properties that were inexistent and without any brokers license. On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public respondent SEC whether petitioners business involves "legitimate network marketing." On the bases of the letters of respondent Manero and Munsayac, public respondent SEC held a conference on December 13, 2000 that was attended by petitioners incorporators John Lim, Paul Nicolas and Leonito Nicolas. The attendees were requested to submit copies of petitioners marketing scheme and list of its members with addresses. The following day or on December 14, 2000, petitioner submitted to public respondent SEC copies of its marketing course module and letters of accreditation/authority or confirmation from Crown Asia, Fil-Estate Network and Pioneer 29 Realty Corporation. On January 26, 2001, public respondent SEC visited the business premises of petitioner wherein it gathered documents such as certificates of accreditation to several real estate companies, list

of members with web sites, sample of member mail box, webpages of two (2) members, and lists of Business Center Owners who are qualified to acquire real estate properties and materials on computer tutorials. On the same day, after finding petitioner to be engaged in the sale or offer for sale or distribution of investment contracts, which are considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities Regulation Code),5 but failed to register them in violation of Sec. 8.1 of the same Act,6 public respondent SEC issued a CDO that reads: WHEREFORE, pursuant to the authority vested in the Commission, POWER HOMES UNLIMITED, CORP., its officers, directors, agents, representatives and any and all persons claiming and acting under their authority, are hereby ordered to immediately CEASE AND DESIST from further engaging in the sale, offer or distribution of the securities upon the receipt of this order. In accordance with the provisions of Section 64.3 of Republic Act No. 8799, otherwise known as the Securities Regulation Code, the parties subject of this Cease and Desist Order may file a request for the lifting thereof within five (5) days from receipt. 7 On February 5, 2001, petitioner moved for the lifting of the CDO, which public respondent SEC denied for lack of merit on February 22, 2001. Aggrieved, petitioner went to the Court of Appeals imputing grave abuse of discretion amounting to lack or excess of jurisdiction on public respondent SEC for issuing the order. It also applied for a temporary restraining order, which the appellate court granted. On May 23, 2001, the Court of Appeals consolidated petitioners case with CA-G.R. [SP] No. 62890 entitledProsperity.Com, Incorporated v. Securities and Exchange Commission (Compliance and Enforcement Department), Cristina T. De La Cruz, et al. On June 19, 2001, petitioner filed in the Court of Appeals a Motion for the Issuance of a Writ of Preliminary Injunction. On July 6, 2001, the motion was heard. On July 12, 2001, public respondent SEC filed its opposition. On July 13, 2001, the appellate court granted petitioners motion, thus: Considering that the Temporary Restraining Order will expire tomorrow or on July 14, 2001, and it appearing that this Court cannot resolve the petition immediately because of the issues involved which require a further study on the matter, and considering further that with the continuous implementation of the CDO by the SEC would eventually result to the sudden demise of the petitioners business to their prejudice and an irreparable damage that may possibly arise, we hereby resolve to grant the preliminary injunction.

WHEREFORE, let a writ of preliminary injunction be issued in favor of petitioner, after posting a bond in the amount of P500,000.00 to answer whatever damages the respondents may suffer should petitioner be adjudged not entitled to the injunctive relief herein granted.8 On August 8, 2001, public respondent SEC moved for reconsideration, which was not resolved by the Court of Appeals. On July 31, 2003, the Court of Appeals issued its Consolidated Decision. The disposition pertinent to petitioner reads:9 WHEREFORE, x x x x the petition for certiorari and prohibition filed by the other petitioner Powerhomes Unlimited Corporation is hereby DENIED for lack of merit and the questioned Cease and Desist Order issued by public respondent against it is accordingly AFFIRMED IN TOTO. On June 18, 2004, the Court of Appeals denied petitioners motion for reconsideration; 10 hence, this petition for review. The issues for determination are: (1) whether public respondent SEC followed due process in the issuance of the assailed CDO; and (2) whether petitioners business constitutes an investment contract which should be registered with public respondent SEC before its sale or offer for sale or distribution to the public. On the first issue, Sec. 64 of R.A. No. 8799 provides: Sec. 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or verification, motu proprio or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. We hold that petitioner was not denied due process. The records reveal that public respondent SEC properly examined petitioners business operations when it (1) called into conference three of petitioners incorporators, (2) requested information from the incorporators regarding the nature of petitioners business operations, (3) asked them to submit documents pertinent thereto, and (4) visited petitioners business premises and gathered information thereat. All these were done before the CDO was issued by the public respondent SEC. Trite to state, a formal trial or hearing is not necessary to comply with the requirements of due process. Its essence is simply the opportunity to explain ones position. Public respondent SEC abundantly allowed petitioner to prove its side.

The second issue is whether the business of petitioner involves an investment contract that is considered security11 and thus, must be registered prior to sale or offer for sale or distribution to the public pursuant to Section 8.1 of R.A. No. 8799, viz: Section 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. Public respondent SEC found the petitioner "as a marketing company that promotes and facilitates sales of real properties and other related products of real estate developers through effective leverage marketing." It also described the conduct of petitioners business as follows: The scheme of the [petitioner] corporation requires an investor to become a Business Center Owner (BCO) who must fill-up and sign its application form. The Terms and Conditions printed at the back of the application form indicate that the BCO shall mean an independent representative of Power Homes, who is enrolled in the companys referral program and who will ultimately purchase real property from any accredited real estate developers and as such he is entitled to a referral bonus/commission. Paragraph 5 of the same indicates that there exists no employer/employee relationship between the BCO and the Power Homes Unlimited, Corp. The BCO is required to pay US$234 as his enrollment fee. His enrollment entitles him to recruit two investors who should pay US$234 each and out of which amount he shall receive US$92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total amount of US$147.20 after deducting the amount of US$36.80 as property fund from the gross amount of US$184. After recruiting 128 persons in a period of eight (8) months for each Left and Right business groups or a total of 256 enrollees whether directly referred by the BCO or through his down lines, the BCO who receives a total amount of US$11,412.80 after deducting the amount of US$363.20 as property fund from the gross amount of US$11,776, has now an accumulated amount of US$2,700 constituting as his Property Fund placed in a Property Fund account with the Chinabank. This accumulated amount of US$2,700 is used as partial/full down payment for the real property chosen by the BCO from any of *petitioners+ accredited real estate developers.12 An investment contract is defined in the Amended Implementing Rules and Regulations of R.A. No. 8799 as a "contract, transaction or scheme (collectively contract) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others."13

It behooves us to trace the history of the concept of an investment contract under R.A. No. 8799. Our definition of an investment contract traces its roots from the 1946 United States (US) case of SEC v. W.J. Howey Co.14 In this case, the US Supreme Court was confronted with the issue of whether the Howey transaction constituted an "investment contract" under the Securities Acts definition of "security."15 The US Supreme Court, recognizing that the term "investment contract" was not defined by the Act or illumined by any legislative report, 16 held that "Congress was using a term whose meaning had been crystallized"17 under the states "blue sky" laws18 in existence prior to the adoption of the Securities Act.19 Thus, it ruled that the use of the catch-all term "investment contract" indicated a congressional intent to cover a wide range of investment transactions.20 It established a test to determine whether a transaction falls within the scope of an "investment contract."21 Known as the Howey Test, it requires a transaction, contract, or scheme whereby a person (1) makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts of others.22Although the proponents must establish all four elements, the US Supreme Court stressed that the Howey Test "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits."23Needless to state, any investment contract covered by the Howey Test must be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent practices. After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al.24 In this case, the 9thCircuit of the US Court of Appeals ruled that the element that profits must come "solely" from the efforts of others should not be given a strict interpretation. It held that a literal reading of the requirement "solely" would lead to unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording broad protection to the public. Our R.A. No. 8799 appears to follow this flexible concept for it defines an investment contract as a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits not solely but primarily from the efforts of others. Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others. Prescinding from these premises, we affirm the ruling of the public respondent SEC and the Court of Appeals that the petitioner was engaged in the sale or distribution of an investment contract. Interestingly, the facts of SEC v. Turner25 are similar to the case at bar. In Turner, the SEC brought a suit to enjoin the violation of federal securities laws by a company offering to sell to the public contracts characterized as self-improvement courses. On appeal from a grant of preliminary injunction, the US Court of Appeals of the 9th Circuit held that self-improvement contracts which primarily offered the buyer the opportunity of earning commissions on the sale of contracts to others were "investment contracts" and thus were "securities" within the meaning of the federal securities laws. This is regardless of the fact that buyers, in addition to investing money needed to purchase the contract, were obliged to contribute their own efforts in finding prospects and bringing them to sales meetings. The appellate court held:

It is apparent from the record that what is sold is not of the usual "business motivation" type of courses. Rather, the purchaser is really buying the possibility of deriving money from the sale of the plansby Dare to individuals whom the purchaser has brought to Dare. The promotional aspects of the plan, such as seminars, films, and records, are aimed at interesting others in the Plans. Their value for any other purpose is, to put it mildly, minimal. Once an individual has purchased a Plan, he turns his efforts toward bringing others into the organization, for which he will receive a part of what they pay. His task is to bring prospective purchasers to "Adventure Meetings." The business scheme of petitioner in the case at bar is essentially similar. An investor enrolls in petitioners program by paying US$234. This entitles him to recruit two (2) investors who pay US$234 each and out of which amount he receives US$92. A minimum recruitment of four (4) investors by these two (2) recruits, who then recruit at least two (2) each, entitles the principal investor to US$184 and the pyramid goes on. We reject petitioners claim that the payment of US$234 is for the seminars on leverage marketing and not for any product. Clearly, the trainings or seminars are merely designed to enhance petitioners business of teaching its investors the know-how of its multi-level marketing business. An investor enrolls under the scheme of petitioner to be entitled to recruit other investors and to receive commissions from the investments of those directly recruited by him. Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits. We therefore rule that the business operation or the scheme of petitioner constitutes an investment contract that is a security under R.A. No. 8799. Thus, it must be registered with public respondent SEC before its sale or offer for sale or distribution to the public. As petitioner failed to register the same, its offering to the public was rightfully enjoined by public respondent SEC. The CDO was proper even without a finding of fraud. As an investment contract that is security under R.A. No. 8799, it must be registered with public respondent SEC, otherwise the SEC cannot protect the investing public from fraudulent securities. The strict regulation of securities is founded on the premise that the capital markets depend on the investing publics level of confidence in the system. IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision of the Court of Appeals, affirming the January 26, 2001 Cease and Desist Order issued by public respondent Securities and Exchange Commission against petitioner Power Homes Unlimited Corporation, and its June 18, 2004 Resolution denying petitioners Motion for Reconsideration are AFFIRMED. No costs. SO ORDERED.

G.R. No. 170585

October 6, 2008

DAVID C. LAO and JOSE C. LAO, petitioners, vs. DIONISIO C. LAO, respondents. DECISION REYES, R.T., J.: IS the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient proof that one is a shareholder in such corporation? This is the main question for resolution in this petition for review on certiorari of the Amended Decision1 of the Court of Appeals (CA) affirming the Decision2 of the Regional Trial Court (RTC), Branch 11, Cebu City in CEB-25916-SRC. The Facts On October 15, 1998, petitioners David and Jose Lao filed a petition with the Securities and Exchange Commission (SEC) against respondent Dionisio Lao, president of Pacific Foundry Shop Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed to examine the corporate books of PFSC.3 Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet filed with the SEC, in which they are named as stockholders and directors of the corporation. Petitioner David Lao alleged that he acquired 446 shares in PFSC from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged that he acquired 333 shares from respondent Dionisio Lao himself. 4 Respondent denied petitioners' claim. He alleged that the inclusion of their names in the corporation's General Information Sheet was inadvertently made. He also claimed that petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or transfer. Since they were neither stockholders nor directors of PFSC, petitioners had no right to be issued certificates or stocks or to inspect its corporate books.5 On June 19, 2000, Republic Act 8799, otherwise known as the Securities Regulation Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC. Pursuant to the law, the petition with the SEC was transferred to the RTC in Cebu City and docketed as Civil Case No. CEB-25916-SRC. The case was consolidated with another intracorporate dispute, Civil Case No. CEB-25910-SRC, filed by the Heirs of Uy Lam Tiong against respondent Dionisio Lao.6

During pre-trial, the parties agreed to submit the case for resolution based on the evidence on record.7 RTC Disposition On December 19, 2001, the RTC rendered a Joint Decision8 with the following pertinent disposition, thus: WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by the Court in these cases: (a) Denying the petition of David C. Lao and Jose C. Lao to be recognized as stockholders and directors of Pacific Foundry Shop Corporation, to be issued certificates of stock of said corporation and to be allowed to exercise rights of stockholders of the same corporation.9 In denying the petition, the RTC ratiocinated: x x x Thus, the petitioners David C. Lao and Jose C Lao do not appear to have become registered stockholders of Pacific Foundry Shop corporation, as they do not appear to have acquired shares of stock of the corporation either as subscribers or by purchase from a holder of outstanding shares or by purchase from the corporation of additionally issued shares. xxxx Secondly, the claim or contention of the petitioners David C. Lao and Jose C. Lao is wanting in merit because they have no stock certificates in their names. A stock certificate, as we very well know, is the evidence of ownership of corporate stock. If ever the said petitioners acquired shares of stock of the corporation, there is a need for their acquisition of said shares to be registered in the Stock and Transfer Book of the corporation. Registration is necessary to entitle a person to exercise the rights of a stockholder and to hold office as director or other offices (12 Fletcher 343). That is why it is explicitly provided in Section 63 of the Corporation Code of the Philippines that no transfer of shares of stock shall be valid until the transfer is recorded in the books of the corporation. An unregistered transfer is not valid as against the corporation (Uson vs. Diosomito, 61 Phil. 535). A transfer must be registered, or at least notice thereof given to the corporation for the purpose of registration, before the transferee can acquire any right as against the corporation other than the right to have the transfer registered (12 Fletcher 339). An unrecorded transferee can not enjoy the status of a stockholder, he can not vote nor he voted for (Price & Sulu Development Corp. vs. Martin, 58 Phil. 707). Until the transfer is registered, the transferee is not a stockholder but an outsider (Rivera vs. Florendo, G.R. No. L-57586, October 8, 1986). So, a person who has acquired or purchased shares of stock of a corporation, and who desires to be recognized as

stockholder for the purpose of voting and exercising other rights of a stockholder, must secure such a standing by having the acquisition or transfer recorded in the corporate books (Price & Sulu development Corp. vs. Martin, supra). Unfortunately, in the cases at bench, the petitioners David C. Lao and Jose C. Lao did not secure such a standing. Consequently, their petition to be recognized as stockholders of Pacific Foundry Shop Corporation must fail.10 Petitioners appealed to the CA. CA Disposition On May 27, 2005, the CA rendered a Decision11 modifying that of the RTC, disposing as follows: WHEREFORE, premises considered, judgment is hereby rendered modifying the Joint Decision dated December 19, 2001 of the trial court in so far as it relates to Civil Case No. CEB-25916-SRC by: (a) Declaring that petitioners have owned since 1987 shares of stock in Pacific Foundry Shop Corporation, numbering 446 for petitioner-appellant David C. Lao and 333 for petitioner-appellant Jose C. Lao; (b) Ordering respondent-appellee through the corporate secretary to issue to petitioners-appellants the certificates of stock for the aforementioned number of shares; (c) Ordering respondent-appellee, as President of Pacific Foundry Shop Corporation, to allow petitioners-appellants to exercise their rights as stock holders; (d) Ordering respondent-appellee to call a stockholders meeting every fourth Saturday of January in accordance with the By-Laws of Pacific Foundry shop Corporation.12 The CA decision was penned by Justice Arsenio Magpale and concurred in by Justices Sesinando Villon and Enrico Lanzanas. In modifying the RTC decision, the appellate court gave credence to the General Information Sheet submitted by petitioners that names them as stockholders of PFSC, thus: The General Information Sheet of PFSC for the years 1987-1998 state that petitionersappellants David C. Lao and Jose C. Lao own 446 and 333 shares, respectively, in PFSC. It is also indicated therein that David C. Lao occupied various key positions in PFSC from 1987-1998 and Jose C. Lao served as Director in PFSC from 1990-1998. The Sworn Statements of Uy Lam Tiong, former corporate secretary of the PFSC, also state that petitioners-appellants David C. Lao and Jose C. Lao, per corporate records of PFSC, own shares of stock numbering 446 and 333, respectively. The minutes of the Annual

Stockholders Meeting of PFSC on January 28, 1988 at 3:00 o'clock p.m. shows that among those present were petitioners-appellants David C. Lao and Jose C. Lao. During the said meeting, petitioner-appellant David C. Lao was nominated and elected Director of PFSC. Withal, the Minutes of the Meeting of the Board of Directors of PFSC at its Office at Hipodromo, Cebu City, on January 28, 1988 at 4:00 p.m. disclose that petitioner-appellant David C. Lao was elected vice-president of PFSC. Both minutes were signed by the officers of PFSC including respondent-appellee.13 Respondent filed a motion for reconsideration14 of the CA decision. On July 11, 2005, respondent moved to inhibit15 the ponente of the CA decision, Justice Magpale, from resolving his pending motion for reconsideration. On July 22, 2005, Justice Magpale issued a Resolution16 voluntarily inhibiting himself from further participating in the resolution of the pending motion for reconsideration. Justice Magpale stated: Although the undersigned ponente does not agree with the imputations of respondentappellee and that the same are not any of those grounds mentioned in Rule 137 of the Revised Rules of Court, nonetheless the ponente voluntarily inhibits himself from further handling this case in order to free the entire court of the slightest suspicion of bias and prejudice against the respondent-appellee.17 Amended Decision On August 31, 2005, the CA rendered an Amended Decision18 affirming that of the RTC, with a fallo reading: IN VIEW OF THE FOREGOING, the May 27, 2005 Decision of this Court is hereby SET ASIDE and the Decision of the Regional Trial Court, Branch 11, Cebu City with respect to Civil Case No. 25916-SRC is hereby AFIRMED in toto.19 The Amended Decision was penned by Justice Enrico Lanzanas and concurred in by Justices Sesinando Villon and Vicente Yap. The CA stated: Petitioners-appellants maintain that they acquired their shares of stocks through transfer - the third mode mentioned by the trial court. David C. Lao claims that he acquired his 446 shares through his father, Lao Pong Bao, when the latter purchased said shares from Hipolito Lao. On the other hand, Jose C. Lao asserts that he acquired his 333 shares through Dionisio C. Lao himself from the original 1,333 shares of stocks of the latter. Petitioner-appellants asseverations are unavailing. To substantiate their statements, they merely relied on the General Information Sheets submitted to the Securities and

Exchange Commission for the year 1987 to 1998, as well as on the Minutes of the Stockholders Meeting and Board of Directors Meeting held on January 28, 1988. They did not adduce evidence that would indubitably show that there was indeed a valid transfer of stocks, i.e. endorsement and delivery, from the transferors, Hipolito Lao and Dionisio Lao, to them as transferees. xxxx To our mind, David C. Lao utterly failed to confute the argument posited by respondentappellee or demonstrate compliance with any of the statutory requirements as to warrant a favorable ruling on his part. No proof was ever shown that there was endorsement and delivery to him of the stock certificates representing the 446 shares of Hipolito Lao. Neither was the transfer registered in PFSC's Stock and Transfer Book. Conversely, Dionisio C. Lao was able to show conformity with the aforementioned requirements. Accordingly, it is but logical to conclude that the certificate of stock covering 446 shares of Hipolito Lao was in fact endorsed and delivered to Dionisio C. Lao and as such is reflected in PFSC's Stock and Transfer Book x x x. In fact, it is a rule that private transactions are presumed to have been faire and regular and that the regular course of business is presumed to have been followed. Thus, the transfer made by Hipolito Lao of the 446 shares of stocks to Dionisio C. Lao is deemed to have been valid and well-founded unless proven otherwise. David C. Lao's mere allegation that Dionisio Lao illegally appropriated upon himself the 446 shares failed to hurdle such presumption. In this jurisdiction, neither fraud nor evil is presumed and the record does not show either as to establish by clear and sufficient evidence that may lead Us to believe such allegation. The party alleging the same has the burden of proof to present evidence necessary to establish his claim, unfortunately however petitioners failed to do so. The General Information Sheets and the Minutes of the Meetings adduced by petitioners-appellants do not prove such allegation of fraud or deceit. In the absence thereof, the presumption remains that private transactions have been fair and regular. As for the alleged shares of Jose C. Lao, We find his position identically situated with David C. Lao. There is also no evidence on record that would clearly establish how he acquired said shares of PFSC. Jose C. Lao failed to show that there was endorsement and delivery to him of the stock certificates or any documents showing such transfer or assignment. In fact, the 333 shares being claimed by him is still under the name of Dionisio C. Lao was reflected by the Certificate of Stock as well as in PFSC's Stock and Transfer Book. Corollary, Jose C. Lao could not be considered a stockholder of PFSC in the absence of support reflecting his right to the 333 shares other than the inclusion of his name in the General Information Sheets from 1987 to 1998 and the Minutes of the Stockholder's Meeting and Board of Director's Meeting.20

Petitioners moved for reconsideration but their motion was denied.21 Hence, the present petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure. Issues Petitioners raise five (5) issues for Our consideration, thus: 1. Whether or not the inhibition of Justice Arsenio J. Magpale is proper when there is no "extrinsic evidence of bias, bad faith, malice, or corrupt purpose" on the part of Justice Magpale, which is required by this Honorable Court in its decision in Webb, et al. v. People of the Philippines, 276 SCRA 243 [1997], as basis for disqualification. 2. Whether or not the inhibition of Justice Magpale constitutes, in effect, forum shopping, which is proscribed under Section 5, Rule 7 of the Rules of Court, as amended, and decisions of this Honorable Court. 3. Whether or not determination of ownership of shares of stock in a corporation shall be based on the Stock and Transfer Book alone, or other evidence can be considered pursuant to the decision of thisHonorable Court in Tan v. Securities and Exchange Commission, 206 SCRA 740. 4. Whether or not the admissions and representations of respondent in the General Information Sheets submitted by him to the Securities and Exchange Commission during the years 1987 to 1998 that (a) petitioners were stockholders of Pacific Foundry Shop Corporation; that (b) petitioner David C. Lao and Jose C. Lao owned 446 and 333 shares in the corporation, respectively; and that (c) petitioners had been directors and officers of the corporation, as well as the Sworn Statement of Uy Lam Tiong, former Corporate Secretary, the Minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988, and the Minutes of Meeting of the Board of Directors on January 28, 1988, mentioned by Justice Magpale in his ponencia, are sufficient proof of petitioners ownership of stocks in the corporation. 5. Whether or not respondent is stopped from questioning petitioners' ownership of stocks in the corporation in view of his admissions and representations in the General Information Sheets he submitted to the Securities and Exchange Commission from 1987 to 1998 that petitioners were stockholders and officers of the corporation. 22 Essentially, only two (2) issues are raised in this petition. The first concerns the voluntary inhibition of Justice Magpale, while the second involves the substantive issue of whether or not petitioners are indeed stockholders of PFSC. Our Ruling We deny the petition.

Voluntary inhibition is within the sound discretion of a judge. Petitioners claim that the motion to inhibit Justice Magpale from resolving the pending motion for reconsideration was improper and unethical. They assert that the "bias and prejudice" grounds alleged by private respondent were unsubstantiated and, worse, constituted proscribed forum shopping. They argue that Justice Magpale should have resolved the pending motion, instead of voluntarily inhibiting himself from the case. In cases of voluntary inhibition, the law leaves to the sound discretion of the judge the decision to decide for himself the question of whether or not he will inhibit himself from the case. Section 1, Rule 137 of the Rules of Court provides: Section 1. Disqualification of judges. - No judge or judicial officer shall sit in any case in which he, or his wife or child, is pecuniarily interested as heir, legatee, creditor, or otherwise, or in which he is related to either party within the sixth degree of consanguinity or affinity, or to counsel within the fourth degree, computed according to the rules of the civil law, or in which he has been executor, administrator, guardian, trustee, or counsel, or in which he has presided in any inferior court when his ruling or decision is the subject of review, without the written consent of all parties in interest, signed by them and entered upon the record. A judge may, in the exercise of his sound discretion, disqualify himself from sitting in a case, for just or valid reasons other than those mentioned above. Here, Justice Magpale voluntarily inhibited himself "in order to free the entire court [CA] of the slightest suspicion of bias and prejudice x x x."23 We certainly cannot nullify the decision of Justice Magpale recusing himself from the case because that is a matter left entirely to his discretion. Nor can We fault him for doing so. No judge should preside in a case in which he feels that he is not wholly free, disinterested, impartial, and independent. We agree with petitioners that it may seem unpalatable and even revolting when a losing party seeks the disqualification of a judge who had previously ruled against him in the hope that a new judge might be more favorable to him. But We cannot take that basic proposition too far. That Justice Magpale opted to voluntarily recuse himself from the appealed case is already fait accompli. It is, in popular idiom, water under the bridge. Petitioners cannot bank on his voluntary inhibition to nullify the Amended Decision later issued by the appellate court. It is highly specious to assume that Justice Magpale would have ruled in favor of petitioners on the pending motion for reconsideration if he took a different course and opted to stay on with the case. It is also illogical to presume that the Amended Decision would not have been issued with or without the participation of Justice Magpale. The Amended Decision is too far removed from the issue of voluntary inhibition. It does not follow that petitioners would be better off were it not for the voluntary inhibition.

Petitioners failed to prove that they are shareholders of PSFC. Petitioners insist that they are shareholders of PFSC. They claim purchasing shares in PFSC. Petitioner David Lao alleges that he acquired 446 shares in the corporation from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleges that he acquired 333 shares from respondent Dionisio Lao. Records, however, disclose that petitioners have no certificates of shares in their name. A certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock.24 It is prima facie evidence that the holder is a shareholder of a corporation. Nor is there any written document that there was a sale of shares, as claimed by petitioners. Petitioners did not present any deed of assignment, or any similar instrument, between Lao Pong Bao and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao. There is likewise no deed of assignment between petitioner Jose Lao and private respondent Dionisio Lao. Absent a written document, petitioners must prove, at the very least, possession of the certificates of shares in the name of the alleged seller. Again, they failed to prove possession. They failed to prove the due delivery of the certificates of shares of the sellers to them. 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 certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. In contrast, respondent was able to prove that he is the owner of the disputed shares. He had in his possession the certificates of stocks of Hipolito Lao. The certificates of stocks were also properly endorsed to him. More importantly, the transfer was duly registered in the stock and transfer book of the corporation. Thus, as between the parties, respondent has proven his right over the disputed shares. As correctly ruled by the CA: Au contraire, Dionisio C. Lao was able to show through competent evidence that he is undeniably the owner of the disputed shares of stocks being claimed by David C. Lao. He was able to validate that he has the physical possession of the certificates covering the shares of Hipolito Lao. Notably, it was Hipolito Lao who properly endorsed said

certificates to herein Dionisio Lao and that such transfer was registered in PFSC's Stock and Transfer Book. These circumstances are more in accord with the valid transfer contemplated by Section 63 of the Corporation Code.25 The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company. Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which they were named as shareholders of PFSC. They claim that respondent is now estopped from contesting the General Information Sheet. While it may be true that petitioners were named as shareholders in the General Information Sheet submitted to the SEC, that document alone does not conclusively prove that they are shareholders of PFSC. The information in the document will still have to be correlated with the corporate books of PFSC. As between the General Information Sheet and the corporate books, it is the latter that is controlling. As correctly ruled by the CA: We agree with the trial court that mere inclusion in the General Information Sheets as stockholders and officers does not make one a stockholder of a corporation, for this may have come to pass by mistake, expediency or negligence. As professed by respondent-appellee, this was done merely to comply with the reportorial requirements with the SEC. This maybe against the law but "practice, no matter how long continued, cannot give rise to any vested right." If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer Book of the Corporation could not exercise the rights granted unto him by law as stockholder, with more reason that such rights be denied to a person who is not a stockholder of a corporation. Petitioners-appellants never secured such a standing as stockholders of PFSC and consequently, their petition should be denied.26 It should be stressed that the burden of proof is on petitioners to show that they are shareholders of PFSC. This is so because they do not have any certificates of shares in their name. Moreover, they do not appear in the corporate books as registered shareholders. If they had certificates of shares, the burden would have been with PFSC to prove that they are not shareholders of the corporation. As discussed, petitioners failed to hurdle their burden. There is no written document evidencing their claimed purchase of shares. We note that petitioners agreed to submit their case for decision based merely on the documents on record. Hence, no testimonial evidence was presented to prove the alleged purchase of shares. Absent any documentary or testimonial evidence, the bare assertion of petitioners that they are shareholders cannot prevail. All told, We agree with the RTC and CA decision that petitioners are not shareholders of PFSC.

WHEREFORE, the petition is DENIED and the appealed Amended Decision AFFIRMED IN FULL. SO ORDERED.

SECOND DIVISION [G.R. No. 138542. August 25, 2000] ALFREDO P. PASCUAL and LORETA S. PASCUAL, Petitioners, v. COURT OF APPEALS (former Seventh Division), ERNESTO P. PASCUAL and HON. ADORACION ANGELES, in her capacity as Presiding Judge, RTC, Kaloocan City, Branch 121,Respondents. DECISION MENDOZA, J.: chanrobles virtual law library The question for decision in this case is whether an action for reconveyance of a piece of land and for accounting and damages which private respondent Ernesto P. Pascual brought against his brother, petitioner Alfredo P. Pascual, and the latters wife involves an intra-corporate dispute beyond the jurisdiction of the Regional Trial Court, Branch 121, Kalookan City in which it was filed. The trial court held that the action did not constitute an intra-corporate dispute and, therefore, denied petitioners motion to dismiss. The Court of Appeals sustained the order of the trial court. Hence, this petition for review of the decision 1 of the appellate court. We affirm. chanrobles virtual law library The facts are as follows: chanrobles virtual law library On February 7, 1996, private respondent Ernesto P. Pascual filed a complaint in the Regional Trial Court for accounting, reconveyance of real property based on implied trust resulting from fraud, declaration of nullity of TCT, recovery of sums of money, and damages against his brother, petitioner Alfredo, and the latters wife Loreta Pascual. The pertinent parts of his complaint read:chanrobles virtual law library 3. Plaintiff Ernesto and defendant Alfredo Pascual are full blood brothers. They, along with Araceli P. Castro, Ester P. Abad, Edgardo P. Pascual, Sr. (now deceased), Corazon P. Montenegro, Leonor P. Rivera, Luciano Pascual, Jr., and Teresita P. Manuel, are legitimate children of Luciano Pascual, Sr. and Consolacion Pascual. Defendant Loreta Pascual is the wife of defendant Alfredo. chanrobles virtual law library

4. Between 1963 to 1975, Luciano R. Pascual, Sr. acquired substantial shares in Phillens Manufacturing Corp. Luciano, Sr. parceled out and assigned a good number of these shares in the names of his children. chanrobles virtual law library 5. With Lucianos substantial shareholdings, his eldest son, defendant Alfredo became President, General Manager, and Vice-Chairman of the Board of Phillens. Plaintiff was only 20 years old then. chanrobles virtual law library 6. Defendant Alfredo was also president of L.R. Pascual & Sons, Inc. which held substantial shares in Phillens. (Plaintiff is a stockholder of L. R. Pascual & Sons, Inc.) chanrobles virtual law library 7. Although during and after the lifetime of the parties parents, defendant Alfredo held family property in trust for Luciano Sr. and Consolacion, and for his brothers and sisters, defendant Alfredo gave the latter no accounting at any point in time contrary to what their father intended. chanrobles virtual law library 8. Because from 1969 to 1990, defendant Alfredo turned over zero profit to plaintiff Ernesto as far as his share was concerned, plaintiff tried to arrange a meeting between them about the matter of accounting -- without any success during a 5-year period (1990-1995). Defendant Alfredo would each time be sensitive, evasive, and drunk, so nothing became of those efforts. chanrobles virtual law library . . . . chanrobles virtual law library 10. Since defendant Alfredo was President of L.R. Pascual & Sons, Inc. which held family properties in Quezon City, Manila, and Baguio, plaintiff wanted this matter taken up in a meeting he requested with defendant Alfredo. In addition, plaintiff asked defendant Alfredo for an accounting in L.R. Pascual & Co., a registered partnership distinct from L.R. Pascual & Sons, Inc. which would be discussed in that requested meeting. chanrobles virtual law library . . . . chanrobles virtual law library 12. Because of defendant Alfredos icy silence and unmistakable attempts to claim the lid on plaintiff Ernesto Pascual, plaintiff conducted an inquiry. As a result, he discovered that when defendant Alfredo caused the dissolution of Phillens Manufacturing Corporation by asking for a shortening of its term, defendant Alfredo represented in an affidavit of undertaking that chanrobles virtual law library (a) he is the owner of the majority of the outstanding capital stock of the corporation; chanrobles virtual law library

(b) that the corporation has no obligation, whether existing or contingent, direct or indirect, due or payable to any person whomsoever, natural or juridical; chanrobles virtual law library (c) he is assuming and will pay any and all valid claims or demands by creditors, stockholders, or any third person or persons, presented after the dissolution of the corporation. chanrobles virtual law library 13. By taking a position adverse to the trust and to his familys, defendant Alfredo, greatly profiting from Phillens, now held he owned majority and will undertake to pay any claimant or creditor. Yet, defendant Alfredo had not paid plaintiff what was properly owing to him. chanrobles virtual law library 14. Plaintiff also discovered, to his dismay, that defendant Alfredo had written an October 8, 1990 letter to the Securities & Exchange Commission falsely representing as follows: chanrobles virtual law library October 8, 1990 chanrobles virtual law library Examiner & Appraiser Dept. [sic] chanrobles virtual law library Securities & Exchange Commission chanrobles virtual law library E. de los Santos Avenue chanrobles virtual law library Mandaluyong, Metro Manila chanrobles virtual law library Gentlemen: chanrobles virtual law library This will certify that the P3.3-million notes payable as shown in the balance sheet of Phillens Manufacturing Corporation as of June 30, 1990, is [sic] my personal advances.chanrobles virtual law library Since I am assuming the assets and liabilities of the company, to which all the stockholders have consented, I am likewise giving my consent to the dissolution of the corporation. chanrobles virtual law library Very truly yours, chanrobles virtual law library ALFREDO P. PASCUAL chanrobles virtual law library 16. Further, on inquiry, plaintiff discovered that last April 3, 1989, defendant Alfredo caused an appraisal of the fair market value of the land and buildings of Phillens in Kalookan, excluding equipment, remaining stock and inventory. Aware that Cuervo had appraised such

properties at P10,977,000 as of March 10, 1989, defendant Alfredo hatched a ploy to buy for himself such properties at only P4.5 million. (A copy of the April 3, 1989 Cuervo report addressed to defendant Alfredo is here attached as Annex A.) chanrobles virtual law library 18. To consummate his fraudulent design, defendant Alfredo caused in bad faith the cancellation of TCT C-28572 and the issuance of TCT 215804 in his and defendant Loretas name (copy of which is here attached as Annex D). That TCT is of course void, proceeding as it does from a void transfer, which constitutes fraud and a breach of trust. chanrobles virtual law library On March 21, 1996, petitioners filed a motion to dismiss on the ground that the complaint raises an intra-corporate controversy between the parties over which original and exclusive jurisdiction is vested in the Securities and Exchange Commission (SEC). At first, the trial court granted petitioners motion and dismissed the complaint on the ground that the complaint stemmed from alleged fraudulent acts and misrepresentations of petitioner Alfredo P. Pascual as a corporate officer of Phillens Manufacturing Corp. (Phillens) and thus the SEC had jurisdiction over the case. However, on respondents motion, the trial court reconsidered its order and reinstated respondents action. In an order, dated September 29, 1997, the trial court held that, since the corporation had been dissolved in 1990 and its corporate affairs terminated in 1993, there were no more corporate affairs to speak of at the time of the filing of the complaint. The court also allowed the amendment of the complaint. It appears that, pending resolution of the motion for reconsideration, respondent amended his complaint by alleging the following matters which are underlined: chanrobles virtual law library 4. Luciano R. Pascual, Sr. together with L.R. Pascual & Sons. Inc. acquired approximately 38% of shares in Phillens Manufacturing Corp., a close corporation. Luciano Sr. died in 1984 while Consolacion died in 1986. Thus, plaintiff became owner by operation of law of 1/9 of his parents stockholdings since they died intestate without obligations.chanrobles virtual law library 5. With Lucianos substantial shareholdings, defendant Alfredo became President, General Manager, and Vice-Chairman of Phillensin 1968 or 1969, positions which he held until 1990 when Phillens was dissolved.chanrobles virtual law library 6. Defendant Alfredo held in trust for the benefit of Luciano Sr. and Consolacion, and for his brothers and sisters, plaintiff included, said stockholdings and the properties of Phillens. chanrobles virtual law library 7. As trustee defendant Alfredo did not turn over the properties and sums due to plaintiff and the former even failed to account for the trust estate and its earnings, to the grave prejudice of the latter. chanrobles virtual law library

8. One of the properties composing the trust estate, TCT No. C-28572 with an area of 7,528 square meters located in Caloocan City, was registered in the name of defendants under devious and fraudulent circumstances engineered by Alfredo. chanrobles virtual law library 8.1. Said property was appraised conservatively to have a market value of no less than P10.9 Million in 1989.chanrobles virtual law library 8.2 Although Alfredo was fully aware of its market value, Alfredo schemed, manipulated and succeeded in transferring title to and possession in his favor of TCT No. C-28572 in 1989 for an alleged consideration of P4.5 Million, in violation of his duties as trustee.chanrobles virtual law library 8.3 In order to cover-up such serious breach of trust, Alfredo maliciously caused the dissolution of Phillens in 1990, shortly after ownership was transferred to him, and further caused the destruction of Phillens records thereby rendering its stocks valueless after its corporate affairs were wound up in 1993.chanrobles virtual law library 8.4 Defendants presently appear as legal and beneficial owners by virtue of TCT No. C215804.chanrobles virtual law library Petitioners reiterate their contention that the complaint against them involves an intracorporate dispute cognizable by the SEC and, therefore, the Regional Trial Court should have dismissed the complaint. They complain that the trial court should not have allowed the amendment of the complaint because it was done in order to confer jurisdiction on the trial court. chanrobles virtual law library First. Petitioners contend that the existence of a corporation at the time of filing of a complaint involving an intra-corporate dispute is not required in order that such dispute be cognizable by the SEC because such requirement is not found in P.D. No. 902-A. chanrobles virtual law library This contention has no merit. P.D. 902-A, 5 provides: chanrobles virtual law library In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of association registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: chanrobles virtual law library . . . . chanrobles virtual law library 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; chanrobles virtual law library . . . . chanrobles virtual law library Sec. 5(b) does not define what an intra-corporate controversy is, but case law has fashioned out two tests for determining what suit is cognizable by the SEC or the regular courts, and sometimes by the National Labor Relations Commission. The first test uses the enumeration in 5(b) of the relationships to determine jurisdiction, 2 to wit: chanrobles virtual law library (1) Those between and among stockholders and members; chanrobles virtual law library (2) Those between and among stockholders and members, on one hand, and the corporation, on the other hand; and chanrobles virtual law library (3) Those between the corporation and the State but only insofar as its franchise or right to exist as an entity is concerned. chanrobles virtual law library The second test, on the other hand, focuses on the nature of the controversy itself.3 Recent decisions of this Court consider not only the subject of their controversy but also the status of the parties.4 chanrobles virtual law library We hold that the Court of Appeals correctly ruled that the regular courts, not the SEC, have jurisdiction over this case. Petitioners and private respondent never had any corporate relations in Phillens. It appears that private respondent was never a stockholder in Phillens, of which the parties predecessor-in-interest, Luciano Pascual, Sr., was a stockholder and whose properties are being litigated. Private respondents allegation is that, upon the death of their father, he became co-owner in the estate left by him, and part of this estate includes the corporate interests in Phillens. He also alleges that petitioners repudiated the trust relationship created between them and appropriated to themselves even the property that should have belonged to respondent. It is thus clear that there is no corporate relationship involved here. That petitioner Alfredo Pascual was a corporate officer holding in trust for his brother their fathers corporate interests did not create an intra-corporate relationship between them. chanrobles virtual law library Nor is the controversy corporate in nature. As we have stated before, the grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. 5 P.D. No. 902-A, 3 gives the SEC jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines. From this, it can be deduced that the regulatory and adjudicatory functions of the SEC, insofar as intra-corporate controversies are concerned, comes into play only if a corporation still exists. chanrobles virtual law library

In the case at bar, the corporation whose properties are being contested no longer exists, it having been completely dissolved in 1993; consequently, the supervisory authority of the SEC over the corporation has likewise come to an end. chanrobles virtual law library It is true that a complaint for accounting, reconveyance, etc. of corporate properties has previously been held to be within the jurisdiction of the SEC. 6 Nonetheless, a distinction can be drawn between those cases and the case at bar, for, in those cases, the corporations involved were still existing, whereas in the present case, there is no more corporation involved. There is no question that assessing the financial status of an existing corporation, for purposes of an action for accounting, requires the expertise of the SEC. But in the case of a dissolved corporation, no such expertise is required, for all its business has been properly accounted for already, and what is left to be determined is properly within the competence of regular courts. chanrobles virtual law library It may be noted in this connection that pursuant to R.A. No. 8799, 5.2,7 which took effect on August 8, 2000, the jurisdiction of the SEC to decide cases involving intra-corporate dispute was transferred to courts of general jurisdiction and, in accordance therewith, all cases of this nature, with the exception only of those submitted for decision, were transferred to the regular courts. Hence, the question whether this case should be filed in the SEC is now only of academic interest. For even if it involves an intra-corporate dispute, it would be remanded to the Regional Trial Court just the same. chanrobles virtual law library Second. Petitioners contend that the lower courts erred in allowing the amendment of the complaint, which were actually made to confer jurisdiction on the trial court after the original complaint was dismissed. chanrobles virtual law library This contention has no basis. The original complaint alleged that Phillens has already been completely dissolved. In addition, it alleged a breach by petitioner Alfredo P. Pascual of the implied trust created between him and his brother, respondent Ernesto P. Pascual, after the death of their father. Thus, even without the amendments, the allegations in the original complaint were sufficient to confer jurisdiction on the trial court. The amendments made by respondent were merely for the purpose of making more specific his original allegations. chanrobles virtual law library WHEREFORE, the decision of the Court of Appeals is AFFIRMED. chanrobles virtual law library SO ORDERED. chanrobles virtual law library Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.